Stocks “Flat-Line” in August

Stocks “Flat-Line” in August: Wake Me When It’s Over!

by Louis Navellier

August 30, 2016

*All content in the Marketmail Introduction is the opinion of Louis Navellier of Navellier & Associates, Inc.*

The S&P 500 fell slightly on Friday (less than -0.2%) pushing the index down barely 0.2% for the boring month of August. In fact, we haven’t seen a daily gain or loss of 1% since July 8. On Friday, Fed Chair Janet Yellen’s speech in Jackson Hole, released early in the trading day, was considered very dovish, since she implied that there would be no immediate interest rate hike. But, she added this caveat: “In light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months.”

Jackson Hole Image

Translated from Fedspeak, the Fed is still waiting to see stronger economic data before raising interest rates at their September, November, or December Federal Open Market Committee (FOMC) meetings.

The title of Yellen’s speech was a yawner: “Monetary Tool Kit,” a technical term which implies that the FOMC is running out of policy options. After her talk, Yellen did not take any questions, since she did not want to fuel any unnecessary speculation. The “data-dependent” Fed surely noticed that on Friday, the Commerce Department revised the second quarter GDP down to an annual rate of 1.1%, from 1.2% previously estimated. Imports were higher than previously estimated, so the growing trade deficit took a nick out of overall GDP growth. Also weighing down second quarter GDP growth was a decline in business inventories. Declining business inventories have been a drag on GDP growth for five straight quarters, so I doubt the Fed has sufficient economic justification to raise key interest rates in September.

In This Issue

Bryan Perry expounds on the conflicting Fed chatter which followed Yellen’s speech, causing a market reversal. Gary Alexander examines the week’s array of negative headlines and addresses the nagging problem of America’s wealth gap. Ivan Martchev looks at the predictable pattern of gyrations in stock and bond markets based off of Fed speculation. Jason Bodner examines the yin-and-yang of winners and losers among S&P sectors, and then I’ll return with a look at the same dilemma, and our preferred solutions.

Income Mail:
Too Many Cooks in the Fed’s Kitchen
by Bryan Perry
The Friday Jobs Report Will be the Market’s Next Test

Growth Mail:
Turning Boring Markets into Scary Headlines
by Gary Alexander
The “Wealth Gap” is a Both a Blessing and a Challenge

Global Mail:
It’s “Déjà Vu All Over Again” at the Fed
by Ivan Martchev
All’s Quiet on the Eastern Front

Sector Spotlight:
It’s Time to Break the Ice and Get This Market Rolling
by Jason Bodner
Sector Winners and Losers of the Last Week and Month

A Look Ahead:
Crude Oil Finally May Have Begun its Seasonal Decline
by Louis Navellier
Finding “Diamonds in the Rough” at Navellier & Associates

Income Mail:

*All content in "Income Mail" is the opinion of Navellier & Associates and Bryan Perry*

Too Many Cooks in the Fed’s Kitchen

by Bryan Perry

The much-anticipated speech by Fed Chair Janet Yellen in Jackson Hole last Friday was initially met with a round of bullish applause as investors put a Goldilocks spin on the narrative of her message – neither too hot nor too cold, but just right. It’s as if the markets accepted the notion of a wait-and-see posture with any 2016 rate hike likely coming in December. The summer party was on and the barbecue was lit as the S&P 500 spiked near record-high territory Friday morning, once the text of her speech crossed the wires.

Within the body of Yellen’s speech, there was a three-paragraph segment that touched on the current economic situation and outlook. In that section, she acknowledged that she believes the case for a rate hike has strengthened in recent months, but also reiterated that monetary policy is not on a preset course. This came off as “we’ll just have to wait and see what the future data holds,” so most traders ran with it.

Then, to everyone’s chagrin, the major indices rolled over in noticeable fashion around noon EST, prompted presumably by a remark that Fed Vice Chairman Stanley Fischer made in a CNBC interview with Steve Liesman. Specifically, Liesman asked if markets should be on the edge of their seats looking for a rate hike in September and then more than one rate hike before the end of the year. As part of a rambling response, Fischer said that what the Fed Chair said in her speech today is consistent with answering “yes” to both questions, but he added that the Fed still needs to see what the incoming data will look like.

Fischer’s remarks helped breathe some added life into the U.S. Dollar Index (closing +0.76 at 95.48). This helped to undercut the front end of the yield curve and took the wind out of the sails of the stock market and the rate-sensitive utilities sector, which had rallied nicely after the release of Yellen's speech.

In short, what went up (briefly) after Ms. Yellen's speech first hit the wires fell down (sharply) after Mr. Fischer's surprisingly candid admission on the a more aggressive policy path – at least as he sees it.

Following Fischer’s remarks, the fed funds futures market indicated a 42% chance of a rate increase in September and a 63% probability of a rate rise by December, according to data compiled by Bloomberg.

This is the current reading of the expectations by FOMC participants over the next few years:

Federal Open Market Committee Participant's Assessments of Appropriate Monetary Policy Dot Plot

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The Friday Jobs Report Will be the Market’s Next Test

If the August employment report – coming out next Friday – looks a lot like the June and July reports, I suspect the probability of a rate hike in September will get ratcheted up to 50/50 and the markets will be more guarded. Mohamed El-Erian, Allianz SE’s chief economic adviser, said Friday on Bloomberg TV, “If we get a really strong employment report, 200,000 plus, with much higher wage growth, then they would find it very difficult to resist a hike, probably in September, but definitely by December.”

The consensus forecast for the August employment data looks for non-farm payrolls to be up 180,000, with an unemployment rate dropping to 4.8% from 4.9% and hourly wages increasing by 0.2%. I expect the markets to spend most of this week watching and waiting on Friday’s figures with great anticipation.

Two Year Treasury Yield Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Unlike stock investors, who are typically optimistic, bond traders are inherently pessimistic and are taking the latest Fed chatter to heart. Yields on two-year Treasuries climbed to their highest level since June as traders increased their bets on a Fed rate hike. The difference in yield between U.S. notes due in five years and those maturing in 30 years tumbled to the least spread since March 2015, while the spread between the 10-year and 2-year Treasuries (charted below) has been sitting at a multi-year low of 0.80% for two months, implying that the yield curve is getting ever flatter.

Ten Year Treasury Constant Maturity Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

As it stands now, incoming data and recent Fed chatter is giving the market a feeling of too many cooks in the kitchen spoiling the broth. Back in the day – call it pre-1990 – the Fed was tight-lipped and made no public statements about Fed policy; we just read about it in the business section the following day.

While some degree of central bank transparency is likely to convey the benefits of keeping the market informed of its current thinking, it may also have some costs that could limit the amount of transparency that is desirable in practice. In the words of economist Alex Cukierman (in “The Limits of Transparency,” March 19, 2007), one danger of transparency is that a central bank “may give the impression to the public that it knows more than it actually does.” It is important to realize that central banks operate in an uncertain environment in at least three different realms: Uncertainty about the data, uncertainty about the nature and persistence of shocks to the economy, and uncertainty about the structure of the economy.

An additional challenge that central banks face by being as transparent as they are is that monetary policy decisions typically are not made by one person using one precise economic model, but rather by a committee that may employ many different economic models, each of which has its own strengths and weaknesses. This explains why it seems that the Fed is not often in one accord about their options. This ‘too many cooks’ analogy is clearly evident in the current investing landscape, dominated by imprecise central bank communications or communications that oversimplify the diversity of views of individual committee members and their various economic models. This creates more confusion than clarity.

As the see-saw rhetoric by the Fed continues, the constant and continuing level of uncertainty of their fiscal policy message pushes the market into what might be described as an agitation-driven trading range. For the S&P to extend above 2,200 in the near term, I believe we will have to see some further improving economic data points so the focus can shift away from the Fed and zero in on GDP growth prospects.

Having just returned from the San Francisco Money Show, the general tone of investor sentiment there was pretty tempered and not very ebullient considering that the market indices have set several new highs of late. In the eyes of many, the summer rally is based on the fact that there’s nowhere else for foreign funds to flow, due to a backdrop of negative interest rates and record bond issuance to buy back corporate shares, which tends to mask the weak top-line growth recently reported by many corporations.

Taking the ‘glass half full’ view, however, it looks like earnings have finally troughed and, if so, a Fed hike here or there isn’t going to stymie an earnings-driven market. If the old saying “rising sales cures all ills” has any application, then rising earnings can make believers out of even the most stubborn bears.

Growth Mail:

*All content in "Growth Mail" is the opinion of Navellier & Associates and Gary Alexander*

Turning Boring Markets into Scary Headlines

by Gary Alexander

Since July 8, when the S&P rose 1.54%, that index hasn’t moved more than 0.9% in any given day, and most of those changes were slight gains, including 10 all-time highs. A gradual rise is far preferable to a buying frenzy, and the declines since June 26th have been microscopic. On Crossing Wall Street (August 26), Ed Elfenbein wrote, “Since Brexit, the S&P 500 has now gone 42 straight sessions without a daily decline greater than 0.7%. Compare that with the first 42 days of this year when it happened 15 times!”

Calm waters cause great consternation among leading financial publishers, who must fan the flames of fear. Looking at last Tuesday, August 23rd, The Wall Street Journal published these two page-1 headlines:

Stock Market Turns Eerily Quiet” – Wall Street Journal Page 1 Headline, August 23, 2016
Risk Grows in Safe Stocks” – Page 1 of WSJ’s “Money & Investing” section, August 23, 2016

Why is a quiet market “eerie”?  Because, the Journal author explains, low volatility “has led some to worry that a market storm may be brewing as peaceful periods in the past have frequently ended in sharp corrections.”  Well, hold on there!  Peaceful periods have also preceded major increases. As the Journal author admitted up front: “Only five [of the last 30 trading days] saw the S&P 500 move by more than 0.5% in either direction, the lowest since the fall of 1995,” early in the huge bull market of 1995-1999.

I admit that we are as guilty as anyone else of drafting headlines to grab your attention. It’s a proven fact that fear is stronger than greed. Bad news sells, so we crafted a similarly scary headline last Tuesday:

August Doldrums Often Precede September Fireworks” -- Marketmail headline for August 23, 2016

After writing that headline, however, we quickly pivoted to say that fireworks can imply a rising market, too. In the first paragraph, we explained, “if some relatively obscure stocks can firm up on light volume during vacation time, we could see more buying across the board when trading volume historically rises again, after Labor Day.” We were merely saying that market volume tends to pick up after Labor Day.

Business Publications Headlines Image

In addition, some of my favorite business magazines printed negative cover stories last week, presumably in search of higher sales. The Bloomberg BusinessWeek cover for August 22-28, 2016 (above) says “A violent crime happens here every day.”  Our minds automatically equate “violent crime” with gunfire, but it includes minor assaults, too. The main point of the article is that retail stores need more in-store security. True, but easily solved.

The Economist cover (August 20-26, 2016) says the U.S. housing market is a “nightmare” and a “horror,” playing on our fears of a repeat of the last (2006-09) housing price collapse. Their editorial colorfully says “The slab of mortgage debt lurking beneath it is the planet’s biggest concentration of financial risk.”  That risk is due to the fact that “65-80% of new mortgages are stamped with a guarantee from Uncle Sam.”

However, the article also points out that there is no housing mania, as in 2003-06. The median home price is down 0.5% in the past 12 months to $294,000. Last Wednesday, the National Association of Realtors (NAR) reported that existing home sales actually declined 3.2% in July. It’s doubtful we’ll see another housing bust soon. Despite the fact that Freddie Mac finances mortgages of up to $417,000 with just 3% down, homebuyers are still wary, due to the recent bubble. Risks in housing are important to weigh, but they are largely obviated by research into your location and putting 20%+ down payments (at low rates).

During a week in which real storms submerged large parts of Louisiana, tornados ripped through Indiana, fires are burning out of control in the West, heat waves are oppressive and a hurricane is entering the Gulf of Mexico, publishers know that fears over our own home (or violence in the malls) are stronger fears.

The “Wealth Gap” is a Both a Blessing and a Challenge

“Income inequality in a capitalist system is truly beautiful. It provides the incentive for creative people to gamble on new ideas and it turns luxuries into common goods.” – John Tamny, Popular Economics: What the Rolling Stones, Downton Abbey, and LeBron James Can Teach You about Economics, Released April 13, 2015, p. 67

Last week, I disputed five political myths – three by Donald Trump and two by Hillary Clinton. I didn’t hear any critiques from Trump fans, but I saw two letters lightly disputing my Hillary Clinton critiques. One Marketmail reader wrote, “Aggregate numbers and averages hide the distributions. America is the richest country but also the most unequal country in wealth distribution, so politicians may have a point.

This is an important issue to discuss in a market-oriented mailing like this, since our economy depends on the economic health of the vast American middle class, and our future as an honorable nation depends on creating an unobstructed path for those in poverty to reach the middle class – or even become super-rich.

Contrary to political claims, the income gap hasn’t expanded much in the last 20 years. The income share of the top 5% was 21% in 1993 and 21.9% in 1994, while the top 20%’s share rose from 49% to 51%:

Share of Total Income Earned by the Top 5% and Top 20% of United States Households Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

As for measuring accumulated wealth over time, the “richest 20%” is a changing group of people each year. Many Americans rose from the lowest quintile (20%) just out of college (I made $5,500 in 1968, for instance) to the top quintile by age 60. Statisticians call this “migration within the quintiles.”  (I wrote about this in more detail in my December 22, 2015 Growth Mail if you want to see the statistical details.)

Let me add a kind word for the rich. If we weren’t a nation with some billionaires, we wouldn’t have the capital needed to fund costly new products and inventions – which only the rich can afford (at first), but which soon become available to nearly everyone. Every kitchen appliance, computer, life-saving drug, or business tool costs a lot of money to develop. Only the rich can afford them at first, but most technology tools come way down in price in short order, as do the life-saving drugs that go generic after a few years.

If it weren’t for the hope of becoming rich, we wouldn’t be a nation that inspires kids like Steve Jobs, Bill Gates, and hundreds of others to create new products. You don’t find that kind of innovation in Europe or Asia, or almost anywhere else. This is a unique advantage of the American ideal, and we must not lose it.

However, we also need to allow those who feel trapped in poverty to do the same kinds of things that Bill Gates did. We need better (more competitive) education, including more vocational training. America faces a tremendous challenge of creating opportunity for youths crippled by poor education and broken homes – by-products of misguided government programs, including dismal and dangerous public schools.

There is a huge skills gap in America. Politicians want to “bring jobs back to America,” but we don’t have enough skilled welders, builders, and other industrially-skilled workers to meet current demand. A fall 2014 Harris Poll (“The Shocking Truth About the Skills Gap”) found that among 1,025 employers, over half “reported they have open jobs for which they cannot find qualified candidates.” In that poll, 81% claimed that it’s at least “somewhat difficult” to fill job vacancies due to a skills gap, and 61% said that they were forced to hire “a person who does not fully meet the stated requirements for the job.”

Solving poverty requires a free choice in education, in which each poor family can select a better school.

Global Mail:

*All content in "Global Mail" is the opinion of Navellier & Associates and Ivan Martchev*

“Déjà Vu All Over Again” at the Fed

by Ivan Martchev

The legendary Yogi Berra has often been an inspiration for this column and this week is no exception as both the stock and bond markets came under pressure due to hints emanating from the Fed’s annual conference at Jackson Hole. “It’s déjà vu all over again,” Yogi tautologically murmured during one of those many New York Yankee games when Roger Maris and Mickey Mantle both hit home runs.

He could have said the same thing about the market action last Friday. So far it has been a familiar pattern in 2015 and 2016. When the Fed starts hinting at rate hikes, both the stock and the bond markets come under pressure, the U.S. dollar rallies and everything starts to look dicey pretty fast. Later on, the Fed decides that the selloffs are way too steep and backs off (save for one Fed funds rate hike in December 2015). Then the markets recover. This cycle has repeated itself several times over the past 18 months.

The trouble is that the world’s governments have created about $12 trillion in negatively-yielding debt. This is about a quarter of all major government debt in the world! So if our Fed wants to hike short-term interest rates in the worst global deflationary shock since Great Depression, they would simply be compounding their mistake from last December. As the Fed has been mulling rate hikes in the past 18 months, the amount of negatively yielding government debt has risen dramatically (see chart, below)

Global Negative Yielding Debt is Climbing Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

As this Fed rate hiking nonsense has ebbed and flowed, the slope of the U.S. Treasury yield curve – the difference between 2- and 10-year notes – has further flattened (see chart, below). At present, this rather important bond market indicator stands at 0.80% (80 basis points). As the chart shows, the yield curve has gone negative before every one of the last five recessions as short-term and long-term rates converge.

Ten Year Treasury Constant Maturity Minus Two Year Treasury Constant Maturity Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The way this has worked is when the 2-year note yield moves up due to Fed policy announcements – as is the case at present – the 10-year yield goes down because of a weakening economy.

The global economy is definitely not doing well. That mountain of negative-yielding global bonds is driving U.S. long-term interest rates lower as financial institutions in countries where yields are negative simply choose to buy more U.S. Treasuries as the yields are positive. Life insurance companies and other institutional investors have to hold a certain portion of their investment portfolios in risk-free assets. The trouble is that their asset/liability matching models don't work very well if the yields on those bonds are negative, hence the increased demand for Treasuries.

Ten Year and Two Year Constant Maturity Rates Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The talk of “tapering” QE, which began in 2013 with the infamous Bernanke slip of the tongue, caused a “Taper Tantrum” among bond investors. This, combined with the December 2015 fed fund rate hike, has pushed 2-year yields higher (blue line, above). As the piling into 10-year Treasuries drives yields lower, the two rates are now converging. When they cross – and I do believe this will be a high-probability event if there is another rate hike – the U.S. Treasury yield curve will turn negative.

Because of the tendency of the yield curve to go negative before recessions, in part due to Fed actions, there is a school of thought that says that the Fed has caused every recession, starting with the Great Depression. As a Fed governor, Ben Bernanke admitted as much at a University of Chicago conference on November 8, 2002 honoring Milton Friedman on his 90th birthday. Bernanke said, “Regarding the Great Depression, you’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”

In his speech, Bernanke referred to Milton Friedman and Anna Schwartz’s book, “A Monetary History of the United States: 1867-1960,” published in 1963, as “the leading and most persuasive explanation of the worst economic disaster in American history, the onset of the Great Depression.” The book placed the blame for “the Great Contraction of 1929-1933” squarely at the feet of the Federal Reserve.

I am not suggesting that another fed funds rate hike in 2016 will cause a Great Depression or anything resembling the Great Recession of 2008-2009, but such an event has a high probability of pushing 2-year note yields above 10-year note yields and that has historically been an ominous sign for the economy.

The Great Recession of 2008 was the result of irresponsible lending practices and financial system engineering that nearly bankrupted the U.S. financial system. In that regard, it was more self-inflicted than driven by Fed policy, although a series of rate hikes starting in 2004 certainly contributed to the popping of the real estate bubble, which in turn popped the mortgage securitization bubble, which then nearly brought the whole financial system down.

United States Fed Funds Rate Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

While the U.S. financial system is in much better shape today, the global financial system is grappling with serious deflation, with European banks being in a particularly tough spot. Hiking U.S. interest rates in that environment will only make global deflation worse. In that regard, if there are more rate hikes, the Fed could be partially to blame for causing a European banking crisis – by accelerating their decline.

All’s Quiet on the Eastern Front

Pondering the Chinese economic situation this week, a Bloomberg story caught my eye (August 25, 2016 “Forget Real GDP, Nominal Expansion in Key for China”). Bloomberg also has a video clip attached to the story of an RBS economist suggesting that because there is a turn higher in nominal GDP growth (red line, below), the PBOC has not been adding to the monetary stimulus with rate cuts of reserve requirement ratio cuts (in effect freeing up funds from major banks to be lent into the Chinese economy).

Chinese Nominal Growth Captures Cyclical Swings Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

As readers of this column know, the meaning of any economic indicator is in the eye of the beholder. To this RBS economist, nominal GDP growth is turning up and this is fine. To me, it looks like China’s GDP growth is struggling near its worst levels in over 20 years. On the surface, it may look like things are improving in China, but that would be looking at a single indicator out of context.

The trend seems even more negative when one takes into consideration that since 2000 China’s total debt to GDP ratio has increased from 100% to about 400%, when one takes into consideration the parabolic rise in unregulated shadow bank lending. This quadrupling of the leverage ratio in the Chinese economy has come when the economy has grown over 10-fold from just under $1 trillion at the turn of the century to over $11 trillion at last count. That means the total debt in China has risen 40-fold on a nominal basis.

China Inflation Rate Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Since China is experiencing slower nominal GDP growth at a time when its financial system is operating on record financial leverage, the situation begins to look pretty dicey because nominal GDP growth affects revenues of Chinese borrowers, so weak revenues mean diminished ability to pay debts that have risen four-fold on a relative basis since the turn of the century. This is why I will not be surprised to see the Chinese authorities devalue the yuan as that would push inflation way up and will also push Chinese nominal growth much higher – as happened after the last 34% devaluation in late 1994.

Sector Spotlight:

*All content in "Sector Spotlight" is the opinion of Navellier & Associates and Jason Bodner*

It’s Time to Break the Ice and Get This Market Rolling

by Jason Bodner

August is that time of year when many of us are focused on vacations and squeezing out our last days of summer before the autumn officially kicks in. Here in Florida, however, school started two weeks ago, which seems like cruel and unusual punishment to some. The thought of Labor Day marking almost a month of school already under the belt seems unnatural to many people (myself included). So officially summer was over here weeks ago. As it is still summer up north, I’ve been procrastinating a bit on writing my column today, but now it’s time for me to bite the bullet, break the ice and get the ball rolling.

If you’ve ever wondered how common expressions like these made their way into our vernacular, there are often entertaining stories behind them. For instance, years ago, doctors short on anesthesia in a battle would ask the patient to bite down on a bullet to distract from the pain.

Source of Common Expressions Image

Ice-breaking comes from a day when ships were the main mode of international trade. In winter, with heavy ice formation, ships would get stuck. The participating countries would send small boats to “break the ice” to clear the way for the trade ships. This gesture showed understanding between two territories.

“To get the ball rolling” supposedly started in the 19th century. In England a popular pastime was croquet, but the opening move offered a distinct advantage. A good player could win without giving the opponent a first roll. Therefore, the player winning the toss of a coin could start first and “keep the ball rolling.”

The reason I am telling you this is that unlike the past two Augusts, this year finds the month to be fairly uneventful thus far. Yet with August of 2014 and 2015 as recent precedents, it is wise not to “turn a blind eye” to the final days of the month. That phrase entered our library of clichés when British Naval hero Admiral Horatio Nelson, who had one blind eye, chose to ignore orders. When signaled to stop attacking a fleet of Danish ships, he simply held the scope up to his blind eye and said, “I do not see a signal.”

Nelson attacked and won.

I Can't Hear You Image

Before we write-off this August as a month when “nothing happened,” let’s look at what has been actually happening and see how it might set us up for the post-holiday trading sessions.

First and foremost, unsurprisingly, volumes have dwindled significantly. Lack of liquidity is visible in the market as we see in the below chart of NYSE volume (blue line) plotted against the price of the S&P 500 (red line).

New York Stock Exchange Volume Versus Standard and Poor's 500 Price Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The S&P 500 Index stands just off all-time highs (red line) with trading activity drying up (blue line). This puts the overall market in a precarious place. As liquidity vanishes, and many professional managers go on vacation, it invites potential volatility as short sellers can step in and try to exploit these conditions. As bid and ask spreads widen and volume is lower, it becomes easier to impact price percentage changes. There are almost certainly algorithms scripted specifically to take advantage of conditions like these.

Sector Winners and Losers of the Last Week and Month

The overall equity market has been undeniably strong for the past few months, but as previously discussed, much of this strength can be attributed to the rise of previously-weak sectors. For instance, energy-related stocks littered the loser’s list in 2015 and but have been shining as winners this year.

Energy was also one of the three biggest losing sectors last week as it finished down -1.34% on the heels of Wednesday’s Crude Oil inventory release of 2.5 million barrels vs. -0.455 million barrels forecasted. With crude oil supply high and demand about to wane, the fundamentals don’t bode well for this sector.

Standard and Poor's 500 Daily Sector Indices Changes Table

Also, healthcare had to nurse its wounds last week after Democratic Presidential Candidate Hillary Clinton renewed her comments aimed at healthcare company pricing practices. The Healthcare Index finished the week with a -1.8% performance, but Utilities was the biggest loser, dropping -2.28%.

Standard and Poor's 500 Weekly Sector Indices Changes Table

For the month, energy is still strong, with a month-to date performance of +1.79%, second only to Infotech’s +1.94%. Healthcare however, is down a notable -3.11% for the month to date. Yet, when we look at month-to-date performance numbers for Utilities and Telecom, the declines are twice that much.

Standard and Poor's 500 Monthly Sector Indices Changes Tables

As Fed chair Yellen introduced more language indicative of a firmer likelihood of a rate rise this year, it is interesting to observe that Utilities continue their decline. Utilities have seen a steady rise since May rallying more than 11% during that time (trough to peak). Since July 6th, however, the S&P 500 Utilities Index has fallen just shy of 5.6%. The reason I single out Utilities over Telecom is due to the presence of more stocks in the sector. The rotation out of Utilities and Telecom and into beaten-down stocks as well as into Information Technology has suggested fear and demanded ebbing for these yield intensive stocks.

Again. these are healthy signs for the market, yet it would be even more reassuring to see growth and strength leading as opposed to seeing sector strength mirroring last year’s sector weakness.

Standard and Poor's 500 Utilities Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Summer slowdown is at its peak and it’s natural to want to let one’s hair down (The source of that cliché is that the aristocratic women of medieval times were obliged to appear in elegant hairdos that were usually pulled up. The only time they could “let their hair down” was when they came home and relaxed.)

Let Your Hair Down Image

Prudent investors will keep in mind that volatility can spike when no one is expecting it. Percy Bysshe Shelley wrote that “nothing wilts faster than laurels that have been rested upon.” It’s the end of summer. Relax, enjoy, and let your hair down, but don’t rest on your laurels, and keep your eye on the ball….

A Look Ahead:

*All content in this "A Look Ahead" section of Market Mail represents the opinion of Louis Navellier of Navellier & Associates, Inc.*

Crude Oil Finally May Have Begun its Seasonal Decline

by Louis Navellier

I took some criticism from readers who are getting a little impatient about our prediction of lower oil prices after the summer ends, but I’ve got to remind you – the summer isn’t over yet. We have another week until Labor Day. Even so, the price of crude oil had its sharpest decline since July last week. From $49+ on Friday, August 19, crude fell below $47 before Yellen’s speech and then closed at $47.64.

The most interesting report last week came from the folks at Bespoke, who pointed out (in “Buying the Losers is the Winner,” their “Chart of the Day” for August 23) that the bottom 10% of stocks in 2015 rose by an average a 22.9% year-to-date through August 23, while the top 10% in 2015 were only up 6.1%.

This Bespoke report also pointed out that energy stocks dominated the winners in 2016, but again I expect many of these stocks will flame out in September as crude oil prices accelerate into their seasonal decline.

Even though energy-related stocks have done well so far in 2016, they have done so despite reporting negative earnings and declining revenue. Some natural gas-related stocks are prospering on a more fundamentally solid basis, due to strong demand, thanks to an unusually hot summer. In my opinion, outside of natural gas, many energy-related stocks are about to crash and burn, since the glut of refined products (diesel, gasoline, jet fuel, etc.) and crude oil is about to go from bad to worse after Labor Day.

Oil Pipelines Image

Speaking of the energy patch, on Tuesday, Goldman Sachs reported that Libya, Iraq, and Nigeria were all ramping up their crude oil production, which had suffered from recent supply disruptions. Furthermore, Goldman Sachs pointed out that even if OPEC agrees to curtail its production at its September meeting in Algeria, that excess supply would continue to weigh down crude oil prices. Speaking of excess supply, on Tuesday, the American Petroleum Institute reported that crude oil inventories rose by 4.5 million barrels in the latest week, which was a shock, since experts expected a decline. So if inventories rise during high-demand summer months, how much more might they rise when seasonal demand plunges?

Finding “Diamonds in the Rough” at Navellier & Associates

My associate Jason Bodner (author of our Sector Spotlight here each week) has written a White Paper called “Finding Diamonds in the Rough.” Not literal diamonds, of course, but the rare stock that can beat the market with less risk, providing “alpha” returns (in excess of a comparative benchmark) over time with less of a heart-stopping roller coaster ride along the way. We always look for stocks that exhibit powerfully growing sales and earnings, but we also manage a potent portfolio of dividend stocks, with a focus on income. We have portfolios of international stocks, small caps, large caps, ETFs, bond portfolios and even gold. The point is, we create each product with an acceptable level of volatility in mind.

We don’t want to achieve alpha at the cost of heavy volatility. For many investors, the goal of investing is more about the smoothness of the ride than being the biggest winner. We want clients to get where they want to go without taking multiple rides on the world’s wildest roller-coaster. That means we don’t necessarily chase the stock with the most explosive potential, but construct a portfolio of stocks that will exhibit an acceptably low amount of volatility, especially in the wake of unexpected events like Brexit.

If you would like to know more about our methods of “Finding Diamonds in the Rough,” please contact our company and request a copy of Jason’s report.


It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list. Click here to see the preceding 12 month trade report.

Although information in these reports has been obtained from and is based upon sources that Navellier believes to be reliable, Navellier does not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute Navellier's judgment as of the date the report was created and are subject to change without notice. These reports are for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of a security. Any decision to purchase securities mentioned in these reports must take into account existing public information on such securities or any registered prospectus.

Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any securities recommendations made by Navellier. in the future will be profitable or equal the performance of securities made in this report.

Dividend payments are not guaranteed. The amount of a dividend payment, if any, can vary over time and issuers may reduce dividends paid on securities in the event of a recession or adverse event affecting a specific industry or issuer.

None of the stock information, data, and company information presented herein constitutes a recommendation by Navellier or a solicitation of any offer to buy or sell any securities. Any specific securities identified and described do not represent all of the securities purchased, sold, or recommended for advisory clients. The reader should not assume that investments in the securities identified and discussed were or will be profitable.

Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. Individual stocks presented may not be suitable for you. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. Investment in fixed income securities has the potential for the investment return and principal value of an investment to fluctuate so that an investor's holdings, when redeemed, may be worth less than their original cost.

One cannot invest directly in an index. Results presented include the reinvestment of all dividends and other earnings.

Past performance is no indication of future results.

FEDERAL TAX ADVICE DISCLAIMER: As required by U.S. Treasury Regulations, you are informed that, to the extent this presentation includes any federal tax advice, the presentation is not intended or written by Navellier to be used, and cannot be used, for the purpose of avoiding federal tax penalties. Navellier does not advise on any income tax requirements or issues. Use of any information presented by Navellier is for general information only and does not represent tax advice either express or implied. You are encouraged to seek professional tax advice for income tax questions and assistance.

IMPORTANT NEWSLETTER DISCLOSURE: The performance results for investment newsletters that are authored or edited by Louis Navellier, including Louis Navellier's Growth Investor, Louis Navellier's Breakthrough Stocks, Louis Navellier's Accelerated Profits, and Louis Navellier's Platinum Club, are not based on any actual securities trading, portfolio, or accounts, and the newsletters' reported performances should be considered mere "paper" or proforma performance results. Navellier & Associates, Inc. does not have any relation to or affiliation with the owner of these newsletters. There are material differences between Navellier & Associates' Investment Products and the InvestorPlace Media, LLC newsletter portfolios authored by Louis Navellier. The InvestorPlace Media, LLC newsletters and advertising materials authored by Louis Navellier typically contain performance claims that do not include transaction costs, advisory fees, or other fees a client may incur. As a result, newsletter performance should not be used to evaluate Navellier Investment Products. The owner of the newsletters is InvestorPlace Media, LLC and any questions concerning the newsletters, including any newsletter advertising or performance claims, should be referred to InvestorPlace Media, LLC at (800) 718-8289.

Please note that Navellier & Associates and the Navellier Private Client Group are managed completely independent of the newsletters owned and published by InvestorPlace Media, LLC and written and edited by Louis Navellier, and investment performance of the newsletters should in no way be considered indicative of potential future investment performance for any Navellier & Associates separately managed account portfolio. Potential investors should consult with their financial advisor before investing in any Navellier Investment Product.

Navellier claims compliance with Global Investment Performance Standards (GIPS). To receive a complete list and descriptions of Navellier's composites and/or a presentation that adheres to the GIPS standards, please contact Navellier or click here. It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report. Request here a list of recommendations made by Navellier & Associates, Inc. for the preceding twelve months, please contact Tim Hope at (775) 785-9416.

Marketmail Archives Trade Summary

It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list. Click here to see the preceding 12 month trade report.

Although information in these reports has been obtained from and is based upon sources that Navellier believes to be reliable, Navellier does not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute Navellier's judgment as of the date the report was created and are subject to change without notice. These reports are for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of a security. Any decision to purchase securities mentioned in these reports must take into account existing public information on such securities or any registered prospectus.

Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any securities recommendations made by Navellier. in the future will be profitable or equal the performance of securities made in this report.

Dividend payments are not guaranteed. The amount of a dividend payment, if any, can vary over time and issuers may reduce dividends paid on securities in the event of a recession or adverse event affecting a specific industry or issuer.

None of the stock information, data, and company information presented herein constitutes a recommendation by Navellier or a solicitation of any offer to buy or sell any securities. Any specific securities identified and described do not represent all of the securities purchased, sold, or recommended for advisory clients. The reader should not assume that investments in the securities identified and discussed were or will be profitable.

Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. Individual stocks presented may not be suitable for you. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. Investment in fixed income securities has the potential for the investment return and principal value of an investment to fluctuate so that an investor's holdings, when redeemed, may be worth less than their original cost.

One cannot invest directly in an index. Results presented include the reinvestment of all dividends and other earnings.

Past performance is no indication of future results.

FEDERAL TAX ADVICE DISCLAIMER: As required by U.S. Treasury Regulations, you are informed that, to the extent this presentation includes any federal tax advice, the presentation is not intended or written by Navellier to be used, and cannot be used, for the purpose of avoiding federal tax penalties. Navellier does not advise on any income tax requirements or issues. Use of any information presented by Navellier is for general information only and does not represent tax advice either express or implied. You are encouraged to seek professional tax advice for income tax questions and assistance.

IMPORTANT NEWSLETTER DISCLOSURE: The performance results for investment newsletters that are authored or edited by Louis Navellier, including Louis Navellier's Growth Investor, Louis Navellier's Breakthrough Stocks, Louis Navellier's Accelerated Profits, and Louis Navellier's Platinum Club, are not based on any actual securities trading, portfolio, or accounts, and the newsletters' reported performances should be considered mere "paper" or proforma performance results. Navellier & Associates, Inc. does not have any relation to or affiliation with the owner of these newsletters. There are material differences between Navellier & Associates' Investment Products and the InvestorPlace Media, LLC newsletter portfolios authored by Louis Navellier. The InvestorPlace Media, LLC newsletters and advertising materials authored by Louis Navellier typically contain performance claims that do not include transaction costs, advisory fees, or other fees a client may incur. As a result, newsletter performance should not be used to evaluate Navellier Investment Products. The owner of the newsletters is InvestorPlace Media, LLC and any questions concerning the newsletters, including any newsletter advertising or performance claims, should be referred to InvestorPlace Media, LLC at (800) 718-8289.

Please note that Navellier & Associates and the Navellier Private Client Group are managed completely independent of the newsletters owned and published by InvestorPlace Media, LLC and written and edited by Louis Navellier, and investment performance of the newsletters should in no way be considered indicative of potential future investment performance for any Navellier & Associates separately managed account portfolio. Potential investors should consult with their financial advisor before investing in any Navellier Investment Product.

Navellier claims compliance with Global Investment Performance Standards (GIPS). To receive a complete list and descriptions of Navellier's composites and/or a presentation that adheres to the GIPS standards, please contact Navellier or click here. It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report. Request here a list of recommendations made by Navellier & Associates, Inc. for the preceding twelve months, please contact Tim Hope at (775) 785-9416.

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