Bulls Hold The Line As Market Coils In Anticipation Of A Bigger Move

After posting record highs the previous week, stocks closed last week slightly down overall. But the major indexes held their psychological levels, including Dow at 18,000, S&P 500 at 2100, NASDAQ at 5,000, and Russell 2000 at 1200. Although the bulls continue to find reliable support levels nearby, strong overhead technical resistance and neutral-to-defensive rankings in our SectorCast fundamentals-based quant model continue to suggest that a major upside breakout is not quite imminent, although a selloff doesn’t seem to be in the cards, either. Overall, stocks appear to be coiling ever tighter while awaiting a catalyst. Earnings season hasn’t provided it, so it might not come until the June meeting of the FOMC.

In this weekly update, I give my view of the current market environment, offer a technical analysis of the S&P 500 chart, review our weekly fundamentals-based SectorCast rankings of the ten U.S. business sectors, and then offer up some actionable trading ideas, including a sector rotation strategy using ETFs and an enhanced version using top-ranked stocks from the top-ranked sectors.

Market overview:

Net-net, the various economic reports last week were taken positively. Q1 GDP report indeed came in quite weak at an annualized +0.2%, but it was evidently already priced in and fully expected, with expectations for grand improvement going forward. The ISM Manufacturing report on Friday came in at 51.5 (unchanged from prior month), and New Orders rose to 53.5. Positive economic reports from Japan and China helped the bulls’ cause, with inflation rising in Japan during March and China showing some growth in both manufacturing and services sectors. The University of Michigan Consumer Sentiment Index for April was 95.9 (versus 93 in March). And first-time applicants for unemployment fell to the lowest in 15 years.

Here are some other noteworthy observations. Last year, S&P 500 companies spent 95% of their operating margins on buybacks and dividends, and this year, stock buybacks and dividends will surpass a record $1 trillion. Also, ETFGI reports that total assets invested in the global ETF/ETP industry will surpass assets in the global hedge fund industry during the current calendar quarter (both are currently around $2.9 trillion).

Interestingly, Brian Wesbury, chief economist at First Trust Advisors, points out that the Fed’s quantitative easing programs since 2008 have inflated the monetary base by 25% per year but have had no discernible impact on the M2 money supply, which has grown only 6% per year, or about the same rate that it grew between 1995-2008. So, if the banks aren’t lending the money, then the excess liquidity has not served to generate new capital investment and profitability. Instead, he believes that the plow-horse economy and rising corporate profits have been driven solely by technical innovation, productivity gains, and the unshakable American entrepreneurial spirit.

But even if it hasn’t boosted the economy directly, it seems to me that QE has provided an indirect effect by helping stabilize markets and investor confidence by putting a bid under asset prices, including both equities and bonds. This has helped create a psychological wealth effect and keep long-term interest rates low (including mortgage rates), which has lifted the housing market and consumer confidence, which in turn has helped boost corporate profits.

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Author: Travis Esquivel

Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

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