As we conclude May the economic data will be plentiful starting with the personal income and spending out Friday, GDP for Q1 revisions, and pending home sales out today. But, the main headlines are still revolving around the Federal Reserve’s views toward stimulus, Central Banks around the world stimulus efforts, Housing, Global Economic issues and their impact on the markets looking forward. I want to take a quick tour and review what is happening with the headlines and the markets.
Home price were up by the most in seven years in March. The Case Shiller index rose 10.9 percent year over year. The 1.1 percent gain in March was ahead of expectations, but shows the strength in pricing currently. What does this mean for the markets? The economy? Stocks? A stronger housing market is a plus for the economy, jobs, spending and confidence looking forward. The news was positive and puts opportunities in our path. XHB, SPDR Homebuilders ETF has moved from $12 in October 2011 to $31.20 currently. How much higher can the sector rise? That depends on prices, inventory and job growth. The recent selling is testing near term support at $30.80. I would say hold and look for the opportunity in the bounce. A break lower and the opportunity is in the short side of the sector. There are plenty of downgrades on the builders despite the upturn in the data. This is purely valuation based on the current fundamentals and growth looking forward. Digging into the sector to find the winning stocks is an exercise worthy of our time going forward.
The Federal Reserve continues to make its way into the headlines and market sentiment. The worry about the central bank cutting stimulus has been a focus since the Fed minutes in February. They have continued to reassure investors there are no changes that are imminent. The global central banks have been equally diligent in making sure everyone has a clear understanding of their commitment to liquidity. Bank of Japan made comments on Tuesday, European Central Bank did similar on Monday. The talk has done little this week to deter investors from pushing yields higher on fixed income. The rise in yields is hurting bond prices and interest sensitive investments short term. Mortgage REITs, REITs, MLPs, dividend stocks and bonds have all seen price declines that have broken uptrends and are currently accelerating on the downside. If you can’t hedge your positions then design an exit strategy based on the how low the positions could go and not the dividend yield.
Global markets have continued to push lower the last week plus as the outlook for the economy isn’t bright. EFA, iShares EAFE Index ETF has faded to the 50 DMA and held with support at the $60.75 level. Hold and we may see some upside opportunity. Sell and the downside pressure on the global stocks grows short term. Europe (IEV) is testing the first level of support. Australia (EWA) has fallen 11.1 percent since the high four weeks ago. Slowing economic picture and a cut in interest rates sent the markets lower. Far East… Japan (EWJ) selling after recent highs were hit, but the outlook remains positive. China (FXI) struggling economics has put the country stocks back in a downtrend. Emerging Markets (EEM) are struggling on concerns in both the US and the global developed countries. The downtrend is back in play short term. The country ETFs are under pressure due to the current economic picture, not interested in owning them currently, but that is subject to change. Watch and track the countries that show promise short term.
The ten sectors of the S&P 500 index are showing continued signs of sentiment shifts. Utilities, Telecom and Consumer Staples are under pressure on the interest rate front. The dividend yield is rising on the long end of the yield curve and that is impacting the dividend stocks… Thus, the downdraft in Utilities, Telecom and Consumer Staples. How long this will last is where we need to focus our attention. At the end of the emotions comes the logic of what to buy and at what price. On the other side of this equation is the slowing leadership from Financials, Consumer Discretionary, Basic Materials, Industrials and Technology. These sectors have been trading essentially sideways near term. What is needed is another boost of leadership from all or at least some of the sector going forward. That means tracking these assets with an eye on the upside short term. The selling has not pushed the sentiment or the momentum lower, but there are plenty of reasons being thrown out to justify the shift in trend. Be patient and track what you find of interest looking forward.