U.S. Largecap Sector Relative Fair Values: Wednesday, August 3, 2016

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Significant Changes Since Last Week:

The domestic market is just 0.6 percentage points away from reaching 100.0% FV. The probability of reaching 20,000 by this time next year remains a realistic goal and at that level the market would still be well within the fair value trading range.

Earnings for mid-year will be very important for the short term, next 3 months, but will most likely not derail the trend toward recognizing increasing strength within the U.S. economy, especially on a relative basis to the global economy. If newly announced earnings are at or above expectations, it could push the market above 100% FV and give it the push it needs to move into the 19,000 level.

Gains in relative value appeared in areas that have struggled throughout the year. During the month of July Telecommunication Services gained the most, advancing 5.5 percentage points from 105.0% FV to 110.5% FV. Consumer Discretion took the number two spot advancing 3.9 percentage points reaching 99.1% FV. Five sectors are now above 100% FV with two more within a single percentage point of reaching 100% FV. Not a single sector is below 90% FV with Energy the lowest at 92.9% FV. This is a long way ahead of this time last year with most sectors well below the 100% FV mark.

Energy continued the step back from previous gains falling 5.1 percentage points retreating back to 92.9% FV. Crude prices dropped significantly during the last week but should stabilize and regain some of the earlier advances. Financials took a smaller step back by 1.7 percentage points as many investors were concerned of the impact of a continued delay by the Fed on increasing interest rates.

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The DOW took a strong look at 19,000 last week only to again move back into the lower regions of 18,000. This has been a continuing story even before the new scape-goat, Brexit. It always amazes me at how a current event gets tagged with the results of markets regardless of reality. Many times in the investment world a result goes searching for a triggering event rather than a triggering event directly impacting and causing a result. Maybe next week it will be peanut butter sales!

Midcap and Smallcap stocks remain above 100% FV but have calmed somewhat in their move to overvaluation. There is still a good amount of gain left in these categories. Only one sector in the midcap market segment remains under the 100% FV mark and that is Energy. This comes as no surprise as crude prices remained soft throughout July. Since there are more leveraged companies within the mid and small cap indices we will need to wait until crude prices again look at $50/bbl to advance. A big advance was made again in Telecommunication Services with a 7.0 percentage point gain to 100.7% FV for the month. Utilities also advanced during the month reaching 114.8% FV as investors continued to seek out yield via dividends. Industrials also lost some ground falling 4.6 percentage points but remains well above 100% FV at 105.2% FV.

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The Smallcap segment produced some dramatic movement in Telecommunication Services advancing over 20 percentage points for the month reaching 101.1% FV. Utilities remains the leader at 117.0% FV and retreated over 5 percentage points. This is a welcome change as Utilities had reached the Caution level (above 120% FV) and was flirting with an overvaluation rating. Only two sectors are below 100% FV with Energy being the laggard. This is consistent with what we are seeing in both the Midcap and Largecap classifications. Energy will be weak until we see strengthening take place in crude prices.

U.S. Allcap Industry Relative Fair Values

One more industry group moved above 100% FV this week making it 12 out of 21, 57%. Retailing has joined the ranks at 101.0% FV. This was a nice move to the upside by over 4 percentage points. This is a good sign since the consumer retailing scare earlier this year when post-Christmas season sales were disappointing. Several industry groups moved to the positive side by more than three percentage points. The big gainers were: Food & Staples Retailing, Real Estate, Semiconductors, and Software.

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Industry groups that lost relative value were few and only by small amounts. The largest was Banking which comes at no surprise since the Fed has continued to delay a rate increase in order to maintain an accommodative position. Banks will continue to struggle with defining distinctive competencies while balancing increased cost structures and regulation.