U.S. Equity Market Radar (June 2, 2014)

U.S. Equity Market Radar (June 2, 2014)




U.S. Equity Market Radar (June 2, 2014)

The S&P 500 Index experienced a broad-based rally this week with utility shares leading the way. The market made new highs this week, shrugging off concerns that the first-quarter slowdown was nothing more than a temporary setback due to weather. Companies hope to recoup their losses in the second quarter.

S&P Economic Sectors
click to enlarge

Strengths

  • The utility sector was the best performer as bond yields and interest rate-sensitive names rallied. The sector also benefitted from an increase in pricing in some East Coast markets to ensure the availability of adequate power supplies.
  • The consumer staples sector was also strong this week as the meat industry continues to consolidate. Tyson made an unsolicited bid to buy Hillshire Brands that trumped an unsolicited bid from Pilgrim’s Pride just two days before to buy Hillshire Brands. Tyson rose 8.5 percent for the week.
  • Exelon Corp. was the best performer in the S&P 500 this week, rising 7.85 percent. The company was one of the prime beneficiaries of the improving forward power prices, which had a positive impact on the company’s gross margin.

Weaknesses

  • With the market having a very good week, weakness was generally narrowly focused or company-specific. Underperformers for the week included Newmont Mining, eBay, Whirlpool and Dollar General.
  • U.S. Steel was the second-worst performer in the S&P 500 this week. Steel prices continued to slide as a result of industry overcapacity and slowing activity in China.
  • Peabody Energy was the worst performer in the S&P 500, falling 6.16 percent. The company is at risk of potentially raising equity capital as debt covenants are restricting its flexibility. The entire coal industry remains under pressure as prices remain under pressure.

Opportunities

  • It is a big week for economic data and first-tier indicators. The ISM Manufacturing Index is scheduled for Monday, the employment report for Friday.
  • The bounce in cyclicals over the past two weeks has been very encouraging and we may be finally turning the corner after a period of underperformance that began in mid-March. This bodes well for quality growth stocks with reasonable valuations.
  • The S&P 500 closed at a new high, and we have seen other encouraging signs that the modest correction may have run its course for the time being.

Threats

  • Large caps outperformed this week by a good margin, potentially reversing the recent trend of broadening breadth in the market.
  • All eyes will be on the European Central Bank (ECB) policy decision on June 5. Any disappointment here would likely lead to a sell-off in the equity market.
  • Housing data remains disappointing overall. If growth does not accelerate, the robustness of the broader economic recovery could be threatened.

About the author

Frank Holmes is CEO and chief investment officer of U.S. Global Investors, Inc., and a Toronto, Canada native, which manages a diversified family of mutual funds and hedge funds specializing in natural resources, emerging markets and infrastructure. The company’s funds have earned more than two dozen Lipper Fund Awards and certificates since 2000. The Global Resources Fund (PSPFX) was Lipper’s top-performing global natural resources fund in 2010. In 2009, the World Precious Minerals Fund (UNWPX) was Lipper’s top-performing gold fund, the second time in four years for that achievement. In addition, both funds received 2007 and 2008 Lipper Fund Awards as the best overall funds in their respective categories. Mr. Holmes was 2006 mining fund manager of the year for Mining Journal, a leading publication for the global resources industry, and he is co-author of “The Goldwatcher: Demystifying Gold Investing.” He is also an advisor to the International Crisis Group, which works to resolve global conflict, and the William J. Clinton Foundation on sustainable development in nations with resource-based economies. Mr. Holmes is a much-sought-after conference speaker and a regular commentator on financial television. He has been profiled by Fortune, Barron’s, The Financial Times and other publications.

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