The S&P 500 closed at a new high on Monday. Never before in the history of the known world had this closely-followed index reached this level. Based on its previous ascents to new highs, we expected a large amount of media fanfare. However, it did not occur.
Perhaps it was because no one noticed, which is very unlikely. Perhaps it was because the S&P has been at or near new highs for most of the past three months and the achievement lacked any surprise. Perhaps the media and investors were distracted by more important events. Then again, maybe there really was a lot of fanfare and we just missed it.
It is much too early in the year for the summer doldrums to be setting in, but given the decline in volume this past week, the prospect can’t be fully rejected. It would seem the market is in need of a catalyst since it has been moving mostly sideways the past three months. Although an upside catalyst would be preferred, even a downside catalyst might put some energy back into this lethargic market. Earnings, merger & acquisition activity, interest rate speculation, and economic reports all seem to receive a giant shrug from the stock market these days. Even the release of the Fed’s FOMC meeting minutes this afternoon was more subdued than usual.
There is no need to worry though. Like every upward and downward market move, this sideways move will also end. In the meantime, try to enjoy the lower stress levels the current calm can provide.
It is now looking like the dethroning of Health Care that took place four weeks ago was nothing more than a temporary abdication. Health Care has been one of the leading sectors for most of 2015, but it embarked on a short-term pullback in late April. The decline wasn’t too severe, but it came at a time when other sectors were gaining strength. As a result, Health Care fell all the way to sixth on a relative-strength basis before turning around and heading higher. It has now reclaimed the top spot and is poised to potentially begin posting new highs. Technology climbed back to second place after spending two weeks in fourth. Materials remains strong, although the resurgence of Health Care and Technology pushed it out of the top spot it held for a week. The Financials sector continues to improve, this week climbing from fifth to fourth. Consumer Discretionary increased its momentum by four points. However, that turned out to be a below-average performance, causing it to drop two spots to fifth. Energy fell again after sitting at the top just two weeks ago. The relatively low volume in the group suggests this is just a pause in a new longer-term uptrend. Like Energy, Telecom is another sector that jumped to the top of the rankings in late April only to give it all back in May. Telecom did manage to flip its momentum reading from slightly negative to slightly positive over the past week. Utilities and Real Estate have been on the bottom for six weeks, and they are the only two of our 33 major equity categories sitting in the red.
Small-Cap Growth was the most-improved style category over the past week, climbing from seventh to third. Don’t be too fast to jump to any conclusions though, as the style rankings are in a compressed state with only nine points separating top-ranked Mega-Cap from Small-Cap Value on the bottom. All eleven style categories posted improved momentum scores, allowing even last-place Small-Cap Value to flip from red to green. The five largest capitalization categories averaged a six-point momentum increase while the four smallest did much better, averaging a nine-point improvement. Despite the shifts, the market is still favoring larger stocks. Mega-Cap and Large-Cap Growth extended their stay at the top to three weeks, while Small-Cap Value and Micro-Cap are bringing up the rear.
Let’s get the obvious out of the way first – China is still on top. It has held that spot for seven straight weeks and shows no sign of letting go. Additionally, it has been at the top for all but five of the past 24 weeks, and it was in second place those five weeks while Japan was in first. Speaking of Japan, it climbed back to second after a three-week absence. Now, let’s talk about the big downward moves in today’s global rankings – namely the drops of Latin America and Canada. As you may recall, Latin America has been at or near the bottom of the rankings since last October. It was in a steep downtrend with the iShares Latin America 40 ETF (ILF) losing more than a third of its value from early September to mid-March. However, it managed to rally higher in April, pulling the Latin America category as high as fourth. Although it is only measuring a low 0.40 correlation with the price of oil over the past year, ILF’s bottoming process and subsequent moves have closely coincided with those of oil, and their correlation jumped to 0.70 the past six months. Latin America fell five places to ninth, and Canada fell two spots to land on the bottom. Canada’s rise and fall can also be linked to the price of oil. The iShares MSCI Canada ETF (EWC) had a 0.82 correlation to oil the past year and 0.92 for the most recent six months. Nearly all other changes in the rankings are the result of the rise of Japan and the fall of Latin America and Canada. For example, the US moved two spots higher to eighth due to the decline of other categories.
“We continue to get the question from clients of how can the markets keep reaching new highs. There’s nervousness among investors, and that’s a good thing. They’re not blindly rushing into stocks.”
Sean Lynch, co-head of global equity strategy, Wells Fargo Investment Institute
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