U.S. Equity Market Radar (May 20, 2014)
The S&P 500 Index ended the week essentially flat for the week. The market rallied early in the week but couldnât maintain the momentum and reversed course. The Russell 2000 continued its recent string of underperformance, once again highlighting the bifurcation in the market.
Strengths
- The telecommunication services sector was the best performer for the third week in a row as AT&T and Verizon both rose by roughly one percent. It was announced this week that some high profile billionaire investors have recently bought stakes in Verizon, including Warren Buffett, Daniel Loeb and John Paulson.
- The technology sector also had a good week as Cisco Systems rose nearly 6 percent on better than expected quarterly earnings results. Applied Materials was another standout performer, rising 4.7 percent, also on better than expected earnings results. Disk drive makers Western Digital and Seagate Technology also were standout performers as the stocks rebounded from recent weakness and Western Digital announced a substantial dividend increase.
- Nordstrom was the best performer in the S&P 500, rising 14.77 percent this week. The company released fiscal first-quarter results which were roughly in line with year ago performance, but beat current expectations on better outlet and online sales.
Weaknesses
- The financial sector was the worst performer this week as the group experienced broad-based weakness. Banks, insurance and discount brokers led on the downside. Charles Schwab and E*Trade both fell about 5 percent after posting disappointing trading activity in their monthly updates.
- The energy sector was a weak performer in what appears to be a normal pullback after a period of outperformance. Chesapeake Energy fell by more than 7 percent as the company cut its output growth estimate for the year.
- Fossil Group was the worst performer in the S&P 500, falling 7.84 percent. The company announced disappointing quarterly results, driven by weakness in handbag and leather goods. Same store sales were disappointing, falling 2.4 percent year-over-year.
Opportunities
- Retailers have begun reporting, with several including TJX, Home Depot, Lowes and Target all reporting next week. The consumer discretionary sector has underperformed recently, potentially setting up a scenario where expectations are sufficiently low that stocks could rally on decent results.
- Next week, new and existing home sales for May will be released and after this weekâs strong housing starts data, it could be a catalyst for housing-related stocks.
- The selloff in high quality companies offers an opportunity to pick up companies with robust fundamentals at attractive prices.
Threats
- The Russell 2000 has broken below its 200-day moving average for the first time since November 2012. This could potentially be an early sign of a broader market correction in the works.
- The flip side of the retailers reporting next week is that if earnings disappoint, this could signal broader problems in the economy and lead to a growth scare among investors after disappointing GDP data out of Europe this week.
- Chinese economic data continues to disappoint and while some stimulus measures have been introduced, China remains a threat to the global growth outlook.
