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The S&P 500 plunged 0.78% on Monday and then bounced off the 200-day SMA to close at 2,067.64, following the Shanghai composite index’s 8.48% meltdown after reports said that Chinese brokerages began restricting margin trading. The news sparked panic selling, especially among China's neophyte retail investors. The IMF urged China last week to exit measures to prop up stocks but no one seemed to be listening. The bottom line is that if you are betting big on China, stop doing it.
There was not much good news for the Federal Reserve as U.S. consumer confidence took its biggest tumble in four years in July on a less optimistic jobs outlook, and home appreciation in major cities stalled in May, suggesting less demand for housing in the near future. The Conference Board said on Tuesday that its consumer confidence index for July fell to 90.9, missing a forecast reading of 100.0. Separately, the S&P/Case Shiller composite home price index of 20 metropolitan areas rose 4.9% year-over-year in May, missing the economists polled by Reuters forecast of 5.6%.
After the Federal Open Market Committee meeting on Wednesday, the Fed made it clear to the market that it will hike the rate this year, regardless of the tepid U.S. economy. In fact, Federal Reserve Bank of St. Louis President James Bullard told the Wall Street Journal on Friday that, “We are in good shape” for increasing the Fed’s currently near-zero short-term rate target at the September 16-17 central bank meeting.
The forward and backward looking U.S. economic data this week looked mixed at best. The U.S. Bureau of Economic Analysis said on Thursday that the first estimate of second quarter 2015 U.S. GDP was 2.3%, missing expectations of 2.6%. For the first half of 2015, the GDP was revised upward to 1.45% from 1.25%. Meanwhile, the Fed kept their economic forecast for this year to between 1.8% and 2.0%.
The Labor Department said on Friday 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. Economists polled by Reuters had forecast the employment cost index rising 0.6%. Wages and salaries in the U.S. seemed to go nowhere, despite a tight labor market. Weak ECI figures sent the U.S. 10-Year Treasury Note yield tumbling 3.58%, to close at 2.187%, on Friday.
The Fed is losing control of bond yields as the U.S. 10-Year Treasury Note yield just broke the key technical support at 2.23%, or the 50% Fibonacci retracement level. The Bureau of Economic Analysis will release the Personal Income and Outlays data on Monday. The market is expecting the ADP jobs report on Wednesday to increase by 210K and about a 225K jobs gain for the non-farm payrolls report to be released on Friday. If the U.S. economy turns out to be weaker than expected, the yield could dip below 2% by September or October.
For the week, the S&P 500 inched up 1.16% and closed at 2,103.84 on Friday, the U.S. dollar index closed at 97.336 on Friday and was unchanged, while the U.S. 10-Year Treasury Note yield was down 3.32%.
The best performing S&P 500 sectors for the week were Utilities and Healthcare, up 3.49% and 2.48%, respectively, as investors rotated money out of high risk sectors into safe havens and defensive sectors while they are trying to make sense out of what comes next after a rate hike. The worst performing sectors for the week were Energy and Financials, down 0.37% and up just 0.14%, respectively. The energy sector trades along with the WTI crude oil price, which was down 2.48% for the week, while stocks in the financials sector are traded along with the U.S. Treasury yield.
From our technical viewpoint, the S&P 500 has been moving in the trading range since February, between 2,040 and 2,120 within the ascending triangle. The index just bounced off the 200-day SMA but was unable to break out the technical head resistance of the ascending triangle at 2,120. With 72% of S&P 500 companies having already announced their quarterly financial reports, earnings have grown a mere 0.9%. Revenue so far has declined 3.3% from a year ago, according Yahoo Finance. There is not much upward momentum to push the index higher.
S&P 500 Summary: +2.18% YTD as of 07/31/15
Barclay Hedge Fund Index: +10.7% YTD
Outperforming Sectors: Healthcare +11.71% YTD, Consumer discretionary +11.01% YTD, Consumer staples +3.13% YTD and Information technology +2.90% YTD.
Underperforming Sectors: Financials +1.66% YTD, Telecommunication services –0.55% YTD, Industrials –4.0% YTD, Materials –5.58% YTD, Utilities –7.05% YTD and Energy –13.39% YTD. |
