Contributor Since 2009
A good Employment Report helped equities get off to a good start on Friday. This time most sectors across the board benefitted. Techs continued to recover from their nearly3% pullback. The NDX is still below its recent record highs, but continuing to make progress. The DJIA and SPX closed at new highs on Friday, but were unable to bust through their prior intra-day highs. With Tax Reform progressing, we expect the rally to continue. At the close, the DJIA gained 0.49%, the SPX moved up 0.55%, and the NDX adding 0.45%. Breadth was positive, on below average volume. RSI’s were slightly higher, with the DJIA leading at 74.1 and the SPX at 71.6. The NDX finished at 56.1. The ARMS Index ended at 0.52, a bullish reading. Once again, the DJIA and SPX made new record highs last week. The NDX began to recover its earlier losses, on the backs of the Big Tech stocks. For the week: DJIA added 0.4%, the SPX gained 0.3%, the NDX inched up 7 points. We get FOMC announcement on Wednesday this week.
Long term, the upside bias continues. The DJIA and SPX made new record highs for the second week in a row. The NDX continued to lag somewhat, but began recovering from its recent losses. This week we look at the 50 week moving average: DJIA-21559, SPX-2433, NDX-5709. Point and Figure charting projects a move of the SPX to 2750. Short term the major averages continue their rally. The major indices are comfortably above 6 month lows. Near term, the DJIA and SPX are moving back into over-bought territory, as their strength continues. The NDX moved back above its 20D-SMA of 6331, increasing near term strength. Critical near term support: DJIA- 23242, SPX-2557, NDX-6227. Europe is mixed in early trade. US Futures are pointing higher pre-market.
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ETFs can lead to unexpected results over the long term. As a result, we believe longer-term investors should consider regularly rebalancing positions. 4) Trendless markets, particularly those with a high level of volatility, can lead to substantial relative underperformance of L&LI ETFs. 2) Leveraged and Leveraged Inverse (L&LI) ETFs typically utilize futures and equity swap agreements. The use of these derivative instruments increases risk and enhances the possibility of tracking error.
Relative to traditional ETFs, leveraged, inverse and leveraged inverse ETFs typically have higher costs and lower tax efficiency. 3) The effects of compounding can lead to significant deviations from traditional benchmarks over longer time periods. For example, if $100,000 is invested in an index that increases in value by 10% on day one and then decreases in value by 10% on day two, the investment will be worth $110,000 at the end of day one and $99,000 after day two. However, the value of a security that doubles the daily performance of the index would be worth $120,000 on day one and $96,000 after day two. Thus, the index is down 1% after two days, a doubling of which would be down 2%. However, the security attempting to double the return of the index is down 4%. Investors should consider carefully the potential impact over longer periods. MLP and MLP ETF Risks Individual MLPs are publicly traded partnerships that have unique risks related to their structure. These include, but are not limited to, their reliance on the capital markets to fund growth, adverse ruling on the current tax treatment of distributions (typically mostly tax deferred), and commodity volume risk.
For tax purposes, MLP ETFs are taxed as C corporations and will be obligated to pay federal and state corporate income taxes on their taxable income, unlike traditional ETFs, which are structured as registered investment companies. These ETFs are likely to exhibit tracking error relative to their index as a result of accounting for deferred tax assets or liabilities (see funds’ prospectuses). The potential tax benefits from investing in MLPs depend on their being treated as partnerships for federal income tax purposes and, if the MLP is deemed to be a corporation, then its income would be subject to federal taxation at the entity level, reducing the amount of cash available for distribution to the fund which could result in a reduction of the fund’s value. MLP funds accrue deferred income taxes for future tax liabilities associated with the portion of MLP distributions considered to be a tax-deferred return of capital and for any net operating gains as well as capital appreciation of its investments; this deferred tax liability is reflected in the daily NAV; and, as a result, the MLP fund’s after-tax performance could differ significantly from the underlying assets even if the pre-tax performance is closely tracked. Commodity ETF Risks Commodity ETFs may be subject to greater volatility than traditional ETFs and can be affected by increased volatility of commodities prices or indexes as well as changes in supply-and-demand relationships, interest rates, monetary and other governmental policies, or factors affecting a particular sector or commodity. Currency ETF Risks Investments in currency involve additional special risks, such as credit risk and interest rate fluctuations. ETFs mentioned at times may have material exposure to small cap and/or international securities that may have higher levels of risk and volatility than other ETFs.
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