U.S. Equity Market Radar (April 20, 2014)
The S&P 500 Index rose 2.71 percent, bouncing back this week after suffering its worst weekly decline since 2012 last week. Utilities were the only sector to eke out a gain as bonds rallied and money flowed into defensive areas of the market. The energy sector led the way, and has emerged as the new leader in the market over the past month.
Strengths
- The energy sector rose 4.67 percent this week as there was ubiquitous strength in virtually every industry group, including refiners, energy service and exploration and production.
- The industrials sector also exhibited strong performance with every index constituent up for the week. Leaders included Textron, Ingersoll-Rand and Kansas City Southern.
- Micron Technology was the best performer in the S&P 500, rising 13.16 percent this week. Flash storage competitor SanDisk reported after the close on Wednesday, topping expectations and raising margin forecast; this news bodes well for Micron.
Weaknesses
- Weakness was seen in the managed care stocks. UnitedHealth reported weaker-than-expected revenues and higher costs for a new Hepatitis C therapy but this report dragged down the entire group.
- Computer and electronics retailers were also weak with Best Buy’s news that the company’s U.S. retail chief is retiring, along with a profit warning from a competitor.
- Intuitive Surgical was the worst performer in the S&P 500 for the second week in a row, falling 6.29 percent. Last week, the company announced that sales of its robotic surgery systems fell sharply in the first quarter, coming up well short of expectations. This week’s move appears to be continued fallout from that news.
Opportunities
- The current macro environment remains positive as economic data is robust enough to give investors confidence in an economic recovery, but not too strong as to force the Federal Reserve to aggressively change course in the near term.
- The selloff in high-quality companies offers an opportunity to pick up companies with robust fundamentals at attractive prices.
- Quarterly earnings reports were generally well received by the market this week, which is good news considering expectations have been lowered considerably going into earnings season.
Threats
- A short-term market consolidation period after such strong performance 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 large.
- Quarterly earnings reports out next week include Apple, Facebook, Amazon, Starbucks and QUALCOMM, which all have market-moving potential if they disappoint.
