The Week In Review
8/4-8/8/14
The major averages finished the first full week of August on a strong note. The S&P 500 settled higher by 1.2% with all ten sectors posting gains. Thanks to the advance, the benchmark index added 0.3% for the week.Although stocks ended higher, the futures market was pressured overnight after President Obama delivered a statement last evening, authorizing humanitarian air drops and air strikes in Iraq. The announcement weighed on futures, while giving a boost to Treasuries.
Despite the overnight weakness, equity futures began climbing once European markets opened for action. Furthermore, the overall sentiment improved in reaction to a report from RIA, indicating Russia is seeking to de-escalate the Ukraine crisis. However, it is worth noting that regional leaders have recently warned that Russia could invade Ukraine under the guise of 'peacekeeping.'
Once the opening bell rang, the key indices searched for direction through the first hour of action, but were able to rally to fresh highs with support from heavily-weighted sectors like consumer discretionary (+1.6%), industrials (+1.4%), and health care (+1.1%). The market received another push during the early afternoon after news reports cited Russia's defense ministry as saying Russia's exercises near the border with Ukraine are over.
The afternoon news lifted underperforming sectors into the green, while sending the day's leaders to new highs. On the fixed income side, Treasuries erased all of their overnight gains and ended flat with the 10-yr yield at 2.42%.
The utilities sector (+2.0%) finished in the lead, while other countercyclical groups were somewhat mixed. Consumer staples (+1.0%) and telecom services (+0.5%) lagged, while health care (+1.1%) ended just behind the S&P 500 thanks to strength in the biotechnology space. The iShares Nasdaq Biotechnology ETF (IBB 251.49, +3.34) rose 1.4%, but ended just short of its 50-day moving average (252.10).
Similar to biotechnology, other high-beta areas like chipmakers and homebuilders also rallied.
Microchip manufacturers rallied after NVIDIA (NVDA 19.00, +1.54) reported better than expected earnings and hiked its revenue guidance. The stock surged 8.8%, while the broader PHLX Semiconductor Index rose 1.2%. However, the technology sector (+0.6%) underperformed amid relative weakness in top-weighted components like Apple (AAPL 94.74, +0.26) and Microsoft (MSFT 43.20, -0.03).
Elsewhere, homebuilders provided a measure of support to the discretionary sector with the iShares Dow Jones US Home Construction ETF (ITB 22.71, +0.53) climbing 2.4%. Retailers and media names also played a part in the outperformance. The SPDR S&P Retail ETF (XRT 85.24, +1.30) added 1.6%, while media stocks were underpinned by CBS (CBS 59.23, +2.33) after the company reported above-consensus results.
Participation was on the light side with a bit more than 615 million shares changing hands at the NYSE.
Economic data was limited to second quarter productivity/unit labor costs data and the Wholesale Inventories report for June:
Nonfarm labor productivity increased 2.5% in Q2 2014 following a downwardly revised 4.5% (from -3.2%) decline in the first quarter
The Briefing.com consensus expected nonfarm productivity to increase 1.4%
An increase in wages led to a 3.1% increase in hourly compensation in the second quarter, down from a 6.8% increase in the first quarter
The larger increase in output, however, reduced unit labor costs growth from an 11.8% gain in the first quarter to only 0.6% growth in the second. The small increase in unit labor costs leaves a lot of room for future profit growth
Wholesale inventories increased 0.3% in June after increasing by a downwardly revised 0.3% (from 0.5%), while the Briefing.com consensus expected an increase of 0.4%
The BEA assumed wholesale inventories increased 0.7% in the second quarter GDP report. The lower-than-expected increase along with the downward revision to the May data will result in a smaller contribution to overall growth from the inventory sector when the second estimate is released at the end of the month
There is no economic data of note scheduled to be released on Monday.
S&P 500 +4.5% YTD
Nasdaq Composite +4.7% YTD
Dow Jones Industrial Average -0.1% YTD
Russell 2000 -2.9% YTD
Week in Review: Searching For Direction
On Monday, the market kicked off the new trading week on an upbeat note despite enduring a shaky start to the session. The S&P 500 settled higher by 0.7% with nine sectors ending in the green. Equity indices climbed out of the gate amid upbeat action in Europe where Portugal's Banco Espirito Santo received bailout funds over the weekend. While the actual need for a bailout was not a positive in itself, the news calmed some fears about the stability of the European banking system. Overall, cyclical sectors fared better than defensively-oriented groups with five growth-sensitive sectors ending ahead of the broader market. The energy sector (+1.6%) was an early laggard, but surged into the lead in the afternoon.
The stock market ended the Tuesday session on a broadly lower note. The S&P 500 lost 1.0% with all ten sectors ending in the red. The Russell 2000 outperformed, but still shed 0.3%. Equity indices were on the defensive from the get-go with the early weakness attributed to disappointing data from overseas. China got the ball rolling overnight with a disappointing HSBC Services PMI report (50.0 from 53.1), which fell to its lowest level on record. Things looked a little bit better in Europe, where Services PMI readings from Germany, Great Britain, and Spain improved, but the overall eurozone reading unexpectedly slipped to 54.2 from 54.4. Another item that kept dip-buyers on the sidelines was disappointing guidance provided by Target (TGT). The retailer lost 4.4% after priming the market for below-consensus results that will include a $148 million expense stemming from the data breach that occurred last year.
The major averages spent some time on both sides of their flat lines on Wednesday before ending little changed. The S&P 500 settled on its flat line with six sectors finishing in the red, while the Russell 2000 (+0.3%) displayed relative strength throughout the session. Although stocks finished on a flat note, the early indication suggested the market could be in for a rough day as economic data from the eurozone and domestic corporate news weighed. On the economic front, Germany reported its second monthly decline in factory orders (-3.2% versus expected 1.0%; prior -1.6%), while the Italian economy slipped into recession following its second consecutive quarterly GDP contraction (-0.2%; previous -0.1%). Back at home, two potential acquisitions were called off with 21st Century Fox (FOXA) terminating its pursuit of Time Warner (TWX) and Sprint (S) withdrawing its offer for T-Mobile (TMUS).
On Thursday, equities finished on a lower note despite showing strength in the early going. The S&P 500 fell 0.6% with eight sectors registering losses. Equities climbed out of the gate after the European Central Bank reaffirmed its commitment to the current policy course. In addition, better than expected earnings and economic data also factored into an upbeat start. Despite the set of positive factors, the S&P 500 could not overtake its opening high at 1928.97. Instead, the index spent about an hour near that level before retreating into the red. An afternoon report from the New York Times concerning potential U.S. airstrikes on militants in Iraq contributed to keeping dip-buyers sidelined. As a result, the S&P 500 ended the session below its 100-day moving average (1913/1914), while the Dow Jones Industrial Average (-0.5%) settled just above its 200-day moving average (16343) after crossing that level for the first time since February 6.