Monday, August 20, 2012

Sector Performance Update for Week Ending 8/17/2012

The upward momentum (if it is actually a momentum with very light trading volume) of the equity market continued last week as the S&P 500 moved up nearly another 1%.  The sectors that we had suggested in March trailed the market.

It appears that although the latest economic news has been disappointing but not to the extreme, the market continues to be pricing in a Fed action, while the probability of an action has been declining.  Of course, as we have mentioned a few times during the last 24 months, a mere smile on Bernanke's face or just an insinuation that the QE option is on the table, is also considered a QE, a psychological one.  Although for the time being the market has proven us wrong (during the last 3 - 4 weeks) we remain convinced that it is overvalued.  We will see if the FOMC minutes which are due out on Tuesday will have any psychological impact(s) on the market.

In addition, even though the home builder index, XHB, took one step back after we mentioned on Jul. 15th that it has gone up too far too fast, it more than made up for it and took a few steps forward.  XHB dipped nearly 5% by Aug. 1st, but has increased more than 12% since; it has gained more than 8% since we touched on it.  We continue to have our doubts.

Upcoming economic indicators include FOMC minutes, new and existing home sales, FHFA housing price index, and the always important initial jobless claims.  We think many continued to refinance their homes at more affordable rates in July, which could have resulted in a slowdown in existing home sales.  Regarding new home sales, the annualized 368K consensus, which is represents by an 18K increase from June, we think, is rather optimistic.  Any slight miss on the new home sales figure may bring XHB just a bit closer to reality.  We look for an increase in months' supply for both existing and new home sales in July.  Our view regarding initial jobless claims hasn't changed - will likely remain above 350K and it is even more likely that the prior week's data will be revised up. 

Sector performance update for the week ending on 8/17/2012 is provided below.  We note that the sectors we mentioned in early March have continued to outperform the overall market, although that gap is narrowing. 

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