The S&P 500 Index appears to be repeating its summer 2015 performance. The index dipped in August, to September lows before rallying back to near all-time highs and has mimicked the trend since January, rebounding strongly over the past week. The next level for SPY to clear is $200; after which all-time highs may be tested.
MDY and IWM have underperformed, as illustrated in the charts. Both funds fell in August and broke to new lows in 2016. If the S&P 500 can take out its old highs, small- and mid-caps will have some catching up to do, but for now large-caps continue to dominate.
QQQ was hit hard in the January sell off, but has rebounded to last year's $105 to $110 range.
SDY is at a new all-time high, a bullish signal for the overall market and dividend- paying and value stocks, which may be poised to recover from the last few years of lagging growth to lead the market.
The European Central Bank is scheduled to meet in just over a week. Last year, the decision to launch quantitative easing sparked a significant decline in the euro (much of it ahead of the formal announcement). The goal was to generate inflation, but as of last month, the Eurozone was still in the midst of deflation.
A break below $104 in FXE would trigger a new bear phase for the euro versus the U.S. dollar. Conversely, the U.S. dollar index hovers near its 52-week highs and core inflation has started to build. Fed rate hikes and unexpected easing by the ECB will dictate trading ranges for both currencies.
Oil has experienced a nice rally in the past few weeks, reviving optimism in the broader financial markets and global economy. The most recent climb resulted from January's supply data; stockpiles heartily beat analyst predictions, but output slowed. Russia has agreed to freeze production at January levels though, and this could push others to follow through with pledges to freeze.
The dynamic U.S. economy continues to work its magic in the shale oil space, where producers are now saying they may increase production if oil reaches $40 a barrel, though at least one more period of energy volatility is likely before a stable climb is achieved.
If shale producers can pump oil more cheaply, it could keep pressure on oil prices for longer than expected, but it is good news for stocks and bonds of these shale producers. XLE has been in an uptrend since January, despite a wave of dividend cuts and concerns, as investors may have priced in negative news.
Coal, steel and copper all continue to rebound as well, following a reserve ratio cut by the Chinese central bank. Home prices in some Chinese cities are rapidly rising, raising the prospect of a pickup in construction there. Although debt-fueled housing construction is not ideal for China's long-term outlook overproduction of steel is positive in the short-term.
iShares MSCI Emerging Markets (EEM)
The key short-term target for EEM, $31, was exceeded last week on Chinese optimism. The $32 level marks bottom of a trading range in EEM that stretches back to 2010. If EEM climbs back into that range, it opens up a rally to as high at $44 a share.
SPDR Utilities (XLU)
SPDR Pharmaceuticals (XPH)
SPDR Materials (XLB)
SPDR Consumer Staples (XLP)
SPDR Consumer Discretionary (XLY)
SPDR Healthcare (XLV)
SPDR Technology (XLK)
SPDR Financials (XLF)
SPDR Retail (XRT)
Last Friday, core PCE inflation began to catch up with core CPI. The Federal Reserve uses core PCE as its inflation gauge and this rise will push Fed officials towards hiking interest rates sooner rather than later. As a result, investors shifted their rate hike expectations, to the benefit of financials and to the detriment of utilities.
Along with solid inflation data, wages rose and consumer spending was robust in January and February, with very strong auto sales. This led to upward revisions in first quarter GDP estimates and has fueled a sharp rebound in retail shares. XLP is already at a new 52-week high as the consumer, plus steady dividends, has favored the staples sector this year. Consumer discretionary is also turning higher as a result.
High-quality bonds experienced a strong rally over the past week, continuing February's growth. Strong economic data, improving oil prices and rising rate hike expectations are all working in the asset class' favor as investors abandon extreme pessimism.
Last week, we said a rally in the 5-year Treasury yield above 1.2 percent would be good news for high-yield credit because it would come with the easing of credit concerns. The 5-year did much better, climbing to 1.35 percent, contributing to the positive factors helping high-yield.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.