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ETF Blog For 4/20: Oil Services and Solar Lead in an Otherwise Choppy Market

Apr. 19, 2015 1:02 PM ET
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Market-Moving News (Summary of 18 Articles)

Spending is up: Retail sales in March rebounded 0.9% after dropping 0.5% in February. Excluding autos, sales gained 0.4%, following no change in February. Gasoline sales dipped 0.6% after 2.3% increase in February. Excluding both autos and gasoline, sales rebounded 0.5% after declining 0.3% in February. Redbook is forecasting a 0.2% gain which is an early hint of strength for the May retail sales report.

Economy: The government's deficit came in at $52.9 billion in March, up from $36.9 billion last March. Six months into fiscal 2015, the government's deficit is up 6.3% from last year to $439.5 billion. Helping the balance so far this year are receipts, up 7.3% year-to-date and reflecting strong tax receipts where gains reflect economic strength. Spending is up 7.3% including an outsized 9.4% increase in Medicare spending tied to Obamacare that offsets a 3.0% decline in defense spending.

Inflation is neutral: The PPI for total final demand rose 0.2% in March after falling 0.5% in February. Excluding food and energy, producer price inflation partially rebounded 0.2% after falling 0.5% the month before. Consumer price inflation rose 0.2% after rebounding 0.2% in February. Excluding food and energy, consumer price inflation posted a 0.2% increase, following a 0.2% rise for February. The Atlanta Federal Reserve Bank's monthly survey indicated next-12-month inflation has held steady since the start of the year, as lower oil prices allow firms to improve their margins, without reducing prices. The trend in inflation is still sluggish and will allow the Fed to not hurry rate increases.

Manufacturing is weak: The Empire State index points to month-to-month contraction for April, at minus 1.19 for only the second negative reading in the last 23 months. New orders are contracting noticeably, at minus 6.00 for the second straight contraction. Weakness in exports is a major factor. Industrial production for March fell 0.6% after a February rise of 0.1%. The March drop was largely due to utilities although manufacturing was soft. Overall capacity utilization declined to 78.4% from 79.0% in February. A headline gain for the Philly Fed index, to 7.5 for its April reading vs 5.0 for March, masks slowing in new orders, at only 0.7 to show the least monthly growth in nearly two years, since May 2013. The 6-month outlook is upbeat, at 35.5 for a 3.5 point gain. The gain suggests that manufacturers see the current trouble as temporary.

Housing is strengthening: After three straight weeks of impressive gains, the purchase index slipped back 3.0% in the April 10 week. Year-on-year, the index is still up a solid 7.0% in a reading that points to strength for the spring housing market. The refinance index fell for a second week, down 2%. Rates are very low with the average 30-year fixed-rate mortgage at 3.87%, up 1 basis point. The housing market index is up 4 points to 56 in April vs a revised 52 in March. Strength is led by the expectations component, at 64, reflecting strong optimism among builders. Present sales are right behind at 61, up 3 points from March which hints at strength for this month's new home sales. Housing starts in March rebounded 2.0% after plunging 15.3% in February. The 0.926 million unit pace was down 2.5% on a year-ago basis. Housing permits were a little stronger but still disappointed, falling 5.7% after gaining 4.0% in February. The 1.039 million unit pace was up 2.9% on a year-ago basis.

Jobs: Initial claims rose 12,000 in the April 11 week to 294,000 vs a revised 282,000 in the prior week. But the 4-week average is little changed, up only fractionally to 282,750 which is nearly 25,000 below the month-ago comparison. Continuing claims, in data for the April 4 week, fell 40,000 to a new 15-year low of 2.268 million while the 4-week average fell 33,000 to 2.329 million.

Sentiment

Sentiment readings are mostly down: Small business optimism fell sharply in March, down 2.8 points to 95.2 from 98.0 in February. The outlook on the economy fell back the most, in line with expectation components in other economic reports. Expansion plans and earnings trends also declined. Consumer confidence cooled last week from an almost eight-year high as Americans took a less favorable view of their finances and the economy. The Bloomberg Consumer Comfort Index fell to 46.6 in the period ended April 12, from the prior week's 47.9, which was the strongest since May 2007. The economic expectations gauge for April declined for a second month. The Consumer Sentiment report cane in strong, at 95.9 for the mid-month April reading vs a final March reading of 93.0 and well up from 91.2 at mid-month March. The index hit an 8-year high of 98.1 in January. Growth is tepid for the index of leading economic indicators, up only 0.2% in March following a downwardly revised gain of only 0.1% in February.

The Market

The S&P500 notched a triple top on Wednesday and Thursday before plunging and somewhat recovering on Friday. The move did not take out the primary trend, leaving in place a wedge that should produce a breakout in one direction or the other in the next week or two. Weak corporate earnings and fears about Greece were blamed for Friday's tumble. Volume was very high on Friday, suggesting that the problems triggered a technical correction away from all-time highs.

Small Caps

Small caps made a new high on Wednesday before Friday's correction, but also maintained their primary trend. The IWM is the strongest of the broad indices and is our reference in this report.

Core Sectors

Three of the nine core funds beat the Russell 2000 last week; Emerging markets (EEM) and energy (XLE) tied for a 10% gain over the last 26 days, as oil prices began a recovery. Foreign stocks (EFA) were up 4% vs the Russell (IWM) gain of 1%. Note the weakness in financials (XLF) and transportation (XRT).

Best Relative Strength

Of the 36ETF's I follow, a group beat the IWM by a substantial amount over the last 26 days. In order, they are OIH, EWZ, TAN, EEM, and SOCL. The biotech/healthcare, recently consistently strong, has weakened somewhat.

Trades Last Week

Bought: TAN, SMH

Bought and sold: QQQ

Conclusion and Action

The media gave many reasons for the seemingly sudden world-wide breakdown: a clampdown on highflying markets in China, a breakdown in the Bloomberg terminal system, more fear in the Greece saga, some poor earnings reports, and weak economic news.

The most serious is the Greek drama, but we've seen it before. My guess is that the market had a technical reaction to recent gains, and people decided that the news was not strong enough for a breakthrough to new all-time highs.

I am not sure that the decline on Friday will follow through, but we will need some positive events to break through, and the economy isn't likely to provide any in the near term. I will try to hold on to TAN and SMH and probably add IWM if there is a rally next week, but I don't expect a break to new highs.

Have a great week!

Analyst's Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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