Market Rotation Continues: Risk On

| About: SPDR S&P (SPY)

Summary

ADP Employment showed a gain of 179k jobs for the month of July, and this beat expectations of 165k.

We continue to see the same trends developing in the equity market over the past few days of this rotation into the higher-risk sectors of the markets.

WTI oil has to this point successfully been able to hold the $40 level.

As of 11:30 AM on August 3, 2016

Top News

ADP Employment showed a gain of 179k jobs for the month of July, and this beat expectations of 165k. The nonfarm payroll number expected on Friday is 185k with an unemployment rate of 4.8%. Can we gather any insight from today's ADP report into Friday's job report? Yes, but not much.

Click to enlarge

We can see from the chart above that by plotting the ADP results against the Labor Dept. (DOL), the ADP has been much more consistent over time. To smooth it even further, I looked at the percentage change chart on a year-over-year (YOY) basis.

Click to enlarge

As we can see, the ADP is the blue line and the DOL is the red line. The ADP has always seemed to outperform the DOL report when we look at this way. I figured out the average spread between the two since January of 2014, and that came to 0.26%. This would imply that if ADP employment rose by 1.93% in July of 2016 over July of 2015, the DOL number should increase by 1.67% (1.93% - 0.26%) over July of 2015. We could calculate the July 2016 payroll report using this method by taking the July 2015 total nonfarm payroll number of 142,001,000 workers, then multiplying that by 1.0167, which would give us 144,372,000. From there, we would subtract it from June's 144,175,000, giving approximately 195k adds in the month of July.

Obviously, this is a complete guesstimate. Whatever the results will be, it is likely to impact the equity, currency and Treasury markets.

Equity Market

We continue to see the same trends developing in the equity market over the past few days of this rotation into the higher-risk sectors of the markets. We can view this by looking at the activity in the iShares Nasdaq Biotechnology ETF (NASDAQ:IBB) and the Technology Select Sector SPDR ETF (NYSEARCA:XLK). The two ETFs continue their marches higher, with IBB up nearly 50 bps to $296. However, XLK is flat today, but it still sits within the striking distance of a 10-year high. The S&P 500 (NYSEARCA:SPY) continues its malaise around 2,160.

In contrast, the Utilities Select Sector SPDR ETF (NYSEARCA:XLU) is down about 10 bps to $51.75, and the Consumer Staples Select Sector SPDR ETF (NYSEARCA:XLP) is down nearly 65 bps to $54.32. Both of these ETFs, also near their respective highs, have stalled out as of late, and in XLP's case, it has turned lower. Again, to me, this is a sign of a shift away from the more defensive, higher-yielding sectors.

This change seems to be signaling a move towards a risk-on mindset. You have to remember that biotech and technology represent the high growth and high beta area of the market. The staples and utilities represent the higher dividend yielding, more consistent returns, and low beta segment of the market. A move into higher beta and out of the lower beta is indicative of this risk-on rotation.

If this is the case, then I would expect this rotation to continue.

Currencies and Commodities

The dollar is stronger today, with the Dollar Index up 0.35 to 95.40. Despite a strengthening dollar, oil prices are up $0.93 to $40.48 despite a build in crude inventory levels. I am encouraged to see that WTI oil has to this point successfully been able to hold this $40 level. I have spoken about $40 being a battleground area in the past.

Lightening Round

  • 10-year Treasuries are up 2 bps to 1.56%.
  • Gold is down $9 to $1,364.

Upcoming Events (From Estimize)

  • 8/4 US Weekly Jobless Claims 264,990
  • 8/4 US Manufacturing New Orders -1.46% MOM
  • 8/5 Unemployment Rate (U3) 4.8%
  • 8/5 Change In Nonfarm Payroll 216k
  • 8/5 Average Weekly Earnings 0.23% MOM

Remember to Follow Us to receive the commentary in your inbox.

Have a great rest of the day!

Mike

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.