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The equity markets continued to drift marginally higher last week. Although the advance in the second quarter failed to gather volume or momentum the performance is nevertheless impressive given the uncertainty surrounding the strength of the U.S. economy and Fed monetary policy. Worries over GDP growth and interest rates have been offset by stronger than expected corporate earnings in the first quarter.

Subtracting the weak energy sector, corporate profit margins surprised to the upside in the first three months of the year. From here there is little evidence that stocks will soon breakout from of a narrow weekly trading range since the start of the second quarter.

Despite the climb to new highs by the popular averages the technical condition for stocks remains mixed. A number of divergences remain including the very unusual performance of the Dow complex. Last week, as the Dow Industrials hit a new record high, the Dow Transports traded a new 2015 low. Dow Theory argues that stocks do best when the industrial and transportation sectors are moving in harmony. Polls of investor sentiment show that while optimism has recoiled pessimism is also absent.

This suggests a broad-based and deeply seated level of complacency that could leave stocks vulnerable to an outside

shock. Stock market breadth has suffered with the loss of momentum in only 76% of the industry groups within the S&P in

defined uptrends despite new highs in the S&P 500 Index. In 2013 when the S&P soared 31%, more than 90% of the industry

groups were in gear. Moreover, the number of issues hitting new 52-week highs has failed to expand with new highs in the

indices and only 60% of stocks are trading above their 50-day moving averages. The less than supportive technical picture argues for the tight trading range seen in recent weeks to continue.

Fed Chief Janet Yellen reiterated that an interest rate hike this year is on schedule. Yellen anticipates that business conditions will

improve in the second half of the year. Considering the advance notice given to Wall Street, it should be assumed that a 25 basis

point rate hike in September or December is already built into current prices. As the clouds over the economy and the future

course of interest recede, this could encourage an expansion in volume and market breadth once a rate hike is formally

announced.

** Denotes Current Relative Strength-Based Overweight Sectors ** 1 ranking = strongest sector - 10=ranking weakest sector

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