U.S. Equity Market Radar (May 12, 2014)
The S&P 500 Index ended the week with a small loss as the market continues to digest a multitude of earnings reports. The market experienced a large bifurcation this week with large-cap stocks significantly outperforming small-cap stocks. A good illustration of this is the performance of the Dow Jones Industrial Average (large cap), which rose 0.43 percent, while the Russell 2000 Index (small cap) fell 1.91 percent. Since March 31, the Russell 2000 has declined by 5.53 percent versus a gain of 0.55 percent for the S&P 500 and 1.02 percent for the Dow. The Russell 2000 has even breached its 200-day moving average. This narrowing breadth in the market is a potential warning sign that needs to be monitored closely.
Strengths
- The telecommunication services sector was the best performer for the second week in a row as AT&T and Verizon both rose by around 2.5 percent. AT&T is in talks to possibly acquire DirecTV, which was discussed last week but intensified as the week progressed.
- The consumer staples sector continued to advance this week as traditionally defensive areas of the market tended to outperform. CVS Caremark, General Mills and Kellogg were among the best performers.
- Electronic Arts was the best performer in the S&P 500, rising 23.23 percent this week. The stock rose more than 21 percent on Wednesday as the company released fourth-quarter, fiscal results. This indicated that turnaround efforts are bearing fruit.
Weaknesses
- The information technology sector was the worst performer this week in spite of Electronic Arts’ performance. The group was dragged down by wide range of companies, which included poor performances from Teradata, Yahoo, First Solar and Facebook.
- The utilities sector was a weak performer for the second week in a row as profit-taking appeared to be the driver after a run of strong performance.
- Whole Foods Market was the worst performer in the S&P 500, falling 20.81 percent. The company announced disappointing quarterly results and cut its full-year guidance. Competition in the organic food space is heating up as other grocery stores and even Wal-Mart have broadened their organic offerings.
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 Federal Reserve to aggressively change course in the near term.
- The sell off in high-quality companies offers an opportunity to pick up companies with robust fundamentals at attractive prices.
- Initial indications from retailers reporting same-store sales showed outstanding growth due to a late Easter pushing sales solidly into April. This should promote good reception from the retail sales report from the Census Bureau, scheduled for release next Tuesday.
Threats
- A short-term market consolidation period after such strong performance cannot be ruled out.
- Housing starts and building permits for April are scheduled for release next Friday. Housing is a key component to the recovery story and has disappointed so far in 2014. A disappointing report would weigh on the economic outlook as a good spring selling season is critical to regaining confidence that the recovery won’t fade as we move into the summer months.
- 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.
