“A man is a success if he gets up in the morning and gets to bed at night, and in between he does what he wants to do.” — Bob Dylan
There seems to be no end to the upside of the market, at least if you go by the trend of the major indices over the last month or so.
Both the Dow Jones Industrial Average (DJIA) and the S&P 500 Index (SPX) have run off a string of five consecutive weeks in the black. Not only that, the Dow ended Friday on a super-high note, ending the day at 15,761, an all-time high.
For the week, the Dow ended up 0.9% while the S&P 500 Index (SPX) tipped the scale into the plus column with a 0.5% gain. Meanwhile, the Nasdaq Composite (COMP) didn’t fare quite as well, shedding 0.1%, just enough to drag it down into negative territory for the second week in a row.
Now if you go by Friday’s jobs data out of the Labor Department, the obvious interpretation is that all is well, as 204,000 jobs were added in October. The number exceeded many economists’ expectations by a multiple of two, and the market seemed to take the report as an obvious sign that the economy is improving.
But wait. Not so fast.
A couple of key points in the report may have revealed that the obvious sign might not be the most accurate one.
First off, the unemployment rate moved slightly higher, going from 7.2% to 7.3%. Not a big drop, but neither is it the sort of number that is indicative of an up-trending economy.
Second, and perhaps more reflective of the nature of the current recovery, a high percentage of the new jobs were part time. When the job numbers are padded with part time workers, it is uncertain how much the newly-employed will be able to contribute to the nation’s consumer-based economy.
In addition, part-time work will hardly support a strong retail push into the holiday season, and the result could be that the first quarter of 2014 will reflect weak consumer spending.
It may also turn out that, upon revision, the job numbers for October will prove less robust, a not uncommon occurrence. That would certainly detract from the investor excitement that was just on display this past Friday.
But let’s put aside the jobs numbers for the moment, and consider a different trend that could be a little more revealing in terms of the state of the economy.
Last week, the Thomson Reuters/University of Michigan’s consumer sentiment survey came in at a two-year low, which seemed to catch economists off guard, at least based on the consensus estimates. It was the lowest number reported from the survey since December 2011.
One of the more revealing aspects of the survey was the difference in outlook between the lower and higher income households, with the lower-income category having strong negative views regarding the economy, and those in the higher brackets expressing a relatively high level of optimism, due to the year’s gains that the stock market has contributed to their bottom line.
So in this case, who can be regarded as the more predictive: the optimists or pessimists?
Well, the uptrend in the market may be topping out, particularly if the underlying economy doesn’t support the equity market’s current record-breaking narrative.
When the Fed does pull the plug on its extremely generous bond-purchasing program, as it will probably have to do at some point, no matter how many times it moves the expiration date, one would be hard-pressed to imagine a scenario where Wall Street cheers the action.
At that moment in time, the health of the economy will become much more of the story.
And, unless it’s a good one, the first wave of selling by investors, the one that occurs once the Fed institutes its tapering, will be accompanied by another powerful wave of same.
So for now, investors may choose to continue to ride the trend.
However, investing a portion of recent gains towards a portfolio hedge makes common sense.
One way to hedge your portfolio would be through the purchase of puts on SPY (SPDR S&P 500), which tracks the S&P 500 Index. A couple of percent of one’s portfolio, going towards some out-of-the money March puts, could prove to be a good way to protect some of the gains many investors have experienced over the course of 2013.
What The Periscope Sees
The Sabrient SectorCast ETF Rankings rate each of the ten U.S. industrial sector iShares (ETFs) by Sabrient’s proprietary Outlook Score and revised on a weekly basis.
This week mirrors the last, as the Financial Sector continues in the top spot with a substantially higher score than the Technology Sector, once again in second place. Rounding out the top three is the Consumer Goods Sector, which found it falling in the rankings due to a souring of investor sentiment towards the sector.
Presented here is the current list of some of the top performing Financial Sector ETFs year-to-date, as of the first week of October:
KIE — SPDR KBW Insurance ETF, +37.75
FXO — First Trust Financial AlphaDEX Fund, +33.12%
IYF — iShares Dow Jones US Financial Sector Index Fund, +26.26%
XLF — SPDR Financial Select Sector Fund, +27.27%
VFH — Vanguard Financials Index Fund, +25.13%
ETF Periscope
Full disclosure: The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”
Disclaimer: This newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Sabrient. Sabrient makes no representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.
