Business and Financial Ask Guido: Your Investment Resource

Posted Friday, August 28, 2015 12:00 am

Bruce A. Bittles

The S&P 500 and Dow Industrials rallied to new record highs last week. It would be a stretch, however, to describe the performance as a ‘breakout’ given that volume plunged and some divergences became more acute. In a healthy bull market most areas are in gear with the primary trend.

In the present example a number of high-profile divergences remain problematic including the fact that the Dow Transports lost ground last week while approaching the low for the year. The transports are worrisome given the fact that planes, trains and trucks historically correlate closely with the short and intermediate-term potential of the economy.

Despite the new highs in the popular indices, the average stock has lost upside momentum with only 54% of Russell 1000 and Russell 2000 issues trading above their 50-day moving average.

The stock market is entering the weakest six-month seasonal period of the year. This has been less of an influence the past two years but the long term record of the one-year cycle cannot be easily ignored. According to Ned Davis Research, the sectors that have historically outperformed during this period include health care, consumer discretionary and consumer staples.

The analysts at NDR add that the energy sector has never outperformed in the May to October time frame. Overall, the technical condition of the stock market suggests a continuation of a tight trading range with the bias to the upside.

The support for the stock market last week was the increasing evidence that interest rates will remain low for longer than consensus estimates. The latest figures on retail sales, industrial production and consumer sentiment were all weaker than forecast.

Inflation pressures remain benign as seen in the April Produce Price Index (PPI) that took an unexpected sharp drop.
The PPI data showed wholesale prices falling 0.4% for the month and down five of the past six months. On a year-over-year basis, producer prices decline 1.3%, the most since 2010. Given the latest data on the economy and prices it will be very difficult for the Federal Reserve to raise interest rates any time soon.

The Fed meets on June 16 and will likely postpone any shift in monetary policy into September. This is already being reflected in the performance of the U.S. dollar that has declined to a four-month low. The dollar was a headwind for stocks in the first quarter and now becomes a tailwind for stocks. The weak dollar has also triggered a rally in commodities including gold. Unlike stocks, the sentiment on gold is bearish, which could mean that gold could outperform equities in the second quarter.