All eyes have been on the Federal Reserve recently, as talk of tapering off the quantitative easing programs was introduced by some Fed governors. An outcome of reducing the QE influence on the economy would likely be a move higher in interest rates. In fact, the yield on the 10-year Treasury recently moved higher from the 1.60% area to the 2.20% level as a result of the tapering comments.

If this gradual reduction in QE is implemented, interest rates are likely to normalize at a higher level. Rising yields are not necessarily bad for the economy; however, higher rates are likely to have an impact on the value of the U.S. Dollar and commodity prices. There are a number of factors that influence the value of a currency, interest rates though, have a direct impact on a country's currency. As interest rates rise, the dollar tends to strengthen.

One investment asset class that seemed to be favored by many investment advisers at the beginning of the year was emerging markets. When the crowd highly favors a certain type of investment, investors should be wary of following this crowd behavior. At the beginning of this year, InvestmentNews surveyed advisers and found the following,

"...more than half the advisers surveyed by InvestmentNews at the beginning of the year said they planned to increase their allocation to emerging market stocks. No other equity asset class was cited as often. About a third of the polled advisers said they planned to increase allocations to emerging market bonds, the most of any fixed-income asset class."

Since the beginning of the year, emerging market investments have generated poor returns for investors as noted in the above chart. The chart shows the divergent spread between the

As interest rates have moved higher, as evidenced by the below chart of the 10-year treasury yield, yield related investments have come under significant downward pressure. The below chart shows the 10-year treasury yield rising from 1.63% in early May to 2.19% at yesterday's close.

Rising rates have had a negative impact on REITs. Investors that were chasing yield in this low interest rate environment are now experiencing the downside in these investments when market interest rates rise.

Source: Institutional Imperative

H/T: Abnormal Returns

The above chart was sourced from the website, Institutional Imperative, and the article examines the valuation metrics of REITs. It is a worthwhile read for investors that are searching for yield.

The spike in interest rates has also resulted in investors selling their investments in bond funds. The below chart shows

Friday afternoon one technical indicator, the Hindenburg Omen, seemed to dominate the discussion of a number of market pundits.

The blog at stockcharts.com provides the following criteria in order for the indicator to be triggered,

Hindenburg Omen: Created by James Miekka, the Hindenburg Omen warns of potential weakness in the stock market. There are three criteria to activate the omen. First, NYSE new highs and new lows must both be more than 2.8% of advances plus declines. Second, the NY Composite is above the level it was 50 days ago. Third, the number of new highs cannot be more than double the number of new lows. The activation period is good for 30 days. Once active, a sell signal is triggered when the McClellan Oscillator moves below zero and negated when the McClellan Oscillator moves back above zero.

Below is the chart detailing the criteria triggering the

A seemingly rare occurrence has taken place with the close of trading on Friday. The S&P 500 Index has declined for two weeks in a row. The last time this occurred was in November of last year. This is a testament to how strong the market advance has been so far this year.

The sectors that have been the weaker performers during this pullback or consolidation have been the traditionally more defensive ones, e.g., consumer staples, utilities, telecommunications. Also, the indices that are focused on dividend paying

The market has interpreted recent commentary from the Fed that quantitative easing may be nearing an end. This type of thinking from market participants has led to a significant sell off in many fixed income investments as well as yield focused equities and ETFs.

The negative impact with the price performance of many of these investments that have fixed income qualities has been exacerbated by the fact the underlying investments in some of these ETFs are highly leveraged in and of themselves. In the ETF MORT, one of the top holdings is Annaly Capital Management (NLY). NLY is leveraged about 9 to 1, debt to equity. Consequently, as the cost of borrowing rises, the amount of income payable to investors declines as interest cost increases. Additionally, as rates rise, the value of the mortgages that make up the assets of these mortgage-type REITs (mREITs) declines. Also, some higher yielding investments

Over time, as investors approach and enter into retirement, fixed income is often viewed as the stable portion of one's investment portfolio. Today though, central banks around the globe have implemented monetary policies that have pushed interest rates to near record lows. Does this artificial stimulus then make fixed income a not so safe investment asset class?

From a prudence point of view, some factors investment advisors inquire about of their clients is an appropriate investment objective, time horizon for the investment funds and risk tolerance. Much thought should certainly go into these decisions, so an appropriate asset allocation and investment strategy can be developed. The ultimate asset allocation goal often leads advisors to talk about risk adjusted returns and possibly modern portfolio theory (MPT). The MPT discussion likely will not occur in those exacts words, but some form of generating returns by assuming less risk will be a general

Standard & Poor's notes in a recent report on Earnings Yield By Sector that seven of ten S&P 500 sectors have earnings yields greater than their long term averages. As of mid-May, the S&P report notes,

"the earnings yield on the S&P 500 was 5.4% (based on trailing GAAP EPS through Q1 2013), and nearly three times as high as the 1.9% yield on the 10-year Treasury bond. The last time the EPS yield was this far above the 10-year note yield was in 1955....Common wisdom holds that if stocks are yielding a lot (in EPS) relative to bonds (in interest), stocks are more attractive than bonds."

The S&P research report contains an analysis of the historical yield relationship and the subsequent 12-month performance achieved by the Index.

Another interesting aspect of the report is the average sector earnings yield relative to the 10-year Treasury Note. The three

As the market continues to seemingly move higher every day, investor complacency appears to be on the rise. The recent CBOE equity put/call ratio is at a low level of .50. Like other sentiment indicators, this measure tends to be more accurate at extremes. On April 20th, we wrote about the elevated put/call ratio and wondered if the market was excessively bearish. Since the time of that post, the market has advanced over 7%.

Additionally, fixed income assets as a percentage of all mutual fund assets recently began to decline. Are investors now warming up to equities in spite of the strong advance that has occurred year to date? On the other hand, given the low level of interest rates, bond investors are having a difficult time finding fixed income assets that provide adequate yield without taking on maturity and/or credit risk.

Not much seems able to restrain the strength of the bull market in U.S. equities. On a year to date basis, the S&P 500 Index is up 15.43%. The advance has finally drawn investors into equity mutual funds as reflected in positive equity mutual fund flows the first three months of the year.

The positive market results continue to keep the S&P 500 Index in a positive uptrend channel that began in the middle of November of last year. Aside from the fact that company fundamentals and valuations look reasonable, at least not overvalued, higher equity prices could continue to unfold. However, we have noted in several recent posts the rotation that has occurred of late out of the more defensive sectors into the more cyclical ones.

Because of the significant amount of artificial stimulus

Ten years ago, Standard and Poor's released its Equal Weighted S&P 500 Index (EWI). Since that time a number of index firms have created equal weighted ETFs that investors are able to invest in directly. In S&P's recently released white paper, 10 Years Later: Where In The World Is Equal Weight Indexing Now?, they cover a great deal of the historical data on the equal weighted index relative to the more common market cap weighted S&P 500 Index. Due to the cap weighted nature of the S&P 500, one obvious characteristic is the EWI S&P 500 is more heavily weighted in the smaller capitalization stocks and underweighted in the large cap stocks of the S&P 500 Index. Because of this factor, S&P demonstrates the equal weighted index does have a tendency to outperform more frequently in up markets than in down markets and the EWI does carry a

We have written a number of articles on the impact of inflation on future bond and stock returns. Our recent article from earlier this month, Inflation And Its Influence On Investment Classes, pointed to the fact that stocks are a good hedge against higher inflation rates versus bonds. At very high levels of inflation though, commodities are the better performing asset class.

The more significant factor, however, is the growth of the economy as measured by GDP. As the below chart shows, the S&P 500 Index continues to move higher in spite of the fact the year over year change in inflation (blue line) is muted. The equity market performs at its worst when GDP (green bar) is contracting and the economy has entered a recessionary period. Earlier in April, the month over month change in the consumer price index was reported at minus .2%. This negative CPI report

One aspect of the strong performance for the S&P 500 Index so far this year has been the outperformance of the defensive market sectors. As the below chart details, the top performing sectors this year are health care (20.5%), utilities (18.8%), consumer staples (17.8%) and telecommunications (15.3%). A notable characteristic of the defensive sectors is their higher dividend yields. With the near zero interest rate environment being perpetuated by the Federal Reserve, investors seem to be allocating some of their investment dollars to these higher yielding stocks and sectors.

Last week though saw a shift in which sectors were contributing to the market moving higher. As the below chart shows, the previously mentioned sectors that contributed to the positive market move on YTD basis were the worst performing sectors last week. Telecommunications, consumer staples, health care and utilities all were the worst performers.

With about 20% of companies in the S&P 500 Index reporting earnings, 70% have reported earnings exceeding analyst expectations. This is above the long term average beat rate of 63%. However, only 44% have reported revenue above analyst expectations, which is below the long term average of 62%. This suggests the EPS beat rate is being driven by cost cutting versus higher demand. As the below chart shows, 58% of the reporting companies that beat their EPS estimate also missed on revenue.

Source: Thomson Reuters

The growth rate of earnings on a year over year (YOY) basis for Q1 2013 is a low 2.1% in spite of the fact analysts had cut earnings estimates going into the first quarter.

Lastly, the number of negative pre-announcements remains high. Thomson Reuters reports there have been 112 negative EPS pre-announcements versus 26 positive ones. This

The impact of central banks around the globe instituting quantitative easing (QE) programs has resulted in a race to the bottom for country currencies. Japan is the latest country to announce and implement an expanded QE program. Earlier this year the Bank of Japan (BoJ) announced that it would spend an additional $155 billion on stimulus projects a month on top of the current stimulus of $410 billion. The impact on the Yen has been to weaken it. For Japanese investors, they can buy U.S. Dollar denominated investments and as the Yen weakens relative to the U.S. Dollar, get enhanced returns when converting the Dollars back to Yen.

One attractive area for foreign investors has been the corporate bond market. As the below chart of the iShares Total Core Bond ETF (AGG) shows, since November 1, 2012, the AGG has returned a negative 1%. The return of AGG in Yen

Today's release of the American Association of Individual Investors sentiment reading saw an enormous drop in bullish sentiment by individual investors. Bullish investor sentiment dropped 16.2 percentage points and saw the bull/bear spread reported at -35.2%. This is the most negative spread since it was reported at -36.1% on July 8, 2010. The bullish sentiment was last at this level on March 5, 2009, near the market low reached at the height of the financial market crisis. The sentiment reading is only one data point; however, investors should keep in mind this contrarian indicator is most accurate at its extreme. Today's reading qualifies as an extreme, almost two standard deviations below its average reading of 38.9%.

Additionally, fund flow data would indicate this has been a stealth rally that has left many equity investors behind. The blue bars in the below chart

An investment strategy some investors follow at the beginning of each year is investing in the Dogs of the Dow. As noted in prior posts, the Dow Dog strategy consists of selecting the ten stocks that have the highest dividend yield from the stocks in the Dow Jones Industrial Index (DJIA) after the close of business on the last trading day of

The weak jobs report was cited as a reason investors sold stocks on Friday. More importantly though is answering the question why the jobs report was so weak. Expectations for the employment report were for payrolls to increase in excess of 190,000 and the employment report from BLS reported only 88,000 jobs were created in March.

As soon as the number was reported, nearly all commentators cited sequestration as the primary cause of the weak report; however, only 7,000 government jobs were lost last month. One area that experienced particularly concerning weakness was in the retail segment which saw a loss of 24,100 jobs. Weakness in retail is a concern as consumers account for nearly 70% of economic growth.

Click to enlarge:

In addition to sequestration, Congress and the White House managed to hammer out a deal at the end of last

One aspect influencing the economy and the markets is the Federal Reserve's stimulative monetary policy via its Quantitative Easing (QE) programs. A concern for market participants is the impact on inflation resulting from the QE programs. Current CPI data shows little inflationary impact; however, is there a point in the future where inflation takes hold? If so, how should investors position their investment portfolios. First though, below are several charts confirming the Fed's influence on some economic/monetary variables.

• Significant growth in the monetary base continues unabated:

• The money supply seems to be "trapped" in banks and is showing up as excess reserves:

• Typically, the excess reserves held by banks would be deployed into the economy by growth in Commercial & Industrial loans. This loan growth has occurred...

• ...But not