Headlines Leading to Sector Rotation

Markets find a way to attract buyers back and stocks push higher on Thursday. Is the worry about rising interest rates over? Absolutely not, just like worry over the Fed curbing stimulus isn’t over. Investors find a way to shelve their worries temporarily in exchange for greed when the upside is in full swing. Thus, the key concerns for investors are still alive and well, but the focus is shifting to how to make money now and worry later. Looking at what made headlines on Thursday can lead to some interesting thoughts for sector rotation looking forward.

Housing was one of the main topics of choice with the pending home sales slowing, but the overall data was still positive for the housing sector. We can cut this up so many different pieces, but lets keep it to the major ideas. First, homebuilders (ITB) are the simple way to play the new home portion of the housing sector. The challenge is how far they have moved, and there are some of the headwinds facing the builders going forward. Simply put… labor costs are rising as a result of shortage, material costs are rising as a result of shortage, land held by builders to develop is low, financing to buy more land is a bigger challenge, financing to build the homes is another equal challenge and new to the lis of concerns, interest rates are rising. I would expect the upside to still be attractive to the homebuilders, but it could see slower growth and experience more volatility.

Second, banks stand to benefit from both new and existing home sales. They will provide the new mortgages to finance those sales and if rates continue to rise they will earn more on the spread going forward. Rising home prices, which were  positive on Wednesday, will help the foreclosures on the books of the banks and raise value of existing assets, etc. Banks are definitely a benefactor in the expansion of the housing market. If residential real estate is turning to the upside, I would expect a continued turn for the better in commercial real estate as rents rise and occupancy rate decline. Bank of America, Suntrust and Morgan Stanley all have opportunities in the space. KBE, SPDR Bank ETF and KRE, SPDR Regional Bank ETF both will benefit from the sector opportunities.

A weaker dollar drew plenty of headlines on Thursday as well. Why the sudden turn in the dollar from the move higher over the last four weeks? My conclusion is the Federal Reserve doing and saying everything possible to assure the markets and the world that they will continue to fund the stimulus at $85 billion per month. As the markets develop confidence the logical reaction is a weaker dollar? Maybe not logical, but it definitely a side effect. The obvious play on this move would be to short the dollar or use UDN, PowerShares Bearish Dollar ETF. The other side of this move is to consider what is impacted? Commodities for one, such as crude oil. On Thursday crude sold lower as a result of the inventory data showing weak demand, but then oil rallied back on the weakness in the dollar. Watch the commodities. Other currencies will benefit such as the euro (FXE), canadian dollar (FXC) and the yen (FXY) for example.

Gold was another headline grabber on the day with a bounce of 1.5% to $1412 per ounce. That is also short term resistance for the metal and brings the downtrend line into play. There are plenty of gold bugs who would love for the bounce to find strength enough to move higher. The help came from the confidence discussed above, the Fed will stay fully engaged in QE infinity. Too much money leads to inflation… right? The more believable this is not just for the Fed, but the central banks around the world, the more the inflation worry could drive gold prices higher. A word of caution is the expiration of the futures contracts today. Again, the obvious benefactor to this is the gold miners (GDX). The price of gold moving lower has pushed the miners valuations below the value of the gold they own or value in the ground. They will rally the most if the move in gold has legs on the upside.

There were plenty of other news items on Thursday that may impact sectors of the market and they are all worth putting on a watch list and finding those that pan out and provide the best opportunities.