Sector Detector: Bulls Remain Unfazed By Borderline Black Swans

Despite a highly eventful week in the news, not much has changed from a stock market perspective. No doubt, investors have grown immune to the daily reports of geopolitical turmoil, including Ukraine vs. Russia for control of the eastern regions, Japan’s dispute with China over territorial waters, Sunni vs. Shiite for control of Iraq, Christians being driven out by Islamists, and other religious conflicts in places like Nigeria and Central African Republic. But last Thursday’s news of the Malaysian airliner tragically getting shot down over Ukraine, coupled with Israel’s ground incursion into Gaza, had the makings of a potential Black Swan event, which in my view is the only thing that could derail the relentless bull march higher in stocks.

Nevertheless, when it became clear that the airliner catastrophe was most likely a mistake born of incompetence among the rag-tag rebels rather than the start of an orchestrated terrorist attack on the West, I fully expected a recovery on Friday, which we got. And so the upward march of stocks continues.

In this weekly update, I give my view of the current market environment, offer a technical analysis of the S&P 500 chart, review our weekly fundamentals-based SectorCast rankings of the ten U.S. business sectors, and then offer up some actionable trading ideas, including a sector rotation strategy using ETFs and an enhanced version using top-ranked stocks from the top-ranked sectors.

Market overview:

Thursday’s brief scare gave the S&P 500 its first single-day decline of more than 1% in three months, while the CBOE Market Volatility Index (VIX) surged 32%, which was its biggest single-day percentage increase since April 2013. Moreover, NYSE volume increased 20% over its daily average for the month. Friday’s bounce saw the Dow Jones Industrials Index regain the 17,000 level, but the Wilshire 5000 Total Market Index was not able to get back above 21,000. Also, both the Dow and S&P 500 are encountering resistance as they re-approach their 52-week highs, and the Russell 2000 small caps are facing resistance from its 50-day simple moving average. I still think there may be more downside in store before summer is over.

Continued strength in U.S. stocks is being driven by expectations of continued low interest rates, a big jump in GDP growth, and improving corporate earnings. Indeed, all major central banks are providing global liquidity and low interest rates. And the start of earnings season has looked promising so far. For example, Skyworks Solutions (SWKS) is a Sabrient favorite that I have written about several times recently as a top pick in the Technology sector, and it reported blowout earnings after the close on Thursday, leading to a +14% day on Friday. SWKS is also included in the new Forward-Looking Value portfolio (which is offered as a unit trust through strategic partner First Trust Portfolios).

Treasury bonds continue to strengthen, with a low 10-year yield of 2.48% and 30-year at 3.29%. Of course, these persistently low yields continue to push investors into equities in their search for both income and total return. So long as the 10-year that remains under 3.5%, it should continue to be a favorable environment for equities. Assuming unemployment continues to fall, eventually there will be wage inflation, which would be the first step toward price inflation -- and higher interest rates.

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The author has no positions in stocks or ETFs mentioned. The materials available from us are published solely for informational purposes. They are not to be construed as advice or ...

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