Trend is our Friend but Rally Looks Tired
The major market indices finished the week solidly higher reflecting strength in the beaten down Financials sector following a batch of better than feared first quarter earnings reports.
April 18, 2016
| By Mike Schwager
Performance for Week Ending 4/15/2016:
The Dow Jones Industrial Average (Dow) gained 1.82%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 1.86%, the Standard & Poor’s 500 Index (S&P 500) closed up 1.62% and the Nasdaq Composite Index (NASDAQ) tacked on 1.80%. Sector breadth was positive with 8 of the 10 S&P sector groups finishing higher. The Financials sector (+3.95%) led the way higher followed by Materials (+3.14%) and Industrials (-2.07%).
||Closing Price 4/15/2016
||Percentage Change for Week Ending 4/15/2016
||Year-to-Date Percentage Change Through 4/15/2016
*See below for Index Definitions
MARKET OBSERVATIONS: 4/11/16 – 4/15/16
The major market indices finished the week solidly higher reflecting strength in the beaten down Financials sector following a batch of better than feared first quarter earnings reports. Adding to the positive tone was a handful of generally upbeat economic reports out of China that helped ease fear over the strength of the world’s second largest economy.
While it’s hard to gauge a top in momentum driven rallies, like the one we’ve been in since the February lows, there are signs that the run up may be starting to lose stream. Trading volumes have turned lower over the past few weeks, suggesting investors may be losing conviction in terms of additional near term upside potential. In addition, valuations have become stretched and complacency, as suggested by the low levels of the VIX Index (aka the fear index), seems elevated. While the macro environment still remains supportive for additional upside over the course of the year, a period of mild consolidation may be needed before stocks can make the next leg higher.
Beige Book Offers Upbeat Outlook: The Fed released their Beige Book report last week. The report—which provides an anecdotal summary of economic conditions compiled by the 12 regional Reserve Banks—reported that activity continued to expand across most of the country in late February and March 2016 as consumer spending once again increased in the majority of Districts. The description of manufacturing activity was upgraded, in line with the recent improvement seen in most manufacturing surveys. Labor market conditions continued to strengthen and several Districts reported signs of a pickup in wage growth. Retail prices increased modestly across the majority of districts, while input cost pressures continued to weaken.
Economic Data – A Mixed Bag last Week: The Commerce Department reported that retail sales during the month of March fell 0.3% with the 2.1% decline in vehicle sales being one of the biggest drag on total sales. The Mortgage Bankers Association reported that mortgage applications rose 10% during the week ended April 8. The uptick in applications reflected an 11.3% surge in the refinancing component and an 8.4% gain in the purchase index. On the jobs front, the Labor Department reported that initial jobless claims during the week ended April 9 fell 13k to 253K, solidly better than the 270K expected by economists, and the lowest level since 1973. Elsewhere, the New York Fed reported that manufacturing activity in the greater NY area expanded for the second straight month. The Empire Index jumped to 9.6 (readings above 0 signal expansion) from 0.6 during March. The “guts” of the report were also strong with the forward looking new orders component rising to 11.1 from 9.6 last month.
The Week Ahead: First-quarter earnings season will shift into high gear as upwards of 100 members of the S&P 500 will report results, including 14 members of the Dow Jones industrial average. The data calendar will be relatively light with a focus on the housing sector. Notable reports include the National Association of Home Builders’ April housing market index, March housing starts and building permits, and March existing home sales. A handful of Fed heads are scheduled to speak including New York president William Dudley, Minneapolis president Neel Kashkari and Boston president Eric Rosengren.
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.
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