In another exciting week of market action, we saw the S&P500 index ($SPX) hit new all-time highs by adding another 1.45% to its already impressive gains for the year. While it is nice to see the rally led by energy and technology there is a bit more that we need to unpack.
First, the price of Crude Oil ($CL or /CL) increased by some 5% to finish the week slightly above $46 a barrel. While a 5% gain is a pretty solid move for one week we still need to provide a bit of context to fully understand what is going on. Prior to the beginning of the 2008 recession the energy sector, often represented by the SPDR Select Sector Energy ETF ($XLE), made up 18% of the S&P500’s total weighting. These days, however, the beleaguered sector fluctuates between 6% and 7% of the index’s makeup. It is less than half of its all-time high and 30% lower than its 30-year average. As mentioned in prior market reviews, we need the Energy sector to start carrying its weight if we expect to see the market to continue its upward trajectory. Unfortunately, Friday’s Baker Hughes Rig Count release indicated that the number of producing oil rigs increased for the second week in a row. As the world’s newest swing producer of oil and natural gas, US production seems to be driving the price of oil worldwide. With, 200+ non-operating rigs, US producers can react to any significant jumps in the price of oil, effectively capping the price and thus any upward mobility that the sector may experience.
Second, we saw the technology sector, typically represented by the SPDR Select Technology Sector ETF ($XLK), which is a holding in our Sector Rotation model, rebound from its recently failed head-and-shoulders pattern. Since the head-and-shoulders technical indicator typically precedes a significant drop, this failure in price action is a welcome occurrence. Gaining more than 3% last week, the gains in the sector came on the back of familiar names like Netflix ($NFLX), Facebook ($FB), Microsoft ($MSFT), and Apple Inc. ($AAPL) all of whom will report quarterly earnings in the next couple of weeks.
Finally, as in the past, we’ll explore the effect of the yield curve and the dollar on the market movements. With Friday’s release of the June Consumer Price Index (flat compared to the expected 0.2% increase), we saw the estimated probability of another Fed rate hike in December dip below the 50% mark. According to the 30 day Fed Funds futures, the likelihood of a December rate hike now sits at 48%. It is not until March 2018 that the probabilities of a rate hike exceed the 50% mark. Because of this the US Dollar index ($DXY), which represents a weighted basket of US dollar currency pairs, continued its slide finishing the week down roughly 1%. This also added to the continued downward pressure on bond yields across all maturities. Remember that the yield curve is often looked to by economists as a leading indicator to predict recessions. While not always perfectly reliable, it is one of a handful of indicators that we have to evaluate the likelihood of an impending recession. Because the yield curve has continued its pattern of lower highs and lower lows we have seen the financials, typically represented by the SPDR Select Sector Financial ETF ($XLF), continue to underperform the overall market. After Wells Fargo ($WFC) reported earnings that fell below analyst expectations most bank stocks dropped more than 1%. Since the financials make up nearly 15% of the S&P500 index, we need financials to find a level of support and begin to contribute to the profitability of the overall index. Unfortunately, as the yield curve continues to flatten this will be difficult as banks typically make money on the spread between short and long-term yields. With numerous regional and national banks reporting in the next couple of weeks, sustained loan and asset growth will be needed to keep the market moving in the right direction.
As always, we will keep our eyes on the market and continue to provide you with the most up to date and relevant commentary regarding its movements. If you would like to learn more about how we help clients please feel free to attend any of our upcoming events or reach out to us directly.
Major Earnings for the Upcoming Week (tickers are listed with a “$” preceding them)
Pre-Market: BlackRock Inc. ($BLK)
After Close: Netflix ($NFLX), Yahoo ($YHOO)
Pre-Market: Bank of America ($BAC), TD Ameritrade ($AMTD), Harley Davidson ($HOG), Johnson & Johnson ($JNJ), Charles Schwab ($SCHW), United Healthcare ($UNH)
After Close: CSX Corp ($CSX), Interactive Brokers ($IBKR), IBM Inc. ($IBM), United Airlines ($UAL), Wintrust Financial ($WTFC)
Pre–Market: Morgan Stanley ($MS), Textron ($TXT), US Bancorp ($USB)
After Close: Alcoa ($AA), American Express ($AXP), Qualcomm Inc. ($QCOM)
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