U.S. Largecap Sector Relative Fair Values: Tuesday, July 26, 2016

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Significant Changes Since Last Week:

The domestic market continues to move closer to 100% FV reaching 98.1% this morning. The probability of reaching 20,000 by this time next year is increasing. 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 move into the 19,000 level. Unfortunately, we will need to wait for the actual reports to begin appearing.

Gains in relative value appeared in areas that have struggled throughout the year. Information Technology moved up the most with a large 4.0 percentage point advance to 96.3% FV. Materials reignited a move to the upside passing the 100% FV mark by 1.5 percentage points. This sector has made several pervious advances above 100% FV and this time it very well may stay above that level. Financials made a similar advance, 1.7 percentage points, but remains below 100% FV primarily due to the dominance of large national banks in the sector. Banks will continue to struggle with margins due to lower interest rates, higher compliance costs and increased competition as the larger banks become increasingly competitive on the e-commerce side.

Energy stepped back a bit in relative value as raw material costs stabilized recently with a hint of softness going forward. Now that crude prices are high enough some exploration and refining capacity is coming back on line ever so slowly preventing a shortage or even reduced supply condition. Consumer Staples also moved back slightly, 1.6 percentage points, but the sector is well above 100% FV at 106.8%. This sector may take a pause in advancing until Consumer Discretion advances closer to 100% FV later in the year.

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The DOW advanced 424 points over the week from 18,146 to a new high of 18,570. This places the market very close to 100% FV at 98.1%. If earnings reports are better than the market expects it would be easy for the index to reach 100% FV. Both the Midcap and Smallcap markets continue at levels above 100% FV. The midcap market remained still at 106.5% FV while smaller companies advanced 1.6 percentage points to 102.5% FV. All three market indicators remain well within normal trading ranges.

All but one sector in the midcap market segment is under the 100% FV mark, everyone else is above. Expectations for midcap companies is high at the moment. A big advance was made in Telecommunication Services with a 6.3 percentage point gain to 102.1% FV. This gain far outstripped all other sectors. Just as in the Largecap segment, midcap stocks in Information Technology and Materials both advanced. Consumer Staples retreated slightly as Consumer Discretion advanced more than 2.0 percentage points.

Utilities has reached a level above 120% FV at 122.3% FV placing them in the early stages of caution. We may see some retrenchment within the sector over the next few months or at least until the remaining sectors advance. Investors that are continuing to seek yield are pushing utility stocks above 100% FV across all market segments.

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The Smallcap segment produced different results than both the Largecap and Midcap segments. Instead of large movements in IT and Materials the real movement took place in Consumer Staples and Energy. Consumer Staples retreated back closer to 100% FV giving up 3.9 percentage points but remaining above 100% FV at 111.2% . Energy also retreated over 5.0 percentage points to 87.7% FV as crude prices stabilized. This is primarily because the Smallcap index has a higher percentage of exploration enterprises within its constituents versus the major oil companies within the Largecap index. Many of the smaller energy companies operate on thinner margins and require a higher raw material to retail price spread. This may continue until we close on in on a $60/bbl price level.

U.S. Allcap Industry Relative Fair Values

Eleven of the 21 individual industry groups are now above 100% FV which is one more than last week. Software & Services is the new arrival by just peeking its head above the 100% FV mark at 100.2%. Both technology related industry groups moved ahead with sizable gains. Semiconductor advanced by more than 6 percentage points to 110.0% FV. Both consumer industry groups also advanced by more than 4 percentage points.

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Only a few groups took a backslide, Household & Personal Products moved back to 102.7% FV from 104.7% FV the prior week. Two industry groups are approaching 100% FV, Retailing and Food & Staples Retailing. Both groups are within 2 percentage points of passing the mark.


This is NOT a Specific Recommendation and Should Only Be Viewed as News Based Information for Your Consideration