U.S. Equity Market Radar (May 11, 2013)
The S&P 500 made new highs again this week as cyclical sectors powered ahead. Two weeks ago we highlighted that we could be at a potential inflection point in the market as the leadership of defensive areas such as telecommunications, staples, health care and utilities started to show signs of cracking and cyclicals began outperforming. This pattern was reinforced this week.
Strengths
- The industrials sector was the leader this week led by Precision Castparts, Fastenal and FedEx. Precision Castparts reported earnings this week which were ahead of expectations and made positive comments regarding the next few quarters.
- The consumer discretionary sector was also a strong performer this week as earnings from Fossil and DIRECTV were well received, with both companies rising by more than 10 percent for the week.
- Electronic Arts was the best performer this week, rising by more than 25 percent. The company gave positive 2014 earnings guidance and is showing discipline on margins.
Weaknesses
- The utility sector was the worst performer for the second week in a row as a sector rotation appears to be in the works as cyclicals gain favor and defensives retreat.
- The consumer staples sector underperformed as well this week in what is likely also sector-rotation driven after relatively strong performance for most of the year.
- Adobe Systems Inc. was the worst performer in the S&P 500 this week, declining 6.36 percent, as the company announced a decision to shift creative software to the cloud. This announcement caused confusion around their subscription model.
Opportunity
- The market continues to climb that proverbial wall of worry and just shakes off any bad news and rallies smartly on good news.
- Global central banks are literally pulling out all the stops in an attempt to ignite economic growth. The European Central Bank (ECB) cut interest rates last week, which is a move in the right direction as far as the market is concerned.
Threat
- A market consolidation wouldn’t be a surprise after a strong start to the year.
- Expectations for cyclical areas of the market are low and allowing stocks to rally when companies just meet expectations. If the global economy were to deteriorate the market wouldn’t have much to fall back on.
