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By HaleStewart January 31, 2015 8:58 am
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US Equity Market Review For the Week of January 26-30: We're Getting Defensive, Edition

          One of the biggest problems with earnings season is that so much data is released in so short a time, it seems impossible to digest all the information in any meaningful way.  However, now that we’re about halfway through, we can note a few trends, starting with the strong dollar and its negative impact on performance.  As noted in this piece over at the Financial Times, companies as diverse as Caterpillar, DuPont, Microsoft and United Technologies are being squeezed by the rising dollar and slower global growth.  And considering the overall dollar index is up 18% over the last six months, it’s no wonder we’re seeing such a negative impact:

          And then there is the monstrous drop in oil prices over the last six months:

Prices have moved from an absolute high of 107.68 to 44.20, for a drop of nearly 60% over a period of just half a year.  That will obviously hurt the oil sector, where analysts are slashing earnings estimates across the board.  As a result of these numbers, the entire energy sector has seen a sell-off, with the XLEs, XOPs and OIHs all showing negative results for the last year:

          And then there are the issues in the financial sector, which are highlighted by this piece from Zack’s:

Finance was an early drag, with tough comparisons at Citigroup (C  -  Analyst Report) and J.P. Morgan (JPM  -  Analyst Report) restricting the sector’s earnings growth to a decline of -2.8% on -1.1% lower revenues. Excluding the drag from the Finance sector, total earnings for the remaining S&P 500 companies would be up +7.8% on +2.2% higher revenues. The +7.8% ex-Finance earnings growth rate is about in-line with what we have been seeing from these companies in other recent quarters, though the revenue growth rate is on the low side.

This has led to the XLF ETF breaking a near year-long uptrend and trending lower, seeking support at the 200 day EMA:

          The sum total of all these factors – the strong dollar, weaker oil and revenue misses in the financial sector – is that upward momentum doesn’t exist right now.  Instead, we’re continuing to see the SPYs consolidate in a pennant pattern just above the 200 day EMA:

What’s also keeping the market from moving higher is that it’s already expensive:

With numbers like this, the only way we’re going to see a meaningful move higher is through earnings growth.  Unfortunately, so far we’re just not getting it in a big way.

          But beneath the surface, we are seeing a slight divergence between defensive and more aggressive sectors:

          The top chart shows the yearly performance of the XLUs, XLPs and XLV – all considered more defensive areas of the market.  All three still have an upward bias.  In contrast are the more aggressive areas of the market, all of which are at best trading sideways for the last few months, with a few sectors (energy and financial) moving lower.

          And all of these factors explains why the bond markets (even including the junk market over the last month) is where we’re seeing gains:

          So, what’s the conclusion to draw from all this information?  First, global headwinds caused by the higher dollar, cheaper oil and slower global growth are clearly having a negative impact.  In fact, the effect is so strong that it’s preventing a meaningful upward move to new highs.  This also means that we’re moving from a “you can throw a dart at a dartboard and pick a winner” market to very much a stock-pickers market.  And, as upward growth has more or less stalled for the time being, adding an income component to any purchase is a good idea.

Hale Stewart is a former bond broker who has been writing about economics and financial markets since 2006 on the Bonddad Blog.  He is also a tax attorney with a domestic and international practice while also forming and managing captive insurance companies for US companies.   You can follow him on twitter at:@captivelawyer





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