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Investors Keep Yellen Buy

The Dow Jones Industrial Average (Dow) added 1.27%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) rose 1.60%, the Standard & Poor’s 500® Index (S&P 500) gained 1.56% and the NASDAQ Composite Index (NASDAQ) finished up...

November 18, 2013    |    By Mike Schwager

Performance for Week Ending 11/15/13:

The Dow Jones Industrial Average (Dow) added 1.27%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) rose 1.60%, the Standard & Poor’s 500® Index (S&P 500) gained 1.56% and the NASDAQ Composite Index (NASDAQ) finished up 1.7%. Sector breadth was positive as all 10 of the S&P sector groups finished higher. The Consumer Discretionary sector (+2.54%) led the way higher followed by Healthcare (+2.09%) and Consumer Staples (+1.67%).

Index* Closing Price 11/15/2013 Percentage Change for Week Ending 11/15/2013 Year-to-Date Percentage Change Through 11/15/2013

Dow

15961.70

+1.27%

+21.81%

Wilshire 5000

18715.32

+1.60%

+26.80%

S&P 500

1798.18

+1.56%

+26.08%

NASDAQ

3985.97

+1.70%

+32.01%

*See below for Index Definitions
 

MARKET OBSERVATIONS: 11/11/13 - 11/15/13

The major market indices finished the week solidly higher with both the Dow and S&P 500 posting new all time highs. The NASDAQ Composite finished just shy of the 4000 level, an area last visited in September 2000. This week’s gains were global in nature with almost every major international market index finishing higher.

Investors applauded Federal Reserve (Fed) Chairman nominee Janet Yellen’s testimony in front of the Senate Banking Committee this week. Dr. Yellen, who is likely to be confirmed as the next head of the Fed, took on a ‘dovish’ tone during her presentation stating that she wants to maintain stimulus until the economy improves. Yellen added that the economy and job market are still performing “far short of their potential,” suggesting that the current $85 billion per month bond buying program will remain in place for the foreseeable future. Earlier in the week, other Fed members also took on a supportive tone with both Minneapolis Fed President Narayana Kocherlakota and Atlanta Fed President Dennis Lockhart opining that monetary policy should remain accommodative.

While the market frets the winding down of quantitative easing, ultimately the decision to taper will be because the economy has embarked on a self sustaining path. A stronger economy should be positive for earnings growth and in turn good for equities. While the strong year-to-date gains has many market participants looking for a near term pullback, the combination of attractive seasonals, the likelihood that Fed policy will remain on hold, and recent signs the labor market is gathering momentum should limit downside risk.

Third quarter earnings season continue to wind down. Through Friday, 462 members of the S&P 500 have reported quarterly results with overall earnings up by 5.2%. Of the 462 companies, 68% have beaten expectations while fewer than 20% have fallen short.   The current “beat” rate remains solidly better than the long-term average of 63%. On the sector level, Consumer Discretionary (+14.1%) has reported the strongest results followed by Financials (+7.9%) and Industrials (+7.7%). The Energy sector (-9.7%) is the only group posting a year-over year decline.

Measures of investor sentiment also remain supportive. This week the American Association of Individual Investors (AAII) reported that bullish sentiment in the most recent week fell to 39.2%, the lowest level in several weeks. Bearish sentiment rose to 27.5% and now stands at the highest level since early October. Sentiment readings tend to be contrarian in nature, therefore the falling levels of bullishness and rising levels of bears should be viewed as a mild positive for the markets.

On the Fund flow front, the Investment Company Institute (ICI) reported that mutual fund flows rose by $6.1 billion in the latest week as strong inflows to equity funds offset outflows from bond funds. Equity funds took in $9.0 billion of new money with $5.4 billion directed to domestic funds while International funds captured $3.6 billion. Bond funds saw another $4.3 billion in funds exit with Taxable funds losing $3.5 and Muni funds seeing outflows of $0.83 billion.

Economic Roundup:  While last week’s economic calendar was light, the data generally pointed to a mixed picture. Last week, the New York Fed reported that manufacturing activity in the greater New York region contracted in November. The Empire Manufacturing Index dropped to -2.21 (readings below 0 signal contraction), the first negative reading since May. In addition to the disappointing headline number, the “guts” of the report were also worrisome with the forward looking New Orders component dropping to -5.53 from +7.75 in the prior month. On the labor front, the Labor Department reported that initial jobless claims during the week ended November 9 fell 2K to 339K.  Results were higher than the 330K rate expected by economists. The 4-week moving average—which helps smooth the week to week volatility—came in at 344K – the lowest level in 5 weeks. In addition, the Mortgage Bankers Association reported that mortgage applications in the week ended November 8 fell 1.8%. The decline in applications reflected a 2.3% dip in the refinancing Index and a 0.5% pullback in the purchase component. Overall applications have now declined in three of the past four weeks.  During the period the 30-year fixed rate mortgage averaged 4.44%, up 12 basis points from the prior week. A year ago rates averaged 3.52%.

The Week Ahead
Earnings season continues to wind down with 26 members of the S&P 500 scheduled to report their quarterly results. The only Dow component scheduled to report during the upcoming week is Home Depot, on Tuesday. After two relatively quiet weeks, the economic calendar will be back in focus. Reports of interest in the upcoming week include; the National Association of Home Builders November housing index, the October Consumer and Producer Price Indexes, October retail sales, October existing home sales, and the November Philadelphia Fed survey. The meeting minutes from the October Federal Open Market Committee meeting will also be released on Wednesday.  Several Fed officials will make public appearances this week including Philadelphia president Charles Plosser, Minneapolis president Narayana Kocherlakota, Chicago president Charles Evans and St. Louis president James Bullard. Chairman Ben Bernanke is also scheduled to speak during the week.


Definitions

The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally defined as the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

Wilshire 5000 Total Market IndexSM represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data. The index is comprised of virtually every stock that: the firm’s headquarters are based in the U.S.; the stock is actively traded on a U.S. exchange; the stock has widely available pricing information (this disqualifies bulletin board, or over-the-counter stocks). The index is market cap weighted, meaning that the firms with the highest market value account for a larger portion of the index.

Standard and Poor's 500© Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.

American Association of Individual Investors – AAII is a non-profit, membership-driven investor education organization. The American Association of Individual Investors (AAII) was founded in 1978 by James Cloonan. The AAII's mission is to teach individuals to manage their own portfolios and to beat average S&P 500 returns, while taking on lower-than-average levels of risk. AAII also publishes the results of its weekly investor confidence surveys that are based on its members' feelings about where the stock market is headed.

NAHB/Wells Fargo Housing Market Index is an index based on a monthly survey of members belonging to the National Association of Home Builders (NAHB) that is designed to measure sentiment for the U.S. single-family housing market. The NAHB/Wells Fargo Housing Market Index (HMI) is a widely watched gauge of the outlook for the U.S. housing sector.

Producer Price Index – PPI – is a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time. PPIs measure price change from the perspective of the seller.

Indices do not include any expenses, fees, or sales charges, which would lower performance. Indices are unmanaged and should not be considered an investment. It is not possible to invest directly in an index.

Past performance is no guarantee of future results. Indices do not include any expenses, fees, or sales charges, which would lower performance. Indices are unmanaged and should not be considered an investment. It is not possible to invest directly in an index.

The individual companies mentioned in this piece were for informational purposes only and should not be viewed as recommendations.

The comments should not be construed as a recommendation of individual holdings or market sectors, but as an illustration of broader themes. This document contains forward-looking statements about various economic trends and strategies. You are cautioned that such forward-looking statements are subject to significant business, economic and competitive uncertainties and actual results could be materially different. There are no gua rantees associated with any forecast and the opinions stated here are subject to change at any time and are the opinion of the individual strategist. Information in this report does not pertain to any investment product and is not a solicitation for any product. This material has been prepared using sources of information generally believed to be reliable. No representation can be made as to its accuracy.


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