Sector Rotation Continues as Market Treads Water

It’s a new week and the news continues to be the driver in direction, and that only means one thing, volatility day-to-day. When the news is driving versus clarity of direction and/or the trend, emotions take over and the markets are pushed by whatever sounds good or bad today. Economic data leads the parade this week with the April results. ISM manufacturing held steady as released on Friday and today the¬†factory orders rose 2.1% and slightly below expectations. Tomorrow is the ISM services data and of course Friday is the jobs report. Speaking of which, if the jobs number is good or better than expected the markets may react negative. It would be perceived as¬†a positive and improving enough or¬†good enough for the Fed to hike short term rats. There in lies some of the current fear being priced into the markets. Yields on the thirty-year bond have risen to 2.87% from 2.05% on April 17th. Fed fear is continuing to get priced in to bonds and interest sensitive stocks. TLT has declined 6.7% the last three weeks and IYR (REITs ETF) has declined steadily over the last three months. Plenty of reasons for worry, but equally important, ¬†little reason for either the buyers or the sellers to take control of the trend or direction going forward.

More worries for the banking sector as loans made to the oil-sector could default as the price of crude falling impacts the revenue projections. This is a developing issues that will unfold further in the coming months, but it is one more reason for continued weakness in the banking sector. Energy on the other hand has been doing well since bouncing off the lows in mid- March. XLE move above $82.50 has stalled and the move sideways the last two plus weeks is on our watch also going forward.

Interest rates as noted above are on the rise in anticipation the Fed will hike interest rates. The ten-year treasury bond yield now stands at 2.13% up more than 30 bps in two weeks. How high do they rise? 2.65% is my target if the Fed is to engage in inflation fighting short term moving interest rates. The result would be selling in the bonds and moving away from the risk in the sector is something to consider short term as this unfolds.

Financials (XLF) were up 1% and a leader on the day despite the rumbling about the above issues. This puts the ETF back at the top end of the trading range, but it still needs a defined catalyst to break higher and take on a leadership role. Banks were the leader on the day.

Utilities (XLU) moved up nicely early in the day, but as the interest rate worries spread throughout the day the sector forfeited half of the gains. Still looking for the catalyst to break from the current consolidation and make a follow through move higher. AES, EXC and PEG all led higher in the sector.

Nothing resolved on the day, but more news to rattle investors in both directions. Russell 2000 small cap index made effort to bounce back above the 1243 again to keep the uptrend in place. Afternoon retreat left the index well short of the level at 1233. Retail, healthcare, technology and telecom have been keeping the broader markets in check as the leadership has evaporated from these sectors. We have to remain patient and let this unfold one day at a time going forward.