This past week the markets were essentially unchanged. Since the August 5th jobs report, concerns that the strength in the economy might result in the Fed raising interest rates has caused weakness in interest-related issues. Rising interest rates are generally a negative for stocks, but with the future rates anticipated to be at low levels for quite some time, we are not seeing an overall adverse reaction in the markets to the possibility of rate increases.
The market is in a “RISK ON” mode, favoring stocks with more “juice.” Sectors related to interest rates such as real estate, utilities, home builders and bonds have under-performed in the last several weeks, while banks have outperformed as they benefit from rising rates.
The NASDAQ, which had been underperforming the S&P 500, has shown strength and has finally taken out the highs of last fall, as the S&P index had done previously. The NASDAQ spent the past week just marking time.
There is an index that is often called “the fear index,” measuring how much investors are willing to pay for options on the S&P 500. Investors are willing to pay more for put options on the S&P if they are concerned that the market is going to go down, as this provides them a form of insurance. This index is the VIX, the ETF that follows this index is the VXX.
You can see that with Britain’s vote to leave the EU, the so-called “Brexit” decision, that investors were willing to pay considerably more for options as they were very concerned that the market could sell off hard on the decision. This concern was short-lived, as the markets rallied hard instead shortly after the vote. At this juncture, market volatility is extremely low. This reflects a bullish mindset among investors, but can also be interpreted as a sign of complacency.
Spotlight on… Energy Markets vs SPY
Energy, designated with the solid blue color, has been outperforming the S&P (red-line) since the lows reached in February of this year. XLE is the energy ETF. XOP, the Oil and Gas Exploration and Production ETF, has also been especially strong.
The earnings schedule is winding down after a raft of earnings reports from retailers last week. Several more retailers are scheduled to report this week including Burlington (BURL), Dollar General (DG), Dollar Tree (DLTR), Sears (SHLD), Tiffany (TIF), Michaels (MIK), Williams Sonoma (WSM), Movado (MVO), ULTA (ULTA), and Big Lots (BIG).
Upcoming Economic Reports
- Tuesday: new home sales
- Wednesday : Existing home sales, housing price index, crude inventories
- Thursday: Initial and Continuing Unemployment claims, Durable Goods Orders
- Friday: GDP second estimate, Michigan Sentiment
Strongest Sectors for past trading MONTH
Cybersecurity stocks rose to the top of sectors showing good gains for the past trading month, along with semiconductors. In descending order the strongest sectors in the past month (from mid-July to the present) were:
- Oil and Gas exploration
- Oil services
Weakest Sectors for past trading MONTH
Sectors that were weakest for the past month were:
- Real Estate
- S. Home Construction
- Metals and Mining
The weakness in real estate, US home construction and utilities and bonds, could be attributed to concern that the strong jobs report will lead to the Fed’s raising interest rates, which would be negative for these sectors.
The precious metals have had a huge run this year and it is not surprising to see them sell off.
Strongest Sectors for past trading WEEK
Sectors that were strongest in the past week were:
- Oil and Gas Exploration
- Oil Services
Weakest Sectors for past trading WEEK
Sectors that were weakest in the past week were:
- Metals and Mining
- Real Estate
- European Financials
- Pacific Ex-Japan