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The S&P 500 inched up 0.39% on Friday to close at 2,091.54, up 0.67% for the week, after the Federal Reserve said that July U.S. industrial production increased 1.3% year-over-year, compared to a 4.8% increase in July 2014. The June U.S. industrial production was revised downward to a 1.3% increase, the slowest pace since July 2013. U.S. industrial production has been decelerating sharply, from a 4.5% increase in January to the current level of a 1.3% gain, according to Federal Reserve data.
Separately, the Thomson Reuters/University of Michigan preliminary August reading of the U.S. consumer sentiment index came in at 92.9, lower than the previous month's reading of 93.1, and missing the Reuters' estimates for 93.5. U.S. consumers might not be in a good mood as their wages and salaries seemed to go nowhere, despite a tight labor market. The Labor Department said last month that the employment cost index (ECI), the broadest measure of labor costs, edged up just 0.2%, the smallest gain since the series started in the second quarter of 1982.
Warren Buffett’s Berkshire Hathaway Inc. [NYSE:BRK.A] could have caught some hedge funds by surprise on Monday after the company announced that it agreed to buy Precision Castparts Corp. [NYSE:PCP] for about $32 billion in cash. The S&P 500 ran up 1.34% after the news broke, to an intraday high of 2,105.35, mainly due to short covering.
The volatility started to pick up on Tuesday when the PBoC began setting the yuan to the U.S. dollar at a new daily reference rate of 6.2298 yuan per dollar, compared to 6.1162 on Monday, and lets it trade as much as 2% on either side of what is known as the parity rate. Under the new methodology, the PBoC said the bank sets its reference rate based upon the previous day’s close, foreign-exchange demand and supply, as well as changes in major currency rates. The sudden move by the PBoC to devalue the yuan against the U.S. dollar, by as much as 1.9% on Tuesday, sent the S&P 500 down 0.96% and the yield of the 10-year U.S. Treasury Note down 4.02% to 2.15%.
The S&P 500 nosedived 1.53% on Wednesday after the PBoC decided to continue its yuan devaluation for the second day running. The S&P 500, however, bounced off the trendline support at 2,052.09, to close at 2,086.05, up 0.10% for the day. The U.S. Job Openings and Labor Turnover Survey (JOLTS) report, released by the Department of Labor on Wednesday, may have saved the day as the number of job openings rose to 5.25 million on the last business day of June, down 100,000 from the revised 5.35 million in May, missing economists’ forecast of 5.35 million job openings. The Federal Reserve likes this report because it helps confirm the trend in jobs.
As of August 11, there are 166,354 short positions of S&P 500 Futures, (CME:SP), traded on the Chicago Mercantile Exchange (CME) by leveraged funds, an increase of 6,246 short positions from the previous week. This is compared to about 85,799 long positions, up 1,506 from the previous week, according to the Commitment of Traders (COT) data released by the Commodity Futures Trading Commission (CFTC) each Friday. Hedge funds have increased their net short positions by about 4,740 contracts from the previous week, where contracts of S&P 500 futures are traded in units of $250.00 x S&P 500 index.
The hedge funds are now piling onto S&P short positions. Bill Gross, who runs the $1.5 Janus Global Unconstrained Bond Fund, told Bloomberg this week that he shorted the German Bunds and the U.S. stock market, which he said would become more volatile when Chinese equities sink and called his “shorts of a lifetime”. His bet against equities equaled almost 10% of the fund’s assets as of June 30, according to Janus’ data.
The best performing S&P 500 sectors for the week were Energy and Utilities. The S&P 500 Energy sector, which usually trades along with the WTI crude oil price, was up 2.68% for the week, despite that crude oil was down 2.31%. There are no specific fundamental reasons, as the hedge fund strategy this year has been to go long the energy sector and short healthcare and biotech stocks. S&P 500 Utilities was up 2.18%, as investors rotated money out of high risk sectors into safe havens.
The worst performing sectors for the week were S&P 500 Healthcare and Consumer Staples, up just 0.05% and 0.04%, respectively. The Coca-Cola Co
[NYSE:KO] and Philip Morris International Inc. [NYSE:PM], top constituents of the S&P 500 Consumer Staples, were down 1.27% and 0.98%, respectively.
From our technical viewpoint, the S&P 500 is pinned to the upper trendline resistance of the descending wedge. If the S&P 500 is able to push higher, there are several head resistances between 2,090 and 2,100, including the 100-day and 50-day moving SMA.
From the sell-side argument, there is not much upward momentum to push the index higher as U.S. corporate profits have been tepid while China, Japan and the eurozone economies are slowing down. The Federal Reserve rate hike will make things worse. If the S&P 500 pulls back, there are technical supports at 2,040 and 2,014.75, or the 38.2% Fibonacci retracement level. Again, it is August and the market is typically volatile due to poor liquidity.
S&P 500 Summary: +1.59% YTD as of 08/14/15
Barclay Hedge Fund Index: +2.91% YTD
Outperforming Sectors: Healthcare +9.88% YTD, Consumer discretionary +8.46% YTD, Consumer staples +2.92% YTD, Information technology +2.4% YTD and Financials +1.83% YTD.
Underperforming Sectors: Telecommunication services –0.83% YTD, Industrials –3.84% YTD, Utilities –4.04% YTD, Materials –6.2% YTD and Energy –13.73%
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