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Market Update

Rate-Sensitive Stocks Lag as Strong Finish Caps Steady-Eddy First Half

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June 22, 2015

The S&P 500 (SPX) clings to a 2.8% year-to-date gain while market volatility measures sit near 2015 lows with just seven trading days remaining in Q2. Despite these feats, the hurdles aren’t going to get smaller in the second half. Challenges include Greece’s default resolution and the future of the eurozone—although signs pointed toward some progress early Monday—as well as the Federal Reserve’s interest rate pacing, which is already taking a bite out of rate-sensitive stock plays.

U.S. stock indicators shot higher in early action Monday as word from Europe hinted at progress toward staving off a Greece default. Against this backdrop, the SPX looks to try for a run above 2130, challenging the top end of its recent range. The dollar traded stronger against everything except the euro early Monday; the buck was largely unchanged against the Continent’s shared currency.

Stocks and currencies are moving as the Greek government advanced a last-ditch reform package to its creditors on Sunday. It’s now up for discussion among the bigger group of euro-zone finance ministers who’ve called an emergency session in Brussels set to take place around 1 p.m. Eastern U.S. time. The European Central Bank on Monday also raised the amount of emergency lending it will provide to Greek lenders for the third time in less than a week.

Greek banking shares led a rebound across Greece’s main stock average and Europe’s leading equity indexes. This climate clearly remains a volatile stock trading time amid the highs and lows of talk progression. Be wary of added volatility and remember, so far we’ve seen this movie end poorly. We may want to wait until the final credits run before declaring a reprieve for Greece and a return to focus on the Fed and earnings.

Wrapping Up the First Half

Last week marked the best SPX performance since April. Nearly every sector participated in the S&P 500’s 2.4% gain to date in Q2. Health care is the top performer so far in 2015, up 4.5% since March and 10.8% for 2015. Financials, basic materials, and technology names have also outperformed over the past few months.

On the flip side, energy continues to lag the broader market despite an uptick in crude prices during Q2. Oil has bubbled back toward $60 per barrel from $55 at the end of March. Yet, on Wall Street, the energy sector is down 1.6%.

Energy is the second weakest sector year to date behind the interest rate–sensitive utility sector. Utility names seem to be feeling the pinch from the prospect of higher rates, as the group is down 2.6% for the quarter and 8.4% year to date.

Utilities are tracking the interest rate market higher. Bonds faced some pressure amid shifting interest rate expectations and the yield on the benchmark 10-year Treasury is now 2.28%, inching up from 1.93% at the end of Q1. 

S&P 500 Performance


Q2 Year to date through 6/19/15
Health care 4.5% 10.8%
Financials 3.9% 1.3%
Materials 3.7% 4.2%
Consumer discretionary 3.2% 7.8%
Technology 3.2% 3.4%
Industrials 0.5% -1.0%
Consumer staples 0.1% 0.6%
Energy -1.6% -3.5%
Utilities -2.6% -8.4%
S&P 500 2.4% 2.8%

Despite weakness in utilities and energy, the broader market continues to display resilience. Risk perceptions are well below the levels seen six months ago. As evidence, the CBOE Volatility Index (VIX) dipped back below 13 intraday Thursday and is again probing the lower end of the 2015 range (figure 1). 

Volatility-2015-Low

FIGURE 1: VIX BACK ON TREND FOR NOW.

The CBOE Volatility Index (VIX), which tracks the implied volatility priced into SPX options, is approaching 2015 lows near 13. It finished 2014 at 19.2. Data source: CBOE. Chart source: TD Ameritrade’s thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Earnings, Data to Heat Up Soon

Looking forward, the theme of choppy and mixed trading could very well continue through the “summer doldrums” as players await the Q2 earnings reporting season in mid-July and react to upcoming economic data.

This week’s light earnings calendar might offer a sneak peek at what to expect during the upcoming profit reporting period. It includes reports from Blackberry (BBRY) and Carnival Cruise (CCL) Tuesday morning. On Wednesday, home builder Lennar (LEN) and Monsanto (MON) report in the morning, with Bed Bath & Beyond (BBBY) after the close. Thursday is the busiest day for earnings this week, with reports coming from Nike (NKE), Micron (MU), and Barnes & Noble (BKS).

On the economic front, most of the data is due out Tuesday and Wednesday and includes reports on durable goods, home sales, and a GDP revision (see the full calendar in figure 2).

At the same time, developing events related to the Greece debt saga remain a topic of conversation among financial news commentators and traders. Although uncertainties remain, the S&P 500 has weathered the latest developments well and sits less than 1% from record highs. In other words, investors seem to be taking the news in stride, but negative headlines could potentially rattle European equity markets and send the jitters rippling across the pond.

Good trading,
JJ
@TDAJJKinahan

Economic-Report-Calendar

FIGURE 2: ECONOMIC AGENDA.

This week’s U.S. economic report calendar. Source: Briefing.com

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