With warmer weather arriving to melt the early snowfall across much of the country, investors seem to be catching a severe case of holiday fever and positioning themselves for the seasonally bullish time of the year. And to give an added boost, both Europe and Asia provided more fuel for the bull’s fire last week with stimulus announcements, particularly China’s interest rate cut. Yes, all systems are go for U.S. equities as there really is no other game in town. But nothing goes up in a straight line, not even during the holidays, so a near-term market pullback would be a healthy way to prevent a steeper correction in January.
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:
Last Friday brought a very nice opening pop to U.S. markets when China decided to cut its lending rate, making U.S. assets more attractive to global investors. Moreover, the ECB indicated its willingness to implement greater stimulus measures, including government bond purchases. Japan has slipped into recession with GDP decreasing by -1.6% in Q3 versus expectations of +2.2%. And Germany only expanded by a paltry +0.1%. The euro fell to near 2-year lows versus the U.S. dollar, while the yen fell to new 7-year lows against the dollar.
The combination of economic weakness in these major global economies and increasing U.S. oil production continues to push down the price of oil, and the resulting wealth effect of rising equity prices and low gasoline prices is expected to create a boon for retailers this holiday season. Adding to the seasonal strength for stocks is that corporations tend to do much of their buybacks this time of the year. Also, elevated short interest can provide yet another short-term catalyst.
M&A activity is another catalyst, and last week Allergan (AGN) and Actavis plc (ACT) both rose when ACT agreed to pay about $66 billion for AGN. Also, Halliburton (HAL) announced its acquisition of Baker Hughes (BHI). All four of these companies have been Sabrient favorites and reside in several of our model portfolios.
Among the ten U.S. business sectors, Healthcare, Utilities, and Technology are the clear leaders year-to-date, but all sectors are positive except for Energy, which continues to suffer from falling oil prices.
The 10-year U.S. Treasury bond yield closed Friday at 2.32%, and the CBOE Market Volatility Index (VIX), a.k.a. fear gauge, closed at 12.90, as it continues its decent into complacency. With bulls in control of the market, VIX remains firmly below the important 15 threshold.
SPY chart review:
