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Will May Live Up to ‘Sell’ Label? Sector-Watching Matters

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May 1, 2015

May kicks off with analysts and investors debating if the old “sell in May and go away” banner still flies. Just as many pundits love to punch holes in the theory, making the case that no matter what the broader market may or may not do as far as seasonal factors are concerned it’s probably a good time to drill down on sectors. Look at energy, for instance. This battered sector came roaring back in April. The move wasn’t quick enough to salvage poor Q1 earnings for energy majors but did crop up just in time to help limit broader stock market losses in a soggy April. Biotech, too, has been an active leader, and is one barometer of growth-stock health. How will biotech perform in May?

As May Day shutters much of Europe, the U.S. stock market shifted toward a Friday rebound. But any bounce won’t likely be enough to repair weekly losses. That’s after recent sessions brought more uncertainty over the timing of the first Federal Reserve interest-rate hike since 2006 and a weaker-than-expected reading for Q1 gross domestic product. The near-term test for the S&P 500 (SPX) will be a reclaim of 2100, still a major line that has been clogged with plenty of congestion (see figure 1).

FIGURE 1: SPX BELOW 2100. The S&P 500 (SPX) closed below the closely watched 2100 line Thursday before a mild rebound early Friday. Thursday’s intraday action marked the lowest point for SPX in about two weeks. Data source: Standard & Poor’s. Chart source: TD Ameritrade’s thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Earnings Roundup. The flow of quarterly reports slowed this week certainly, but a nice cross-section of the economy offered their results last night and early today. Visa (V), the largest U.S. payments network, trades lower early Friday despite issuing revenue and profit figures that beat Wall Street expectations. Last month, Costco (COST) said Visa, along with Citigroup (C), won the coveted contract for the warehouse retailer’s credit-card business, replacing American Express (AXP). Meanwhile, LinkedIn (LNKD) slumped over 20% in early action after the professional networking company late Thursday widely missed Wall Street expectations with its profit forecast. Drugstore CVS Health (CVS) said adjusted Q1 results beat most industry analyst expectations. Oil major Chevron (CVX) said Q1 earnings dropped 43%, but strength in the refining segment helped offset tumbling crude prices and its results topped estimates. This news follows a similar tune for rival Exxon Mobil (XOM). It reported a 46% plunge in profit yet still not as bad as the Street braced for.  

Oil Rebound. Speaking of oil, the weak prices that hurt the majors to start the year just wrapped April logging their strongest monthly gain in some six years. Crude futures finished Thursday’s session up 1.8%, as a weekly decline in crude inventories at the U.S. storage hub supported industry analyst expectations that a U.S. production and supply glut will begin easing. Crude futures pulled back early Friday but are still on track to log a nearly 2% weekly gain, the fourth straight weekly advance. Oil futures prices, which dropped to multiyear lows earlier in 2015, rebounded 25% in April. It was the strongest monthly gain since 2009, according to FactSet.

Volatility Measure Itself is Volatile. The CBOE Volatility Index (VIX), the market’s “fear” gauge, closed above 14 Thursday and cleared its highest intraday level in over three weeks. There could be pressure for some to pocket short-term VIX profits here as participants eye these spikes in an otherwise low-volatility trend. Low for now, that is.

Good trading,
JJ
@TDAJJKinahan

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JJ Kinahan

JJ began his career in 1985 as a Chicago Board Options Exchange...

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