By Michael Arold
US stocks continued to act weak during the month of June with market participants focusing on potential U.S. Federal Reserve Policy changes in the future. “Bond purchase tapering” was the driving theme in the last weeks.
I’m still seeing positive signs in the market that support higher equity prices and therefore trading US stocks mainly from the long side. Let’s discuss the relevant factors:
1) The trend is up. One of the premises of technical analysis is that price sometimes moves in trends. Unless the trend is broken, one expects higher prices ahead. The market is “innocent until proven guilty.”
Technically, stocks are still in an uptrend, which began in Summer 2011. A close below 1530 for the S&P 500 would end this intermediate term trend. However, this would still be a five percent decline from current levels.
2) Smallcaps have been outperforming. In a risk-off environment, speculative small cap stocks should underperform. Currently, they don’t: the Russell 2000 Small Cap Index is trading just one percent below all time high and has been outperforming the S&P 500 Index since May.
3) High-beta stocks acting relatively strong. Similar to small caps, high-beta stocks tend to lead down during risk-off periods. The PowerShares S&P 500 High Beta Portfolio ETF (SPHB) has been holding up quite well, performing in-line with the general index.
4) Sentiment is now neutral. Several measures of investors’ emotions are now in the neutral zone. So at least from the sentiment perspective, stocks have more upside (unfortunately also downside) potential.
One example is the AAII weekly sentiment survey. Recent results came in at 41%, which is a fairly neutral number.
5) The Fed Continues to Support Markets: There is no tapering yet. The Fed continues to support markets by buying $85 Billion in bonds each month. Research has shown that POMO (“permanent open market operations”) has been supportive to equity prices.
So while there are bullish arguments, we have also seen differentiation among the various sectors. Investors have been moving out of interest rates-sensitive stocks. On the other side, consumer discretionary stocks have been in a solid uptrend.
The Select Sector SPDR-Consumer Discretionary (XLY), the ETF that covers the sector, is trading at an all time high, similar to small caps. The US consumer has been leading the American stock market (and economy) higher.
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