Stocks closed last week on a strong note, with the S&P 500 notching a new high, despite lackluster economic data and growth. I have been suggesting in previous articles that stocks appeared to be coiling for a significant move but that the ingredients were not yet in place for either a major breakout or a corrective selloff. However, bulls appear to be losing patience awaiting their next definitive catalyst, and the higher-likelihood upside move may now be underway. Yet despite the bullish technical picture, this week’s fundamentals-based Outlook rankings look even more defensive.
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:
All the major indexes are back comfortably above their psychological thresholds, including Dow at 18,000, S&P 500 at 2100, NASDAQ at 5,000, and Russell 2000 at 1200. And yet most of the U.S. economic reports lately have been surprisingly weak. Consumer sentiment fell to 88.6, industrial production fell for the fifth straight month (mainly due to the energy, mining and utilities segments), capacity utilization declined to 78.2%, consumer comfort index fell yet again, wholesale prices (PPI) tumbled, and April retail sales disappointed.
On the other hand, it must be said that “core” retail sales (x-autos, building materials, and gasoline) actually rose and March sales were revised upward to +1.1%. Also, the Federal budget deficit fell, overall debt levels continue to improve, the US dollar has receded from its recent highs, employment and wages are improving, public companies continue to reduce operating costs and leverage while boosting free cash flow; and Q1 corporate earnings reports have largely beat reduced expectations. Also worth noting, in April the U.S. Treasury Department reported an all-time monthly record of $288 billion in individual income tax payments (indicating that people are making more money and were under-withholding).
At the same time, the forward multiple on the S&P 500 earnings is now around 17x, which of course is on the high side (just ask Federal Reserve chair Janet Yellen). But U.S. investors have historically tended to shrug off such warnings from the Fed, and stocks have kept rising, led by the large caps. After getting off to a strong start in Q1, small and mid caps have significantly trailed the performance of large caps so far in Q2.
Dividend payments and buybacks are at all-time records, and yet non-financial firms still held $1.7 trillion in cash as of 2014 year-end, with Technology firms holding $690 billion of it, led by Apple (AAPL) with $178 billion, Microsoft (MSFT) $90 billion, and Google (GOOGL) $64 billion.
In Asia, Japan’s current account surplus hit a 7-year high. China is speeding up its implementation of policy changes in bank financing and introducing a debt-for-bond swap program intended to ease the burden on municipalities buried deeply in debt from aggressive construction and infrastructure development.
