It’s all commodities, all the time with every media
outlet covering the commodity mania that’s swept over retail investors in
China. Our weekly Quant Movers Report
shows that fever has been exported to America because while equity markets
might have been relatively flat last week, a new speculative frenzy is leading
to major changes in what drives the markets.
With another huge week of earnings releases on deck, will it last or is
it time to stage an intervention?
We don’t rank commodity ETFs but the presence of three
MLP funds in our weekly list of biggest behavioral quant gainers was something
we haven’t seen in a while with the ETRACS Alerian MLP Infrastructure Index ETN
(MLPI) leading the charge with an 86% gain.
Big swings by energy names are nothing new; our behavioral scores
incorporate volatility and MLP funds are nothing but volatile (despite their original
promises of slow and steady dividend payments) but what makes this interesting
to us is the backdrop this move is set against.
This week will see energy sector titans like ExxonMobil and Chevron
release their Q1 earnings and investors are braced for bad news; analysts are expecting a -110%
change in sector earnings on a year-over-year basis as stabilizing oil prices
should only help moderate losses until the fourth quarter when analysts are
finally projecting the sector will return to profitability. But along with stabilizing prices despite
record product, even just being “less unprofitable” is enough for investors to
go long (or at least to cover their shorts) and sent energy names soaring with
Chevron, which is expected to report a loss for the first quarter, up 4.9% last
week while the broader sector is now trading at a forward P/E multiple of 71x
compared to 16.9x for the broader S&P 500.
Energy stocks weren’t the only ones to benefit despite
the weak prospects, which brings us to Plan B in the case for hope over
logic, specifically, the astounding momentum shift by financial stocks which have now
outperformed the broader markets over the last two weeks with the SPDR S&P Bank
ETF (KBE) up over 11.4% during the last two weeks compared to a more modest 2.15%
for the S&P 500. Some will argue
that the strong performance was long overdue; KBE did underperform the S&P
by over 1100 bps in the first quarter so who else would benefit the most from
declining volatility and hope that the worst of the economic weakness is behind
us? Sounds nice but the only real
problem with that is the last time bank stocks enjoyed such strong performance
was last fall in the interlude between the Fed’s failure to hike in September
and when it finally chose to do so in December. Then investors could hope that rising rates
would ease pressure on net-interest-margins but more importantly that we could
get off the zero boundary with a series of minor rate hikes and encourage
investors to stop hoarding cash and get their money back to work. This time it’s nothing but hopes for wine and
roses ahead with the awful first quarter behind us which makes the logic behind
last fall’s big move seems almost quaint by comparison. In the last two weeks nearly every major bank
missed on revenue (but miraculously somehow beat earnings estimates), set aside
more capital for future defaults in the energy sector while most of the “too
big to fail” institutions had their living wills declared insufficient.
Investors on the whole are rewarding companies who beat earnings estimates while holding fire on those who miss, but someone apparently forgot to tell tech investors after Alphabet and Microsoft shares were pummeled last week. It’s easy to understand why investors are in an unforgiving mood given that both Alphabet and Microsoft were trading at rich multiples precisely because they weren’t supposed to miss and it’s not like either company was offering a rich dividend yield to help tide investors over but if you think this was a one-time thing, think again. Technology funds have been steadily losing momentum against the broader equity market since last December and noticeably so over the last three weeks. In fact, the Technology Select Sector SPDR’s (XLK) aggregate price momentum score is the lowest of all the Select Sector Funds and largely because of those rich valuations. It takes nerves of steel to short big-name tech stocks which eliminates one major catalyst to keep boosting them higher, along with stock buybacks which are increasingly short supply. And with the markets just off their old highs, it’s easier to convince clients to put their “capital to work” in beaten down energy and financial names rather than high-flying tech stocks.
Investors on the whole are rewarding companies who beat earnings estimates while holding fire on those who miss, but someone apparently forgot to tell tech investors after Alphabet and Microsoft shares were pummeled last week. It’s easy to understand why investors are in an unforgiving mood given that both Alphabet and Microsoft were trading at rich multiples precisely because they weren’t supposed to miss and it’s not like either company was offering a rich dividend yield to help tide investors over but if you think this was a one-time thing, think again. Technology funds have been steadily losing momentum against the broader equity market since last December and noticeably so over the last three weeks. In fact, the Technology Select Sector SPDR’s (XLK) aggregate price momentum score is the lowest of all the Select Sector Funds and largely because of those rich valuations. It takes nerves of steel to short big-name tech stocks which eliminates one major catalyst to keep boosting them higher, along with stock buybacks which are increasingly short supply. And with the markets just off their old highs, it’s easier to convince clients to put their “capital to work” in beaten down energy and financial names rather than high-flying tech stocks.
The real question is how will investors handle these
volatile markets when 178 S&P 500 components report their earnings next
week including former darling Apple whose stock has been under pressure as
reports of waning iPhone sales continue to take their toll and the
aforementioned Chevron who is expected to report negative earnings.
Who will investors continue to love?
Thank you for reading ETF Global Perspectives!
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