Tech At New Highs And The Nasdaq Up 10 In A Row. Can It Keep Going?

After a rough June, technology has come roaring back with the S&P 500 Information Technology Index finally clearing its March 2000 peak and the tech-heavy Nasdaq Composite Index up 10 days in a row for the first time since early 2015. The obvious question is: Can this potentially continue? We think so.

First things first; it took the S&P 500 Information Technology Index 4,354 days to clear its March 27, 2000 closing high, but it finally did on Wednesday, July 26. Here’s the catch. Per Ryan Detrick, Senior Market Strategist, “Some might think because tech is at new highs this means we are in a bubble, but we would disagree. Tech is 42% away from a real high if you factor in inflation, meaning there still could be plenty of room to run. Not to mention earnings are strong and valuations are still modest, a recipe for higher longer-term prices in our book.”

Tech has been strong recently, but on a longer-term basis relative to the S&P 500 Index, it took years to get over the tech bubble hangover. As the chart below shows, tech isn’t as extended as it might seem and could continue to be a major driver of equity gains.

Last, yesterday (July 20) the Nasdaq closed in the green for the tenth day in a row. This is significant, as history would suggest near-term strength could continue. In fact, since 1980, the Nasdaq has gained 2.6% on average during the month following a 10-day win streak versus an average monthly return of 1.0%. Looking at this same period, three months later things became more normal. Over the next several weeks though, the bulls could still be in charge.

IMPORTANT DISCLOSURES

Past performance is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly.

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security.

The economic forecasts set forth in the presentation may not develop as predicted.
Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.

Because of their narrow focus, specialty sector investing, such as healthcare, financials, or energy, will be subject to greater volatility than investing more broadly across many sectors and companies.

Stock investing involves risk including loss of principal.

The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S.-based common stocks listed on the NASDAQ stock market. The index is market-value weighted. This means that each company’s security affects the index in proportion to its market value. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index. It is not possible to invest directly in an index.

The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The S&P Information Technology Index is comprised of stocks primarily covering products developed by internet software and service companies, IT consulting services, semiconductor equipment and products, computers and peripherals, diversified telecommunication services, and wireless telecommunication services.

This research material has been prepared by LPL Financial LLC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.

Not FDIC/NCUA Insured | Not Bank/Credit Union Guaranteed | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Securities and Advisory services offered through LPL Financial LLC, a Registered Investment Advisor Member FINRA/SIPC

Tracking #1-627624; Exp. 07/17

Market Update: Friday, July 21, 2017

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Yesterday’s Market Activity

  • Nasdaq (+0.1%) up again, as the tech heavy index gained for 10th consecutive day to post fresh record high along the way.
  • Dow (-0.1%), S&P 500 (-0.1%) down slightly.
  • Sectors split as rate-sensitive telecom, utilizes lead, consumer staples, materials lagged
  • European stocks -0.4% after ECB meeting, but euro rallied 1.0%.
  • US Dollar dropped on the heels of the euro strength.
  • Japan’s Nikkei +0.6% after the BOJ’s downward revision to inflation forecast, extended projected timeline to hit 2% inflation target.
  • 10-year Treasury yield dipped to 2.27%.

Overnight & This Morning

  • US stocks lower at the open following earnings from bellwethers General Electric, Microsoft, and Visa.
  • European markets near worst levels of the session, as investors continue digesting ECB meeting.
  • Asia ended mostly lower amid light trading.
  • WTI crude oil lower (-0.8% to 46.55/bbl.), surrendering earlier gains.
  • Treasuries yields lower across the curve. 10-year note -3 basis points (-0.03%) to 2.24%.

 

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Key Insights

  • Next week: Focus likely on earnings over Fed. Corporate earnings are likely to overshadow the Federal Reserve (Fed) next week amid the busiest week of earnings season with nearly 40% of S&P 500 constituents slated to report. With the season off to a good start, it’s important to note that recent history (past 20 years) shows stocks have fared relatively well when earnings are in focus. Though the Fed holds their two-day monetary policy meeting with an announcement on Wednesday, no rate hike is expected. Next week’s U.S. economic calendar includes housing, manufacturing, durable goods, and second quarter gross domestic product (GDP) data. Overseas, minutes from the last Bank of Japan policy meeting are due out on Monday.

Macro Notes

  • BLOG: Nasdaq up 10 in a row. For the first time since February 2015, the tech-heavy index is up 10 consecutive days. Additionally, the S&P 500 Information Technology index on Wednesday made a new all-time high for the first time in 17 years. When you consider tech had a rough June, this bounce back is impressive. Today on the LPL Research blog we will take a closer look at where this win streak ranks in history and what tends to happen after 10 day win streaks.
  • What’s going on in Washington? Republican efforts in Washington, D.C. to resolve healthcare and budget challenges, and enable a pivot to tax reform, will continue to garner and warrant attention. Look for our latest policy thoughts in Monday’s Weekly Market Commentary.

 

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Click Here for our detailed Weekly Economic Calendar

Friday

  • UK: Public Sector Net Borrowing (Jun)
  • Canada: CPI (Jun)
  • Canada: Retail Sales (May)

 

Past performance is no guarantee of future results.

The economic forecasts set forth in the presentation may not develop as predicted.

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

Stock investing involves risk including loss of principal.

Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, political risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks.

Because of its narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.

Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, disease, and regulatory developments.

Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.

Investing in foreign and emerging markets debt securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical and regulatory risk, and risk associated with varying settlement standards.

Currency risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged.

This research material has been prepared by LPL Financial LLC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.

Not FDIC/NCUA Insured | Not Bank/Credit Union Guaranteed | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Securities and Advisory services offered through LPL Financial LLC, a Registered Investment Advisor

Member FINRA/SIPC
Tracking # 1-627682

 

 

MOVE Index and Treasury Yields – Correlation but Likely No Causation

The Merrill Lynch Option Volatility Estimate Index (MOVE) is the bond market’s equivalent of the Chicago Board of Options Exchange Volatility Index (VIX), and helps to gauge the current level of fear or complacency in fixed income markets. Since launching in April 1988, the index has averaged a reading of approximately 97, but it has averaged just 70 over the last five years. On July 18, 2017, it dipped below 50 for the first time since May 9, 2013. In fact, the index has shown a reading of less than 50 just 11 days in its nearly 30-year history.

So, what can very low bond market volatility tell us about the future direction of interest rates? The answer is: Disappointingly little. There appears to be correlation with large moves in 10-year Treasury yields when the MOVE is at extreme levels; however, a closer look at history leads us to believe this correlation does not imply causation, as the below table shows.

All of the index readings below 50 occurred between late April and early May 2013. The bond market may have been complacent at the time; however, the driver of higher yields was former Federal Reserve (Fed) Chairman Ben Bernanke’s comments about tapering Fed bond purchases, which led to the period’s aptly named “Taper Tantrum.” Although bond market complacency at the time may have exacerbated upward moves in rates, it certainly did not cause them.

Conversely, very high MOVE readings (above 200) occurred between late September and December 2008, during a period of extreme equity market volatility and weakness. 10-year Treasury yields tumbled 40% in the fourth quarter as equity market turbulence led investors to flee riskier assets and allocate to perceived safe-havens such as U.S. Treasuries. The high readings in the MOVE (a high level of fear in the bond markets), therefore, seemed to be a symptom of the same problem that led to the drawdown in yields, but not the cause of them.

While the MOVE index may well gauge current sentiment in the markets, its predictive power in the direction and severity of yield moves appears lacking.

IMPORTANT DISCLOSURES

The economic forecasts set forth in the presentation may not develop as predicted.

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security.

Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.

All indexes are unmanaged and cannot be invested into directly.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond and bond mutual fund values and yields will decline as interest rates rise and bonds are subject to availability and change in price.

Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.

The VIX is a measure of the volatility implied in the prices of options contracts for the S&P 500. It is a market-based estimate of future volatility. When sentiment reaches one extreme or the other, the market typically reverses course. While this is not necessarily predictive, it does measure the current degree of fear present in the stock market.

The Merrill Option Volatility Estimate is a yield curve weighted index of the normalized implied volatility on 1-month Treasury options.

This research material has been prepared by LPL Financial LLC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.

Not FDIC/NCUA Insured | Not Bank/Credit Union Guaranteed | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Securities and Advisory services offered through LPL Financial LLC, a Registered Investment Advisor
Member FINRA/SIPC
Tracking #1-627308 (Exp. 07/18)