Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
Investors return to what appears to be a quiet open. Last week, the markets did what bull markets do. Rather than any sort of moderate pullback to work off overbought conditions money just moved from some areas to the market that had been overheated to other areas. Last week was in fact a very big week of sector rotation as technology took a punch to the gut and consumer discretionary stocks seemed to begin to weaken in the face of higher oil, but other groups saw that money head their way. But first the S&P 500 which last Thursday poked its head above the intraday high late May. The index actually recorded positive gains for the week which is certainly one way to “consolidate”. I don’t have the 5 day moving average on the chart below but since the breakout on July 5 off the employment data this index has not closed below that moving average, which is a very strong market indeed. Even a market that bounces of its 10 day ma is considered strong…
The small cap index, the Russell 2000, continues to be the leadership group; as you can see it broke over its May highs a few weeks ago and hasn’t looked back. Small cap leadership is one area of ‘risk on’…
For the more old fashioned set, a confirmation of transportation stocks making new highs along with the Dow Industrials is important. That happened late last week as well, on the back of some railroad earnings along with a strong move by airlines despite the higher oil. For those playing at home use the $TRAN symbol in stockcharts (I am showing the ETF below).
Speaking of higher oil, this breakout from a half year base continues – there is still potential upside to the $120-$130 area but if that happens it will quit being a cute breakout on a chart and start having some more serious effects on the real economy.
Bernanke has done a good job bringing down the 10 year Treasury yield with words alone as it had spiked to near 2.8% on the QE tape talk, but is now back in the 2.5% range. This of course affects the mortgage market which is one of the two primary conduits for the “wealth effect” (the stock market being the other), so obviously was a concern as Bernanke has stated quite a few times of late. 2.4% was the breakout level so that number is the one to watch in the coming weeks – if yields fall back below it will mean this was a false breakout of sorts.
Here was the sector performance last week as expressed by the SPDR ETFs, as always the far left one is mislabeled as it is “consumer discretionary”.
We continue to see the ‘right sectors’ rally – financials have been a leader for weeks, first the regional banks and more recently the investment banks have picked up.
Industrials (XLI), healthcare (XLV) and energy (XLE) all saw rotation in last week.
The big loser was technology as missteps by Intel (INTC) and Microsoft (MSFT) among others hurt the sector.
It is a quiet week on the economic front – there are a lot of housing reports coming this week, durable goods on Thursday, and a sentiment indicator Friday but with Bernanke’s testimony out of the way the focus should be on earnings with a huge swathe of S&P 500 companies reporting this week. With 20% of those type of companies reporting the game remains the same – poor revenue growth, but “ok” earnings growth over very low bars, much of it based on cost cutting, share buybacks, and the like. Nothing new – most of the stock market advance this year has been about multiple expansion and little to do with earnings expansion. That is great, until it reverses…. of course no one knows when since P/E multiple movement up or down is ethereal in nature.
Disclosure Notice
Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund’s holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/index.php/the-fund/holdings
