Brooke Thackray: Market Update April 2016

Market Update April 2016

by Brooke Thackray, Alphamountain Investments

I just finished releasing a separate report, Stock Markets are in for a Rough Summer. It posits the position that the stock market is priced for perfection as it is richly valued in an environment of weak economic growth, poor earnings, high and declining profit margins and entering the weaker six months of the year for stocks.

For a copy of the report:  Stocks are in for cold summer

We are entering the time period when investors should consider being more conservative with their equity allocations. In my March newsletter, I wrote about the return profile of the favorable six month period of the year for stocks (May 6th to October 27th), compared to favorable six month period (October 28th to May 5th).

The April earnings season could help provide a bit of support for the stock market to move higher, but after the earnings season gets underway, in the second or third week of the month, it is going to be difficult for stocks to move higher. After a long consolidation starting in 2014, a strong catalyst is needed to move the S&P 500 past is all time high of 2135 set in May 2015. It would be unusual for the S&P 500 to move substantially above its all-time highs without a strong catalyst.

The stock market rallied strongly in March ... but investors do not trust it.

The defensive sectors of the stock market have been outperforming or performing at market when the S&P 500 has been rising over the last two months. When this phenomenon occurs, it indicates that investors are skeptical of the broad stock market rally. This is particularly true during the six month favorable period for stocks. In addition, volume has been declining as the recent rally has progressed.

Consumer Staples - Outperforming again recently

The consumer staples sector outperformed the S&P 500 strongly in January and into the beginning of February as investors were attracted to the sector for its defensive properties during the stock market correction. In the last three weeks, consumer staples have been outperforming once again.

Utilities - Performed at market in March

The utility sector had exceptionally strong performance in January, as the risk-off trade environment evolved. It was interesting to see the utilities sector perform at market when the S&P 500 was advancing rapidly in March.

Typically, when the S&P 500 advances rapidly, the utilities sector underperforms, especially in the favorable six month period for stocks from October 27th to May 6th.

The utilities sector received some help from declining interest rates over the last three months, but nevertheless it is still remarkable that the utilities sector has managed to hold its own against the S&P 500.

Health Care - Signs of life

I have included the health care sector as a defensive with which to measure investor sentiment, but in this case the sector has been underperforming since last August. At this time Martin Shkreli, CEO of Turing Pharmaceuticals, brought unnecessary attention to the health care sector with his “price gouging” tactics. The response was for Congress to investigate drug price policies with possible future reforms to lower prices. As a result, the sector has been underperforming the S&P 500. It is important to note that the health care sector has always been a political football in election year, just not so many months away from the election.

The health care sector has been rising recently, as the merger deal between Allergan and Pfizer fell apart based on new legislation being introduced aimed at stopping inversion deals so that corporations can pay less tax. The result has been an increase in speculation that companies may merge domestically now that inversion deals are not as attractive. The end result is that health care stocks have rallied.

Junk Bonds vs. High Quality Corporate Bonds

Junk bonds tend to outperform high quality corporate bonds in risk-on markets and vice versa. Recently, there has been a divergence between the performance of the junk bond, corporate bond ratio and the performance of the S&P 500. Junk bonds have been underperforming corporate bonds at the same time as the S&P 500 has been rising.

It is also interesting that junk bonds have been underperforming corporate bonds at the same time crude oil has been rising. Over the last year, one of the arguments for a weaker junk bond sector has been the poor performance of energy companies. It is possible that junk bonds are riskier than they are being given “credit.”

When there is a divergence between bonds and stocks, more often than naught, bonds are correct and stocks are wrong. The divergence is definitely a warning sign.

Read/Download the complete report below:

Thackray Newsletter 2016 04 April 1

Copyright © Alphamountain Investments

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