The Past Week: A Choppy End To A Positive Quarter!
Stock Market: A Volatile Quarter Takes Global Shares Down, Gold Plunges!
Wall Street: Dow Logs Best 1st Half Of Year Since 1999!
by Ian Harvey
July 01, 2013
The Dow Jones Industrial Average (DJI) and Standard & Poor's 500 Index (SPX) finished near session lows on Friday of the past week, as investors were reluctant to jump in following a three-day rally, but major averages still capped the volatile quarter with gains.
Stocks finished lower for the month of June, logging their first monthly drop this year. But all three major averages logged their third winning quarter in four. And so far for the year, the Dow has surged more than 13.8 percent, while the S&P 500 tacked on 12.6% and the Nasdaq Composite Index (COMP) jumped 12.7%.
Stocks closed out a skittish past week with gains, as the bond market stabilized. The S&P 500 was 0.9 percent higher for the week at 1606, but it ended Friday on a sour note, with a loss of six points.
Bond yields topped out earlier in the past week with the 10-year Treasury note, reaching a high of 2.66 percent, before moving back to a range around 2.50 percent. It was at 2.48 percent late Friday.
According to statistics, investors pulled a record $61.7 billion from bond mutual funds and exchange-traded funds in the month of June, through June 24. If the credit market stabilizes these type of flows should not continue to occur.
Rates bottomed in early May and then moved higher on improving data, but really ripped higher when Fed Chairman Ben Bernanke indicated after the Fed's last meeting that the Fed could begin to slow its $85 billion in monthly bond purchases before the end of the year and complete the program by the middle of next year.
A flurry of Fed officials this past week were on the speaking circuit, and delivered a more consistent and seemingly more coordinated message to markets than usual. They re-emphasized that cutting back on bond purchases does not mean the Fed will be raising short-term interest rates any time soon. They also said that any plan to cut back on bond purchases would be made based on improvement in the economic data, and several said the markets have misread the Fed's message.
Stocks have jumped around in June. By contrast, the first five months of the year were mostly calm, marked by small but steady gains as investors bought on news of higher home prices, record corporate earnings and an improving jobs market.
By May 21, the S&P 500 had climbed to a record 1,669. Fed Chairman Ben Bernanke spoke the next day, and prices began gyrating.
Investors have long known that the central bank would eventually pull back from its bond purchases, which are designed to lower interest rates and get people to borrow and spend more. Last week, Bernanke got more specific about the timing. He said the Fed could start purchasing fewer bonds later this year, and stop buying them completely by the middle of next year, if the economy continued to strengthen.
Investors dumped stocks, but then had second thoughts this past week as other Fed officials stressed that the central bank wouldn’t pull back on its support soon. The Dow gained 365 points Tuesday-Thursday. For the month, the Dow moved up or down at least 100 points 16 of 20 trading days, the most since September 2011.
Bonds have also been on a bumpy ride in recent weeks, mostly down.
The prospect of fewer purchases by the Fed sent investors fleeing from all sorts of bonds — municipals, U.S. Treasury securities, corporate bonds, foreign government debt and high-yield bonds. Investors pulled a record $23 billion from bond mutual funds in the five trading days ended Wednesday, according to Bank of America Merrill Lynch.
Bond yields, which move in the opposite direction of bond prices, have rocketed.
The yield on the 10-year Treasury note rose to 2.49 percent from 2.47 percent late Thursday. Last month, the yield was as low as 1.63 percent. Treasury yields help set borrowing costs for a large range of consumer and business loans.
It was a rocky month in foreign markets, too. Major indexes in France, Germany and Britain lost about 5 percent in June.
The Fed Influence in the Past Week!
Global stock, bond and commodity markets have been highly volatile since Federal Reserve Chairman Ben Bernanke signaled the week before last that the U.S. central bank would soon cut the pace of its stimulative bond buying unless the economic recovery slows.
Markets had taken heart on Thursday of the past week after two Fed officials seemed to back away from Bernanke's comments, but two other policymakers of the U.S. central bank who spoke on Friday - Governor Jeremy Stein and Richmond Fed President Jeffrey Lacker - showed a more aggressive tone on when the central bank's unprecedented policy accommodation might be reduced.
Talk of the Fed tapering its bond buying has hit Treasury prices hard. The slump in prices started in May, gaining momentum with Bernanke's words the week before last.
With quarter-end adding to volatility, exposure to U.S. Treasuries through the iShares Barclays 20+ Yr Treasury Bond (ETF) (TLT) fell 8.9 percent in the last three months, its worst performance over the last 10 quarters.
A survey of 53 investors across the United States, Europe and Japan released on Friday found that funds had already cut their average equity holdings in June to a nine-month low due to the recent volatility and held more cash.
The Fears of Fed Tapering Continues!
Fed officials have been in major damage control mode, since Fed chairman Ben Bernanke kicked off tumult in the stock, bond and gold markets last week. He said the central bank could wind down its stimulus program later this year, if the economy continues to improve.
Fed governor Jeremy Stein, while trying to allay investor fears, appeared to have inadvertently stoked them Friday. He said the Fed could "hypothetically" consider tapering its bond buying in September.
At the same time, he said investors were overreacting, but that didn't seem to make a dent in sentiment.
Richmond Fed president Jeremy Lacker said the Fed will keep buying bonds, "though at a decreasing rate over the next year."
Bond and Gold Carnage
The mere mention of any end to bond buying has recently sent bond investors scrambling for the exits. The yield on the 10-year Treasury note hit 2.65% earlier this past week -- its highest level since August 2011 and well above the 1.6% in early May. The yield hovered around 1.5% at the end of Friday's trading day.
Gold prices have been slammed as well. Gold rose 1% Friday, but the precious metal slid 13% this month.
As volatility rose in June, so did the CBOE Market Volatility Index (VIX). The VIX rose 4% this month, and 37% for the quarter.
• The Dow Jones Industrial Average (DJI) broke its three-day winning streak, dropped back below 15,000, and suffered a triple-digit drop, but gained 0.7 percent in the past week, to close at 14,909.60.
Still, the Dow posted its strongest first half of the year since 1999.
Microsoft was the best performer for the quarter on the Dow, while IBM tumbled.
• The Standard & Poor's 500 Index (SPX), widely used by mutual funds as a proxy for the stock market, held onto the 1,600 level but dropped nearly 7 points, or 0.4% on Friday.
In June, the SPX fell 1.5%, but it added 2.4% during the second quarter.
Financials topped the S&P 500 sector gainers in the second quarter, while utilities lagged.
• And the Nasdaq Composite Index (COMP) was Friday's outperformer, edging up 1.4 points, or less than 0.1% to finish at 3,403.25.
The COMP dropped 1.5% in June and closed the second quarter 4.2% higher.
• The CBOE Market Volatility Index (VIX) , widely considered the best gauge of fear in the market, finished unchanged below 17.
World Markets in the Past Week
The past week started off with another jolt, as overnight lending rates in China spiked to well over 10% in an effort to clamp down on their hidden banking system. The chart reveals that this was a breakout from a yearlong trading range (line a).
This action was in response to the high-risk activity of some banks, in what some have referred to as a "Ponzi scheme." So it was not surprising that the Shanghai Composite plunged back to the late 2012 lows (line a) in the past week, as it was down over 15% in June.
It has been a rough month for many of the markets, with selling especially heavy in the past few weeks. Gold is down more than $180 per ounce, so is not surprising that gold is the worst-performing asset class for the year, down over 26%.
Stocks have clearly been the only place to be. The Spyder Trust (SPY) is still up over 12% for the year. Next to stocks, bonds are the second-best performer of the four asset classes.
iShares Barclays 20+ Yr Treasury Bond (ETF) (TLT) is down 8.8%, while the emerging markets, as represented by Vanguard FTSE Emerging Markets ETF (VWO) is down 12.9% so far in 2013.
If the US economy is going to get stronger as the year progresses, then it would be surprising if all of the emerging-market economies were to become worse. The outflows in June from emerging markets (see chart) were the highest since January 2008.
The chart of VWO shows that it is testing its weekly Starc band, with next important support in the $34 area (line a). The on-balance volume (OBV) has turned lower from resistance (line b) and has dropped below its WMA in the past week.
The Bond Market in the Past Week
Many of the top bond managers have had a rough month. Up until last Monday, PIMCO Total Return Fund Class A (PTTAX) was down 3.8% for the month. But quite a few other bond funds actually did worse. In May, $1.32 billion flowed out of Pimco's flagship fund, and early reports suggest these outflows have tripled in June.
Pimco was not alone -- in the week ending June 26, a staggering $23.3 billion was pulled out of a wide gamut of bond funds, including emerging market, mortgage backed, high yield and investment grade.
Since the beginning of the year, the SPDR Barclays Capital High Yield Bond ETF (JNK) is down 4.5%.
Therefore, what is a bondholder to do in this environment?
The completion of the weekly reverse head-and-shoulders bottom formation in T-Bond yields at the end of May has an "upside target at 4%." The yield is currently at 3.49%, but well below the week's high.
The weekly yield chart below illustrates that from a technical perspective, yields have risen too far, too fast. Rates are still close to the weekly Starc+ band. This makes a pullback to the 3.29% to 3.40% area likely over the next several weeks. This target level is highlighted on the chart by the yellow box.
This view is also consistent with the analysis of T-Note Futures, which violated important support (line b) two weeks ago. The futures dropped well below their Starc- band in the past week, before firming late in the past week.
T-Notes are likely to rebound or at least move sideways in the coming weeks. The OBV did break key support at line c in the past week, so a rebound is likely to be followed by a further decline in T- Note prices.
Therefore, the rally in yields looks ready to fizzle in the coming weeks -- but then probabilities favor a resumption of the uptrend in yields and even lower bond prices. The 30-year T-bond yield may not reach its 4% target until next year.
The iShares Dow Jones Transportation (IYT) was up 0.7% in the past week, bouncing off the monthly S1 support at $107.60. The close was just below next month's pivot of $110.87, with more important resistance at $111 and $113.84.
Most of week before minus signs have been replaced by positive values in the past week. The Select Sector SPDR Utilities (XLU) led the pack.
Also strong was the Select Sector SPDR Consumer Discretionary (XLY), which was up 2.4%, and not far behind were the financials, as the Select Sector SPDR Financials (XLF) was up 1.5%.
The Select Sector SPDR Materials (XLB) was down again, and has lost over 4% in the past two weeks. The Select Sector SPDR Industrials (XLI), Select Sector SPDR Consumer Staples (XLP), and Select Sector SPDR Energy (XLE) also lagged, gaining only 0.1% to 0.7%.
Earnings Reports for the Past Week
The earnings reporting cycle is about to take the spotlight with Alcoa’s (AA) release on July 8th. The Q2 earnings season has already gotten underway, with results from Nike (NKE), Accenture (ACN), Oracle (ORCL), FedEx (FDX) and others.
Accenture’s weak guidance reconfirms what we saw in the recent Oracle report about macro issues weighing on corporate spending outlook. Importantly, it puts us on notice about what to expect from IBM (IBM) and others in the coming days.
As has become customary at the start of recent quarterly earnings cycles, expectations for the Q2 earnings season remain quite low. A major driver of these low expectations is company guidance during the Q1 earnings season, which was overwhelmingly on the negative side. Total earnings for companies in the S&P 500 are expected to be down -0.3% from the same period last year on -0.5% lower revenues and almost flat margins. This is sharply down from +3.9% growth expected in the quarter in early April.
Trends in Estimate Revisions
The revisions trend appears to have lost some ground in the last few weeks, though it still remains in neutral territory as the charts below show. The key metric in all the charts is the ‘revisions ratio’, which is the ratio of total number of upward revisions over the preceding four weeks to the total number of revisions (positive and negative) over that same period.
There are two charts each for 2013 and 2014. The bar charts show the current state of the ‘revisions ratio’ (as of 6/21/13), while the line charts plot the ratio’s trajectory over the preceding 24 months. As you can see below, the revisions ratio for 2013 dropped to 46% from the prior week’s 49% level, while the same for 2014 dropped to 49% from 51% the week before.
The ratio doesn’t tell you the ‘magnitude’ of the revisions, only the direction. The ‘50%’ level (the dark line) is the dividing line between positive and negative trends, with readings above 50% implying more positive than negative revisions. That said, the analysis shows that readings between 45% and 55% don’t offer material insights into the magnitude of revisions. It is only readings above 55% and below 45% that offer bullish and bearish signals about the magnitude of earnings revisions.
As you can see in the charts above, the revisions trend for the S&P 500 as a whole is still in neutral territory, the current level (46% for 2013) is down from three weeks back (56% at the end of May). Finance has been in bullish trend for weeks now, but the revisions trend for the Tech sector also seems to be moving in that direction now.
Hard to tell how sustainable the trend will prove to be, but the sector’s revisions ratio for 2013 currently (as of 6/21) stands at 56.8%, down from the prior week’s level, but still the highest level in over 12 months. Some of the stand-out revisions in the sector were industry players like Micron Technology (MU) and Advanced Micro Devices (AMD). Salesforce.com (CRM) is the only Tech sector firm that has suffered material negative revisions lately.
Finance continues to be in bullish territory for both this year and next (the blue line) even though the revisions ratio has come down lately. The sector’s revisions ratio currently (as of 6/21) stands at 69% for 2013 (down from 72% the week before) and 73% for 2014 (down from 74%), signaling good times ahead for the sector.
The trend makes perfect sense as higher interest rates may be a hindrance for other industries, but they are beneficial for the Finance sector’s earnings. Flat net-interest margins have been a permanent feature of the sector’s, particularly banking’s, earnings picture in recent quarters. The Finance sector’s positive earnings outlook is a function of the rising trend in interest rates.
On the negative side, the revisions trend is decidedly in bearish territory for Industrials and Basic Materials both for this year and next. Peabody Energy (BTU), U.S. Steel (X), Joy Global (JOY) and Freeport-McMoran (FCX) have all suffered significant negative estimate revisions lately.
Crude Oil in the Past Week
Crude oil had a strong past week, gaining over $1 per barrel, but it has been a very choppy market over the past few weeks.
Precious Metals in the Past Week
The gold futures tried to rebound on Friday of the past week, but still closed the past week down more than $70. Most have been cleaned out of this market, as the bullion holdings of the SPDR Gold Trust (GLD) have dropped almost 50%.
Though we are entering a strong seasonal period for gold, and a $50 up day would not be surprising, there are no signs yet of a bottom.
Economic Reports in the Past Week
Overall, the economic data was quite positive in the past week, and helped support the stock market. Early in the past week, the Dallas Fed Manufacturing Survey beat expectations, as did numbers on durable goods, new home sales and consumer confidence. All show quite positive trends from a technical perspective.
The S&P Case-Shiller chart also shows a very strong uptrend. It previously gave a great sell signal in 2006 when it broke a 14-year uptrend.
The GDP was revised downward, and the Chicago PMI was lower than expected. Pending home sales remained strong, as did the University of Michigan's Consumer Sentiment Index on Friday.
• Durable Goods Orders
Durable goods orders were up 3.6 percent for the second consecutive month in May. This compared to consensus estimates expecting durable goods to be up 3 percent for the month.
Excluding the transportation sector, durable goods rose 0.7 percent in May compared to an increase of 1.7 percent in April. The consensus expected durable goods ex transportation to fall 0.5 percent.
• Consumer Confidence
The Conference Board's Consumer Confidence Index jumped to 81.4 in June compared to 74.3 in May. This was the highest reading for the index since January 2008. The consensus had expected a slight rise to 75.0.
• New Home Sales
New home sales rose to 476,000 in May from 466,000 in April. This came in ahead of consensus estimates which pegged new home sales at 460,000 for last month.
• GDP - Third Estimate
First quarter GDP was revised down for the third estimate to 1.8 percent growth compared to 2.4 percent growth in the previous estimate. The consensus had expected GDP to remain unrevised at 2.4 percent. Normally, GDP revisions are small, so the large decline for the third estimate caught economists by surprise, although it did not prevent the market from rallying on Wednesday.
• Jobless Claims
Initial jobless claims fell from 355,000 for the week ending June 15 to 346,000 for the week ending June 22. This was still above consensus estimates which expected initial claims to fall to 345,000.
The continuing claims level also declined. Continuing jobless claims fell to 2.965 million for the week ending June 15 versus 2.968 million for the week ending 2.966 million for the week ending June 8. This was slightly above consensus estimates which were pegged at 2.958 million.
• Personal Income and Spending
Personal income rose 0.5 percent in May after recording an increase of 0.1 percent in April. this was well above consensus estimates which called for personal income to rise by 0.2 percent for the month.
Personal spending rose 0.3 percent in May after losing 0.3 percent in April. This was slightly below consensus estimates calling for an increase of 0.4 percent.
• Pending Home Sales
Pending home sales leaped 6.7 percent for the month of May. The very large gain comes after a decline in pending home sales of 0.5 percent in April. The May figures were way ahead of consensus estimates which called for an increase of just 1.5 percent.
• Chicago PMI
An index measuring manufacturing activity in the Chicago area fell in June, but still showed expansion. Chicago PMI declined to 51.6 compared to 58.7 in May. This came in below economists' consensus estimates which called for the index to register a smaller decline to 55.5.
• University of Michigan Consumer Sentiment
The final reading of the University of Michigan Consumer Sentiment index was revised higher to 84.1 for June compared to the previous estimate of 82.7. This was a decline compared to May when the index registered at 84.5. The final reading, however, was ahead of consensus estimates which called for a decline to 82.7.
Conclusion for the Past Week
Stock investors have a tendency to sell on any signs the Fed is slowing its economic stimulus program.
However, this rally is still very much being supported by monetary easing by central banks – as observed with Friday’s quiet trading session!
Maybe it’s the calm before the storm!