A week ago in this column, we commiserated about the dismal performance of commodities, especially crude oil, coffee, and sugar. That was apparently the cue they were waiting for, as they and other commodities commenced to rally. Two of the crude oil ETNs we track posted gains of 13% or more over the past week: coffee jumped 8% and sugar rose more than 6%. We also pointed out that copper and cotton were exceptions to the recent commodity declines. Fortunately for them, the bounce in weak commodities did not come at the expense of the strong ones, and the iPath Bloomberg Cotton ETN (BAL) padded its recent gains with an additional 5% upside move.
The short-term results have been impressive, but for now, they appear to be nothing more than a counter-trend bounce. These moves need to extend into a new uptrend before we turn bullish. One of the catalysts for the rise in crude oil was a decline in inventories last week. Yesterday, the Energy Department provided additional fundamental support for oil prices when it claimed US production was expected to fall in June. Today, oil prices went the other direction and are off 5%, adding more fodder to the bounce versus the new uptrend debate.
Markets were closed last Friday, but the US government was open for business, and the Bureau of Labor and Statistics released its March employment reports. New job creation came in at 126,000 for the month, which was only about half of the 250,000 expected. The weakest number in 15 months was accompanied by downward revisions for both January and February. All told, the first quarter of 2015 produced an average of 197,000 jobs per month. In comparison, the rate during the fourth quarter of 2014 was 324,000 per month. Quarter-over-quarter, new job growth plunged 39%.
This data can allow the Fed to be patient about when to start raising interest rates. At one time, the April FOMC meeting was assigned high probability as the time the Fed would begin increasing interest rates. Today, the CME Group FedWatch indicator puts the probability of a rate hike at the April 29th FOMC meeting at 0%. Additionally, their interpretation of interest rate futures contracts puts the probability of the June 17th meeting producing a rate hike at 6% and the July 29th meeting at 14%. In fact, the implied probability does not exceed 50% until the October 25th meeting, and even then they give it only a 51% chance.
A sluggish economy and an accommodative Fed seems to be what the market likes at this point. The overall trend remains positive despite the short-term pullbacks some groups are experiencing. Earnings are next on the radar with Alcoa (AA) kicking off earnings season today.
Consumer Discretionary ascended to the top of the sector rankings today. It reclaimed the honor from Health Care, which held the position for the intervening three weeks. Both retailers and homebuilders are contributing to the success of Consumer Discretionary. Health Care slipped to second place as the previously hot biotechnology industry has somewhat cooled. Real Estate held its #3 spot, but it is now sharing the position with Consumer Staples and Telecom, two other categories sporting the same momentum readings today. Consumer Staples is in the same relative position as a week ago, but Telecom jumped three places higher. Financials held steady in sixth, while Technology slid two places lower, and Industrials finds itself one notch lower. Materials flipped from red to green, although it was unable to improve its relative standing. There is a significant change at the bottom today. Energy has been in the red for 29 of the past 30 weeks. Today, it moves back into the green on hopes that oil prices might start trending upward again. The Utilities sector is now in last place.
Unlike the sector rankings that saw a large amount of changes this week, the style rankings are little-changed from a week ago. Small-Cap Growth tops the list for the eleventh week, as the market continues to favor both smaller company stocks and growth characteristics. Micro Cap and Small-Cap Blend remain neck-and-neck and are the only two style categories that changed positions this week. The overall relative strength leaders are in the lower right-hand corner of the traditional style box. The middle of the rankings remains a swath across the style box from Small-Cap Value to Large Cap Growth. This leaves the upper left-hand corner the area of weakness, and Mid-Cap Value, Large-Cap Blend, and Large-Cap Value are again the laggards. Mega Cap remains on the bottom and is the only style category in the red.
In last week’s update we said that China was on a trajectory to be at the top this week. In addition to accomplishing that task, China also put significant distance between itself and Japan. Japan’s slip to second is not really a negative since it gained momentum over the past week. Europe held steady in third. Emerging Markets zoomed from eighth to fourth, with China and Latin America both making positive contributions. EAFE, World Equity, the US, and Pacific ex-Japan all slid one spot lower as a result of the jump by Emerging Markets. Canada climbed a notch higher and turned green in the process, leaving just two global categories in the red. Latin America is one of them, moving from having a large negative momentum score a week ago to a very small reading today. Latin America’s great one-week performance improvement also allowed it to climb off the bottom of the rankings. The UK is now in the basement.
“The next market catalyst is going to be how earnings do against expectations.”
Brad McMillan, Chief Investment Officer for Commonwealth Financial Network
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