U.S. Equity Market Radar (June 16, 2014)

U.S. Equity Market Radar (June 16, 2014)

The S&P 500 Index sold off this week as geopolitical events flared up in Iraq, sending oil prices higher and giving investors a reason to take profits after three weeks in a row of solid gains.

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Strengths

• The energy sector was the only positive performer this week as oil prices rose to $4 after an al-Qaeda-affiliated group took control of Mosul, Iraq’s second largest city. Observers fear the potential for a civil war, similar to what is currently ongoing in Syria, the key difference being a disruption to global oil supplies. The S&P 500 Oil and Gas Drilling Index and the Exploration and Production Index both rose by more than 3 percent this week in broad-based rallies.
• The technology sector was near breakeven this week as semiconductor and semiconductor equipment stocks were strong after Intel raised its second-quarter revenue forecast on improving business demand for personal computers. Intel rose 6 percent for the week.
• International Game Technology was the best performer in the S&P 500, rising 26.8 percent this week. The company, the world’s largest slot machine-maker, announced on Monday that it hired an investment bank to explore a sale, and by Friday multiple potential bidders and interested parties had been identified. Interest appears very robust.

Weaknesses

• The consumer discretion sector was the worst performer this week as homebuilding and auto-related groups sold off as higher oil prices caused concerns among investors that consumers would be forced to scale back activity. Homebuilders, home improvement retailers and automotive retailers were hit the hardest.
• The industrial sector was also an underperformer as airline stocks came under pressure on higher oil prices and Deutsche Lufthansa’s profit warning this week, citing tough competition for long-haul international flights.
• Tyson Foods was the worst performer in the S&P 500, falling 11.7 percent. The company won the bidding war for Hillshire Brands, but investors are concerned that the price may have been too dear.

Opportunities

• FedEx reports next week and is often looked at to provide a read on the direction of the overall economy. Hopefully FedEx will confirm the economic strength we are seeing in the macro indicators.
• We have several technology companies reporting next week, with bellwether Oracle the headliner, but also Adobe Systems, Red Hat and Jabil Circuit.
• The S&P 500 suffered its first loss in three weeks, and the winning strategy for the past 18 months has been to buy the pullbacks.

Threats

• Sell in May has not worked so far this year, but with a dearth of significant earnings or market moving economic data, a June swoon can’t be ruled out.
• At almost 18 times trailing earnings, the S&P 500 is not cheap. Valuation may be a headwind for future market gains.
• Any hawkish comments out of next week’s Federal Open Market Committee (FOMC) meeting could make the markets jittery and the inclination would be to sell first and ask questions later.