U.S. Equity Market Radar (March 31, 2014)
The S&P 500 Index suffered modest declines this week but under the surface the market is churning as sector leadership is being reshuffled. The best performing sectors for the week are typically viewed as defensive with the exception of energy, which is inconsistent with the moves we are seeing in the bond market which appear to be moving forward with expectations of higher short-term interest rates.
According to the Stock Trader’s Almanac 2014 springtime is a good time to own equities with the rally off the February or March low for the Dow Jones Industrial Average averaging 11.5 percent over the past 49 years. The Dow bottomed in early February and has rallied about 6 percent since that time, implying we are roughly half way through the spring rally if the seasonal averages hold.
Strengths
- The energy sector rose 2.52 percent this week as energy service and exploration and production companies were particularly strong. Oil and natural gas prices didn’t move that much so this change appears to be part of the rotation in the market as mentioned above. Strong performers included Noble Energy, Schlumberger and Baker Hughes.
- The technology sector led the S&P 500 in stock buy backs during the fourth quarter as the sector accounted for 27 percent of the $129.4 billion in buybacks.
- Symantec was the best performer in the S&P 500 rising 8.74 percent this week. The shares bounced back as last week the company unexpectedly fired President and Chief Executive Officer Steve Bennett and was the worst performing stock in the S&P 500.
Weaknesses
- Since the post Federal Open Market Committee (FOMC) press conference last Wednesday the market has experienced quite a rotation from growth to value. High quality companies exhibiting strong relative strength have been hit hard, while traditional value stocks have experienced a price reversal.
- Certain industry groups have been hit the hardest. They include internet retailers, internet software & services, biotechnology and casino & gaming.
- Netflix was the worst performer in the S&P 500 this week, falling 11.61 percent. The company has fallen by more than 19 percent in March and is a good example of the market rotation mentioned above without company specific news.
Opportunities
- The current macro environment remains positive as economic data remains robust enough to give investors confidence in an economic recovery but not too strong as to force the Fed to aggressively change course in the near term.
- Money flows are likely to find their way into domestic U.S. equities and out of bonds and emerging markets.
- The improving economic situation could possibly drive equity prices well into 2014.
Threats
- A short-term market consolidation period after such strong performance over the past six months cannot be ruled out.
- Higher interest rates are a threat for the whole economy. The Fed must walk a fine line and the potential for policy error is potentially large.
- Potentially a lot of good news is priced into the market and the economy will need to deliver to maintain the positive momentum in the market.
