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The S&P 500 closed up 0.21% for the week, at 2,079.36 on Friday, as a short covering rally in the healthcare sector and Federal Open Market Committee (FOMC) rate decision set off another round of volatility and S&P 500 sector rotation. The yield of the U.S. 10-Year Treasury Note jumped another 2.83% for the week to close at 2.146% on Friday, while the U.S. dollar index (DXY) was down 0.23% from the previous week, to close at 97.019, after failing to break out the head resistance at 97.89 on Wednesday.
The S&P 500 was under selling pressure on Monday as short sellers were crashing shares of Apple [NASDAQ:AAPL], down almost 3.5%, after power management chip supplier Dialog Semiconductors [OTCMKTS:DLGNF] reported weak earnings. Apple shares recouped their losses from Monday during the week after announcing its earnings report on Tuesday that beat top- and bottom-line-expectations.
The S&P 500 pulled back further on Tuesday to test the 200-day moving average, at the 2,060 level, after the U.S. Commerce Department said durable-goods orders fell a seasonally adjusted 1.2% to $231.1 billion in September, following a 3.0% decrease in August. The number missed economists' expectations of 1.1% decline. After the announcement, the Dow Jones Transportation Average and S&P 500 Transportation sector tanked 2.64% and 2.59%, respectively, and also in part due to the earnings miss by United Parcel Service [NYSE:UPS], top constituent of both transportation indexes.
The U.S. Federal Reserve decided to keep rates on hold on Wednesday after a two-day FOMC meeting. The Fed issued a somewhat hawkish policy statement, hinting of a rate hike at the next FOMC meeting on December 15-16. From the statement, the Fed seems to be determined to hike the rate this year even though they admit that the pace of job gains has slowed. The U.S. nonfarm payrolls report for October will be released by the Labor Department next Friday, November 6. Wall Street economists' expectations are for a 177,000 gain in payrolls with the unemployment rate remaining at 5.1%.
The federal funds futures, traded on the Chicago Mercantile Exchange and commonly used to estimate the market’s views on the likelihood of changes in U.S. monetary policy, indicate 53.5% odds for a quarter-point rate hike at the December 16 policy meeting, according to data from the CME Group as of October 30. Don’t place a big bet on a December Fed rate hike yet, as the U.S. economy is starting to show signs of trouble. The Bureau of Economic Analysis (BEA), the U.S. Department of Commerce, said on Thursday that the advance estimate U.S. gross domestic product (GDP) increased at an annual rate of 1.5% in the third quarter of 2015, missing the 1.6% median projection in a Bloomberg survey of 80 economists.
On Friday, the U.S. Department of Commerce said that personal spending rose just 0.1% in September from a month earlier, the slowest pace since January, missing The Wall Street Journal’s forecast of 0.2% growth. If the U.S. holiday shopping season stalls, the U.S. will have a recession next year. And that will be the Fed's Janet Yellen's second mistake that ended up with a recession.
The spread between the 2-year and 10-year U.S Treasury yield fell on Thursday to 1.37 basis points, the lowest in six months. Falling spreads may indicate worsening economic conditions in the future, resulting in a flattening yield curve. A very low or negative spread could signal an upcoming recession.
As of October 27, there are 168,513 short positions of S&P 500 consolidated futures, traded on the CME by leveraged funds, a decrease of 14,671 short positions from the previous week. This is compared to about 62,346 long positions, down 563 from the previous week, according to the Commitment of Traders (COT) data released by the Commodity Futures Trading Commission (CFTC) each Friday. As expected, hedge funds significantly reduced short positions during the week ending October 27 ahead of the Fed meeting, resulting in a decrease of net short positions of 14,108 contracts, worth about $7.3 billion, where contracts of S&P 500 futures are traded in units of $250.00 x S&P 500 index.
The best performing S&P 500 sectors for the week were Healthcare and Consumer discretionary, which surged 3.11% and 1.74%, respectively. Short sellers triggered a short covering rally in the healthcare sector despite that shares of Valeant Pharmaceuticals Int’l Inc [NYSE:VRX] tanked another 19.24% for the week. Shares of AbbVie [NYSE:ABBV] skyrocketed 18.3% for the week, after reporting third-quarter earnings results that beat estimates and issuing long-term financial guidance that stretches out until 2020.
The S&P 500 Biotechnology sub-sector is down just 0.23%, recovering along with the healthcare sector, since September 21 when U.S. presidential candidate Hillary Clinton sent the sectors tumbling when she went on a Twitter frenzy and sent out a tweet about “outrageous” price gouging by a pharmaceutical CEO and that she would reveal her own drug affordability plan. Many believe that Clinton's plan will not go anywhere since several items in her proposal would be very difficult to pass in Congress.
Shares of The Priceline Group [NASDAQ:PCLN], top constituent of S&P 500 Consumer discretionary, jumped 6.42% for the week along with Expedia [NASDAQ:EXPE] after Expedia raised its full-year guidance. Shares of Expedia were up 8.86% for the week. Priceline will report its earnings on November 9.
The worst performing S&P 500 sectors for the week were Utilities and Consumer staples, which were down 1.91% and 1.61%, respectively. The high dividend yielding utilities and consumer staples stocks that have been considered an attractive alternative to bonds, are becoming less attractive for income investors in a rising-rate environment.
Technically, the S&P 500 has broken back into the long-term symmetrical triangle (SYM TRI) chart pattern and closed well above the 200-day SMA. The double bottom reversal is confirmed and the projected price for the S&P 500 is 2,187. There are several head resistances at 2,112, or the upper trendline resistance of the symmetrical triangle, 2,120 and 2,134. One should be cautious as the RSI and MACD are now at, or near, peak levels. We expect the S&P 500 to grind higher as sector rotations and the short covering rally continues.
S&P 500 Summary: +0.99% YTD as of 10/30/15
Barclay Hedge Fund Index: –1.44% YTD
Outperforming Sectors: Consumer discretionary +12.15% YTD, Information technology +6.12% YTD, Healthcare +4.17% YTD and Consumer staples +2.53% YTD,
Underperforming Sectors: Telecommunication services –2.08% YTD, Financials –2.8% YTD, Industrials –3.15% YTD, Materials –6.76% YTD, Utilities –7.5% YTD and Energy –14.4%
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