This weekend has not been kind to the Yinzer Analyst. First someone accused him of being “funemployed” and when he had to look it, he felt even older than usual. Then hours were spent raking leaves before capping the fun parade off with the NY Jets breaking their losing streak by beating the Pittsburgh Steelers. This is serious people, it’s like if France ended its streak for military defeats by taking on America and not only winning, but making us all eat a big block of Limburger cheese while singing the Marseilles. So it’s a perfect time to turn to the markets to provide some hope and solace in this dark hour for Yinzer’s everywhere.
If you were watching the tape this week, you could be forgiven for thinking the clocks got set back a little too far like to last July. The volume wasn’t much greater this week then it was then and the spread between the high and the low for the week was the narrowest it’s been since the beginning of September. While it’s tempting to simply write this off because we’re finally past the old highs and the market’s climbing the wall-of-worry, this is a good time to take a look at the internals to see how much juice there might be to push up higher.
Let’s start by looking at the market breadth and being a simple yinzer, I like to keep it simple by checking out a few choice charts. The first are the % of S&P 500 stocks above their 50 and 200 day moving averages. You can see that we’re right back to levels where the market has typically found itself running out of steam. It doesn’t necessarily mean that anything bad is about to happen, just that the powerful move from October 17th to November 9th consumed a lot of energy and the rally has entered a late state. The next chart is the ratio of new highs to new lows and here we can see a clear divergence. Utilities and energy stocks had 1% days on Friday, but that wasn’t nearly enough “umph” to help keep the rally alive, especially in the face of strong selling pressure in the healthcare sector.
Why the pressure in healthcare? While it’s always tempting to say “profit taking” the healthcare sector is probably the most sensitive to political issues and with the Republican win on Tuesday night, another round of votes to repeal the Affordable Care Act are sure to be in the offing early next year. Concerns over the ACA helped depressed P/E multiples for several years until the Supreme Court decided the issue and those old fears are coming back to the fore.
So all in all, breadth is okay, not fantastic.
The most widely followed of sentiment surveys, the American Association of Individual Investors Sentiment Survey showed bullishness at the highest levels of 2014…in fact we’re right back to the highs seen in late December 2013 before the market went exactly nowhere for 3 ½ months (but in a really erratic and volatile manner.) More from Marketwatch here.
Now after one of the strongest rallies in years; the S&P 500 can be forgiven for needing to take a breather and there’s strong support just below us around the $201.50 level. After breaking through to new highs, it would be surprising if the S&P didn’t need to stop and retest prior resistance. But fingers crossed it doesn’t break through this level because there are a whole bunch of gaps that needed to be filled after this advance.
As we talked about last week, the picture for small and mid-caps is mixed. After closing the week of October 27th with a x.x, this week confirmed the weakness with a back-and-forth action that ended with a measly .13% gain and a potential hanging man pattern (we think, looks a lot like the hammer) indicating that there might be more weakness ahead.
Dividends and Bonds:
In fact, for the first time in a long time, bonds pulled it out of the fire on Friday and racked up some very impressive gains with TLT up 1.15% on the day as the “Search for Yield” continues. And check out the long-term chart of the ten year bond yield; it just keeps walking down the 2007 downtrend line as if it was drawn to it like a magnet. But doubt remains as to how much of it is yield seeking and how much is defensive buying although we’ll grant you that one doesn’t necessarily exclude the other. High yield bonds (using HYG) lagged this week after putting in a respectable month as doubts about the future of corporate earnings in a reduced-deficit, no Fed easing world persist.
Back with equities, dividend payers continue to rack up points both in the broader equity index ETF’s and in the sector plays with defensive names like consumer staples and utilities outperforming their more cyclical inclined brethren. REIT’s lagged although some of this must have to do with the fallout from American Realty Capital. But this brings me to the second thrust of this article, “Are Dividends Cool Again?”
Show me the Money!
If there’s been one sector that surprised all forecasters with its performance in 2014, its utilities where the Utilities Select Sector SPDR (XLU) began outperforming the broader market in January and now is up 24.99% YTD versus 9.93% for the S&P 500. According to Factset, in the third quarter, the utilities sector saw their earnings grow 2.8% compared to the broader market’s 7.6% and while the market typically doesn’t reward the sluggards, in this case it’s made an exception. If earnings are going to be more important going forward, why are utilities outperforming so handily in 2014? Partly because among the companies that have offered forward guidance, their expectations for future growth are among the most stable.
So far 55 companies have offered negative guidance versus 18 with a positive outlook for the next quarter. The spread between positive/negative outlooks is of skewed with tech stocks having the widest ratio (7.5X) while the lowly utilities sector has only one name offering forward guidance and of course, it’s positive. Given that analysts have trimmed their 4th quarter earnings forecasts since the end of the 3rd quarter by 53%, this stability clearly offers a lot of attractions in this brave new world without a backstop from the Federal Reserve but it comes with a heavy price. Factset now estimates that utilities are the most expensive sector based on the 12 month forward P/E ratio. While this strong performance, along with that of REITS was attributed to either annual sector rotation or a quest for yield, the Factset Earnings Insight Report leaves little room for doubt that consistent earnings and expectations for more of the same are also playing their parts.
While the financial sector theoretically has the third highest earnings growth this quarter at 16.4%, according to Factset if you removed J.P. Morgan it would drop to 2.8% putting it in-line with the utilities and even with a 5/4 positive to negative announcement ratio, investors aren’t feeling too generous to the banks. Continuing uncertainty over future lawsuits and settlements including the FOREX scandal has led to more cash hoarding to build up reserves while also lowering investor optimism. Factset’s 12 month forward p/e estimate for the financial sector is currently 13.5, the lowest for all the sectors of the S&P 500 and that’s been weighing heavily on some ETF’s offering a focus on preferred stocks in the financial sector such as PowerShares Preferred Portfolio (PGX) and iShares S&P US Preferred Stock Fund (PFF) both making the short list and offering dividend yields in excess of 5.5% compared to the 1.8% offered by SPDRS&P 500ETF (SPY).
For now, dividends are back on top!