Reliance Investment Management

Even with a decelerating economy and a recent sub-par earnings season behind us, the USA stock markets continued to show their resiliency.    The S&P 500 finished the week at 1,406 for a gain of a little over 1%. This was the fifth straight week the S&P 500 has finished higher.

This week was also the slowest in terms of volume of shares traded in 2012.  Additionally, the range that  the S&P 500 traded in was it’s smallest in nearly 5 years.   Both these indicators suggest that much of the Institutional money was away from the markets last week.

Below is a chart of the S&P 500.  We continue to show the bullish trend channel of a series of higher highs and higher lows that the S&P 500 has recorded since it’s recent lows on June 4th.

(Click on Image of Chart for a Bigger Picture)

The S&P 500 is now within 14 points of it’s multi-year highs of 1,419 which was reached on April 2nd.  This level should provide some resistance and we have drawn a black line on the chart to show how close the S&P 500 is to it’s recent April 2, 2012 highs.

Taking A Look at Performance

The Chart above also shows that the S&P 500 made it most recent lows on June 4, 2012 at 1,278.  We would like to use this opportunity to take a look at the 9 sectors that make up the S&P 500 and how each of them have preformed since the most recent bottom on June 4th.

To obtain a better understanding of how the USA markets are performing, we  need to examine the performance of the nine sectors of the S&P since the low of 1,278 on June 4th.  All 500 of the S&P 500 stocks will fall into one of these nine sectors.

1. Materials
2. Energy
3. Financials
4. Industrials
5. Technology
6. Consumer Discretionary
7. Health Care
8. Consumer Staples
9. Utilities

Sectors #1 – #6 tend to outperform when there is improving expectations for economic growth and Investors wish to assume More Risk.

Sectors #7 – #9 tend to outperform when there is decreasing expectations for economic growth and Investors wish to assume Less Risk.

Below is a Performance chart of the nine sectors of the S&P 500 since the recent bottom on June 4, 2012.

(Click on Image of Chart for a Bigger Picture)

As you can see the gains from both the offensive and defensive sectors are relatively the same.  This tells us that since the bottom on June 4, 2012 – that while investors are adding more equity exposure to their portfolios, they are still preferring the safety of Big Cap, USA Based, Dividend Producing companies over the more risky smaller cap growth companies.

Going Long  – 30 Year Mortgage Rates

We would like to take this opportunity in this weeks commentary to share with our readers a 35 year chart of the 30 year Mortgage Interest Rates.

As shown in the chart below, the low rates offered to mortgage borrowers today is unprecedented.  While rates can go a little lower in the future,  the amount will not be by much.  However, as the chart clearly demonstrates,  future mortgage interest  rates have significant more room to move on the upside than the down side.

(Click on Image of Chart for a Bigger Picture)

We do recommend to our readers (and maybe to their grown children) that if the 30 year mortgage makes sense for your financial situation that you go long the 30 years interest rates at these levels today.

Forecast for the Next Week

Earning season has come to a close and the markets are higher by 4% then they were entering earnings season.  For the most part, this last earning season was a disappointment as only 48% of companies made their revenue estimates (lowest in 5 years) and most companies guided their future earnings as either the same or  lower.  Very few raised future earnings estimates.

However the markets exit the earnings season higher than where they entered.  We attribute this to the lowered expectations for the earnings season along with the hope for additionally stimulus from central bankers across the globe.

The S&P 500 can very well make a new multi-year high this week.  If it does we expect there will be an additional sudden move higher over the 1,420 mark but we feel that this move won’t last too long due to the fact that technically the markets are near over bought levels.

We still caution readers that with USA markets near their multi-year highs against a backdrop of deteriorating economic fundamentals worldwide that now is a better time to be trimming portfolios than to be adding additional equity exposure to them.