Friday, April 19, 2019
1. Stock sector winners, and loser, for 2019
2. What if the S&P 500 breaks higher?
3. Rebounding Treasury yield curve
Looking back on 2019 thus far, it has been a wildly successful year in the stock market.
However, perhaps the most encouraging aspect of this run higher is the breadth of the bullishness. Every sector within the S&P 500 is in positive territory for the year. You can see this on the sector comparison chart below, which uses the following sector-based ETFs managed by State Street Global Advisors:
- Industrial Select Sector SPDR Fund (XLI)
- Consumer Discretionary Select Sector SPDR Fund (XLY)
- Energy Select Sector SPDR Fund (XLE)
- Technology Select Sector SPDR Fund (XLK)
- Financial Select Sector SPDR Fund (XLF)
- Consumer Staples Select Sector SPDR Fund (XLP)
- Materials Select Sector SPDR Fund (XLB)
- Utilities Select Sector SPDR Fund (XLU)
- Health Care Select Sector SPDR Fund (XLV)
- Real Estate Select Sector SPDR Fund (XLRE)
With the exception of XLV – which has been tanking during the past few weeks as investors have grown increasingly nervous that healthcare stocks could see their revenues and earnings decline if a Democrat wins the Presidential election in 2020 – all of the sectors have experienced double-digit percentage growth so far this year.
This tells me that unless we see some surprisingly negative news this earnings season, the uptrend on Wall Street is going to continue during Q2.
The closure of the U.S. stock market for Good Friday gives us an excellent opportunity to speculate a little regarding where the S&P 500 could potentially go in 2019.
With the index climbing so close to the all-time high it established on September 21, 2018, many investors are wondering how high it could climb if earnings beats continue to propel stocks higher this quarter.
While it certainly isn’t a guarantee of where the S&P 500 is going to go, using a few technical analysis techniques can provide some insight.
First, the up-trending resistance level that forms when you connect the peak from early-2018 with the peak established in September 2018 forms a price target for the index that rises just above 3,000 in late-summer.
Second, the round number of 3,000 is bound to be a psychologically important level for investors. Much of technical analysis revolves around investor psychology, and the tendency for investors to anchor on large round numbers is no exception. When the S&P 500 hits 3,000, many investors will likely start to take some profits off of the table, causing some resistance to form.
Lastly, the Fibonacci extension that forms by placing the first anchor point at the February 2016 low, the second anchor point at the 2018 all-time high and the third anchor point at the December 26, 2018, low provides a 61.8% projection level of 3,045.42.
Looking at all three of these indicators together, if the index is able to break above the previous all-time high, it looks like the S&P 500 has an excellent chance of rising just above 3,000 before hitting significant resistance.
Risk Indicators – Treasury Yield Curve
The U.S. Treasury yield curve is an important gauge of investor sentiment, but because it is such a long-term indicator, it can be difficult to interpret and draw conclusions from.
For example, during the past 100 years, whenever we have seen an inversion of the Treasury yield curve – a situation where yields on longer-dated Treasuries are lower than the yields on shorter-dated Treasuries – it has always been followed by a recession.
However, those recessions have taken an average of eight months to materialize once the curve has inverted, and the stock market has tended to move higher during those periods between the signal and response.
That’s why trying to tease out what impact the Treasury yield curve could potentially have on the stock market in the short term is so difficult – especially with how it is currently acting.
For the past few months, the belly Treasury yield curve – the portion of the curve from the 2-year Treasury yield to the 7-year Treasury yield – had been slowly inverting, reaching a low point on March 28 (see the blue line in the chart below) as investors worried about the slowing growth rate for the global economy, the ongoing tariff threats between the United States and China and the potential disruption of the looming “Brexit” deadline.
Interestingly, since hitting that low three weeks ago, the belly of the Treasury yield curve has been rebounding and has almost moved back into positive territory (see the orange line in the chart below).
This makes predicting a looming recession based on this recent inversion incredibly difficult because the inversion seems to have happened and reversed so quickly.
Additionally, the long-end of the Treasury yield curve – the 20- and 30-year Treasuries – never inverted. The inversion only occurred in the belly of the curve. Most of the Treasury yield curve inversions that have led to recessions in the past have seen the 30-year Treasury yield drop below the Federal Funds rate.
From my perspective, the recent inversion in the belly of the Treasury yield curve is a warning sign that bond investors aren’t as bullish as they once were, but it is not a harbinger of short-term doom. The U.S. stock market still has room to climb if earnings remain solid.
Bottom Line – Objects in Motion
According to Newton’s first law of motion, an object in motion tends to stay in motion unless acted upon by an external force. The same holds true for the stock market. Unless we see some external bearish news, the bullish uptrend in stocks is bound to continue.