The Fed Seems Determined

The Fed Seems Determined to Raise Rates in June or July

by Louis Navellier

May 31, 2016

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

At the end of earnings announcement season, stock buy-backs naturally pick up.  That seems to be one reason for the underlying strength in the stock market lately.  Furthermore, the stock market typically rallies after Memorial Day.  Ever since Memorial Day was first recognized as a national holiday in 1971, the S&P 500 has posted average gains of 0.54% in the holiday-shortened week, according to Bespoke Investment Group.  That’s more than three times the 0.16% average gains for all weeks since 1971.

Workers Image

We also saw a lot of positive economic news released last week, causing some Fed officials to imply the likelihood of a key interest rate hike at the June or July Federal Open Market Committee meeting.  On a panel discussion at the Radcliffe Institute at Harvard University last Friday, Fed Chair Janet Yellen said that a rate increase would be appropriate “probably in the coming months” if the economy and labor market continue to strengthen.  During this panel discussion, Yellen cautioned against overreaction to this one change.  Specifically, Yellen said, “It’s appropriate, and I’ve said this in the past I think, for the Fed to gradually and cautiously increase our overnight interest rate over time, and probably in the coming months such a move would be appropriate.”  However, all this still depends on the economic data – most notably the May payroll report, scheduled to come out next Friday.  Even though a key rate increase is possible in June or July, I think such an act could backfire if it makes the U.S. dollar even stronger than it is.

Essentially, while Fed officials try to talk up short-term interest rates, long-term rates continue to fall due to negative yields around the world, sending foreign capital into the U.S., causing the U.S. dollar to firm up, and putting downward pressure on Treasury bond yields.  Essentially, the chronic negative interest rate policies in Europe and Japan have caused global capital to seek safer havens, like U.S. Treasury bonds.

In This Issue

In Income Mail, Bryan Perry explains why a “covered call” strategy will likely work well in this see-saw market.  In Growth Mail, Gary Alexander examines the fears which have driven retail investors away from common stocks over the last month.  In Global Mail, Ivan Martchev explains why the coming Chinese devaluation and recession may impact Australia more than any other trading partner.  In Sector Spotlight, Jason Bodner will ask whether market volatility comes more from robot trading or crowd wisdom.  Then, my closing column will pause to examine why we should be thankful to live in America in troubled times.

Income Mail:
The Fed is “Chompin’ at the Bit” to Raise Rates
by Bryan Perry
Ringing the Register in a Range-Bound Market

Growth Mail:
Memoirs of a Market Dinosaur
by Gary Alexander
Personal Returns from My First Foray into Retirement Accounts, 1983-2016
Market Bulls Fall Below 18% -- a 10-Year Low

Global Mail:
In China, 2016 Could be the Year of the Bear
by Ivan Martchev
Trouble Down Under

Sector Spotlight:
‘Bots, Crowds, and Markets – Who’s in Charge?
by Jason Bodner
What “Mr. Market” Sees Before Anyone Else

A Look Ahead:
Why America is Still the World’s Oasis
by Louis Navellier
U.S. Economic Indicators Are Starting to Recover

Income Mail:

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

The Fed is “Chompin’ at the Bit” to Raise Rates

by Bryan Perry

The onslaught of Fed-speak over the past week has been more transparent than at any time in recent memory. It’s as if the entire body of Federal Reserve members got on the speaking circuit to pontificate on how the latest string of economic data supports the rationale of tightening short-term interest rates by a quarter point, taking the Fed Funds rate to a range of 0.50% to 0.75%. Treasury 10-year futures contracts fell by the most in more than one week after Fed Chair Janet Yellen said on Friday that improvement in the U.S. economy could warrant raising rates in the coming months (source: Bloomberg, May 29, “Yellen’s Hawkish Turn Sees Treasury Futures Drop on Memorial Day.”) More importantly, the market seems just fine with the idea – the S&P 500 rose 2.3% last week – as if it’s a foregone conclusion.

The fed funds futures market also took notice of this rate-hike talk, resulting in rate-hike expectations being pulled forward. At the end of last week, the fed funds futures market was hinting at a 30% chance of a rate hike in June after pricing in just an 8% likelihood of a June move a few days before. The fed funds futures market also sees an 80% likelihood of a move by the end of 2016, up from last week's 59.2% estimate (source: CME Group – 30-day Fed Funds Futures)

Bond Futures Slide Chart

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

Investors are also consumers. Lately the typical investor/consumer/worker is feeling better about job security, housing, and the economy in general. The final reading for the University of Michigan Consumer Sentiment survey for May was revised to 94.7 from the preliminary reading of 95.8 – due primarily to a downward revision in the Index of Consumer Expectations, lowered to 84.8 from a preliminary reading of 87.5. Still, the index is up nicely from the final reading of 89.0 for April and the 90.7 reading from a year ago, in May of 2015. In fact, it was noted in the report that there were only four prior months since the peak in January 2007 that the Sentiment Index was higher than it was in May 2016. In addition, the Current Economic Conditions Index was revised up to 109.9 from a preliminary reading of 108.6.

Adding more spice to a possible Fed rate hike, the second estimate for first-quarter real GDP produced an upward revision to 0.8% growth on an annualized basis (from 0.5%). That was slightly below the consensus estimate of 0.9% and it isn't going to generate a lot of applause for several reasons. First, 0.8% growth is still weak. Second, personal consumption expenditures growth was left unchanged at 1.9%. In addition, real final sales of domestic product, which excludes the change in inventories, were up 1% versus the prior 10-quarter average of 2.4%. (Source: Briefing.com Market Commentary, May 27.) So, with an upward revision to GDP and the latest string of inflation readings showing an average 1.1% since January, the Fed is feeling more confident in their rationale to bump rates sooner rather than later.

United States Inflation Rate Chart

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

This nonchalant attitude about a pending rate hike is a major departure from the high-tension landscape that preceded prior FOMC meetings. If the Fed feels they aren’t going to rattle the markets on a decision to bump rates, then I would assume they would be inclined to act in June or July, while the iron is hot.

Ringing the Register in a Range-Bound Market

As far as the market trend is concerned, it would seem that investors want to wait until second-quarter earnings start rolling in – about six weeks from today – to generate enough optimism to break the S&P out of its current trading range. That said, the trading landscape is ripe for an actively-managed covered-call strategy that can optimize portfolio returns after a nice short-term rally such as last week’s move.

Selling calls against the energy sector as crude oil trades up against resistance at $50/barrel makes sense. So does selling calls against the bank stocks that have run higher in anticipation of a Fed hike – or taking advantage of selling calls against stocks that seem a bit extended after posting strong earnings.

Most stocks consolidate after logging sizeable gains. Selling just out-of-the-money calls that expire in the next month is a great way to boost total return. With a well-managed covered-call advisory, investors can take full advantage of capturing extended moves and breakouts by selling short-term greed and optimism back to the market, collecting free money over and over again. When positioned in a good stock that fits our custom profiles, as determined from our proprietary grading system, investors can ride a covered-call strategy long, generating consistent monthly gains that take full advantage of a range-bound market.

Based on all the uncertainty with OPEC, the Fed, the Brexit vote, the upcoming political conventions and elections, terrorism, and emerging market debt, we might not see the market break out until next year. But that shouldn’t keep investors from making consistent returns on their invested capital from a well-crafted and well-managed covered call portfolio that takes into account the market’s leading growth stocks. It’s a method that makes sure your money never sleeps.

Growth Mail:

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

Memoirs of a Market Dinosaur

by Gary Alexander

Memorial Day gives us an extra day to reflect on the past without getting ping-ponged around by market action, so let me recall the market’s last Ice Age – a primitive time of stock certificates and open outcry.

Many of you may remember this dramatic decade in stock market history: (1) The decade began with a tech stock bubble bursting in the spring. (2) A few years later, we suffered through a massive 50% market crash taking place during a controversial overseas war and a difficult transition time in the White House.

No, I’m not talking about the tech stock bubble of 2000 and the crash of 2008.  I’m talking about 1970 to 1974.  Going into the Memorial Day weekend of 1970, many leading tech stocks were off 50% or more in just five weeks (April 20 to May 26, 1970).  The S&P 500 fell 23% from April 1 to May 26.  Many tech stocks fell over 80% from their 1968-69 highs.  As for the second crash, the S&P fell 48% in 1973-74, and the tech-heavy NASDAQ fell by 60% as the Vietnam War and the Nixon Presidency ended in disgrace.

I was an economic and financial writer during these dark days.  I was also a young father of three trying to make a living despite four inflationary recessions between 1969 and 1982.  At the time, I couldn’t afford to buy stocks and didn’t really want to.  I saw gold rising and went into that field as Managing Editor of Jim Blanchard’s Gold Newsletter from 1983 to 1989.  That was the first time I made a decent salary, so in 1983 I began saving for retirement, creating my first IRA and Keogh (remember them?) in October, 1983.

In case you don’t recall that time, interest rates were very high – 11.7% on 30-year Treasury bonds, nearly the same (11.6%) on 10-year T-bonds, and tempting rates of 9.7% on 3-month T-bills.  Gold was $393, way down from its peak of $850 in 1980.  Stocks seemed uncomfortably high.  The DJIA was at 1246.75, just 3% off its peak.  But on October 19, 1983, I put $1,000 each into a stock fund, a bond fund, and a gold mining fund.  At the time, stocks and bonds felt riskier than gold.  The investment conferences I helped to host then were calling for another stock market crash.  I recall one speaker, Dr. Hans Pick, saying in his thick German accent that Treasury bonds were “certificates of guaranteed confiscation.”

I basically forgot about those three funds until I turned 70 last July and had to cash in some retirement accounts this year.  Last month, I cashed in all three of these 1983 accounts.  As it turns out, my gold stocks flamed out while the funds I worried about most (at the time) rewarded me the most in the end.

Personal Returns from My First Foray into Retirement Accounts, 1983-2016

  • My $1,000 stock fund returned $11,745 in 32+ years (+1,075%), similar to the S&P’s 1,159% gain.
  • My $1,000 bond fund was closed out at the end of 2013 at $8,469 (+747% in 30+ years)
  • My $1,000 gold stock returned only $69 after 32+ years (down over 93%)

(I am not naming these funds for obvious reasons; I am not claiming any track record for them)

In 20/20 hindsight, I learned that stocks offer the best returns in the long-run.  I also rode a great 30-year bull market in bonds as interest rates declined from 12% in 1983 to 1% to 2% lately.  Alas, my gold stocks turned out to be worthless holes in the ground with too many great salesmen and too few good geologists.

My gold coins, however, more than tripled in value from $385 to over $1200.  Moreover, gold tended to rise the most in the two specific decades when stocks were the weakest: 1970 to 1980 and 2000 to 2010.

I waited too long (age 38) to start investing for retirement, but it worked out fine since I avoided those dismal 1970s.  Despite the 1970s, however, the last 50 full years delivered 112-fold gains in stocks and 24-fold gains in bonds, making the case for wise diversification for protection during bear markets.

So much for ancient history.  Where is the stock market headed next?  To many, 2016 feels as risky as any time in the last 50 years.  Markets always climb a wall of worry, but right now investors seem more fearful of a stock market crash than at any time during the course of this ultra-long 87-month bull market.

Market Bulls Fall Below 18% -- a 10-Year Low

The most recent sentiment survey from the American Association of Individual Investors (AAII), released last Thursday, showed the lowest level of bullish sentiment (17.75%) since April of 2005 and the highest proportion of neutral fence-sitters (52.86%) since February of 2003, right before the strong 2003-07 bull market began.  This is very rare.  According to Bespoke Investment Group (“Bulls Plummet, Neutrals Surge,” May 26, 2016), “there have only been 36 prior weeks where bullish sentiment was below 20%, while there have only been 28 weeks where neutral sentiment was above 50.”  Then, what happened next?

Standard and Poor's 500 Gains Table

Moreover, Bespoke added, “There have been only five occurrences where bullish sentiment fell below 20% and neutral sentiment rose above 50%.”  All five occurred just after the 1987 stock market crash – from early 1988 through early 1989.  The S&P 500 rallied 16% in the year after the last such occurrence.

Looking back 18 months, Matt Egan, writing for CNN/Money (May 26, “The most unloved stock market since 2005.”), showed how bullish sentiment declined by over two-thirds, despite a fairly flat market.  In November, 2014, the S&P 500 traded over 2000 for the entire month, closing at 2067.  That’s not far off last Friday’s close at 2099, but 18 months ago a whopping 58% of the AAII poll participants were bullish.

Bullish Sentiment Image

According to contrarian theory, when the vast majority of investors are neutral or bearish, they tend to take some chips off the table, running to cash and other “safe” assets, despite their terribly low returns.  That puts trillions of dollars on the sideline as a sort of “kindling,” ready to stoke the next market fire.

According to Andrew Adams, a market strategist at Raymond James (quoted in Business Insider, May 26, “The match has been lit for an ‘explosion higher’ for stocks”), this “dry powder on the sidelines could possibly force an explosion higher, assuming we don't get anything major that comes out of nowhere.”

In the last five weeks, a net $31.4 billion has flowed out of equity funds (and mostly into bond funds):

Equity Funds and Bond Funds Flows Table

In last weekend’s Barron’s (“5 Reasons the Stock Market Won’t Crash – Yet,” May 28, 2016), Economics Editor Gene Epstein argued that bear markets usually accompany or anticipate a recession.  To buttress his case, Epstein marked off the close proximity of recessions and bear markets since 1982:

Market Crashes and Economic Recessions Chart

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

By this definition, there has been just one market crash over the past 35 years that wasn’t accompanied by a recession.  That would be the “flash crash” of 1987, which was a painful but temporary market anomaly.

Also, June starts today.  We may see a spirited run toward new highs this month.  According to Jeff Hirsh (Almanac Trader, May 26: “June is the best S&P month of an election year”).  June is the #1 month of the election years (since 1952) for the S&P 500 (+1.4% average), with 13 years up and three years down.

If you believe that we’re headed into a recession, it might be wise to lighten up on stocks; but the latest economic data are far healthier than expected.  For now, it looks like we might escape a recession in 2016.

Global Mail:

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

In China, 2016 Could be the Year of the Bear

by Ivan Martchev

The Chinese calendar has 12 animals that recur in order: Rat, Ox, Tiger, Rabbit, Dragon, Snake, Horse, Goat, Monkey, Rooster, Dog, and Pig. Last year was the year of the Goat. This year is officially the Year of the Monkey, but by the way Chinese equities opened 2016, one would have thought that the Politburo Standing Committee of China’s Communist party had issued a decree renaming 2016 “Year of the Bear.”

Shanghai Stock Exchange Index Chart

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

Chinese markets opened 2016 with a botched trading halt rule, causing limit-down trading suspensions for days on end until the rule was expeditiously abandoned. Still, the Shanghai Composite did manage to reach 2638.96, dangerously close to a 50% decline from last year’s peak on June 12 at 5178.19. We have since seen a rebound off that low, which I can only characterize as a “dead cat bounce,” as I believe the Chinese economy is experiencing the effects of a busted epic credit bubble, the deflating of which will push China into a nasty recession, at a minimum.

It is not possible to say if a Chinese recession will happen in late 2016 or in 2017 as China’s authorities are fighting the deflation of their credit bubble with all they have, but it is my opinion that there is very little they can do to stop this deflating credit bubble. Chinese equities are trading with a very peculiar downside bias since early April, even though it cannot be characterized as a crash yet. The Shanghai Composite closed last week at 2821.05, miraculously “finding support,” as traders like to say, every time it dipped below 2800 over the past three weeks (see weekly chart above). This low-volume buying below 2800 is suspicious as the Chinese authorities have been known to intervene in the stock market in the past year.

If they are intervening, that would be rather sad as any professional investor would tell you that the stock market tends to gravitate towards its fundamental value over time. If the fundamental outlook for Chinese equities is deteriorating – as I believe it is – then no intervention can stop the Chinese stock market from declining further. I think the Shanghai Composite may find a bottom in the 1000 to 2000 range, possibly towards the end of the recession I envision, which has not even started yet. It is way too early to speak of a bottom for equities in China.

I think we will see a recession in China courtesy of a credit growth binge to the tune of 40-fold in the past 15 years – a time when the Chinese economy grew 10-fold. This rapid economic growth cycle in China, driven by surging borrowing, can only be compared to the Roaring 20s in the U.S., culminating in the 1929 stock market crash, followed by the Great Depression. The only one of those historic parallels that we have not yet seen is the recession/depression part. (For investors interested in macroeconomics and market dynamics see Navellier’s MarketMail article from April 27, 2015 “Can Crashes be Predicted?”)

Mind you, I am not necessarily looking for a depression in China, although one is possible. The Great Depression in the U.S. was brought about by a series of fiscal and monetary policy errors that resulted in the raising of tariffs and the tightening of monetary policy at precisely the wrong time. Those were quoted on more than one occasion by former Fed Chairman Ben Bernanke when he was explaining the case for his unorthodox monetary policies, including QE. I believe history will judge that it was Bernanke's policies – although I do not necessarily agree with them on principle – that prevented the onset of the Second Great Depression in the U.S. and limited the economic downturn to only being a Great Recession.

I haven't seen creative monetary policies of Bernanke’s type in China so far during the present credit crisis. The Chinese appear to be caught like “deer in the headlights,” not really knowing how to react. It is my opinion that they will choose to dramatically devalue the Chinese yuan as they have done it before (in 1994 to the tune of 34%) after what seems to have been another recession (although it was never officially acknowledged). I am not sure if a devaluation is coming in 2016 or 2017, but I do believe it is likely to happen.

This is a good time to clarify my view by saying that a Chinese recession is highly unlikely to cause a U.S. recession, or one in the UK, or India for that matter. The U.S. and U.K. are service-oriented economies, while India is domestically-oriented and appears to be accelerating as China is slowing down, with falling inflation and interest rates and a pro-business government. China has caused a lot of trouble for their Asian trading partners and for many commodity producing countries. Two developed countries that are likely to see more troubles are Canada and Australia, due to their reliance on commodity prices.

This discussion on the Chinese economy and stock markets is necessary as both in August of 2015 and in January of 2016 the Chinese financial markets caused quite the headaches for U.S. investors and Chinese stocks again appear to be weakening. Still, the U.S. stock market, as measured by the S&P 500, last week closed at 2099.06, a little over 35 points from its all-time high of 2134.72. So while sell-offs in China have caused sell-offs in the U.S. before, the declines here have been transient.

I think more declines are coming in China, be it for the Chinese currency or stocks. Some reverberations are likely although easier to rebound from as they are external in nature for U.S.-based investors. From the perspective of a U.S.-based investor, I am treating this as a repetition of the infamous 1997-1998 Asian Crisis which also caused some volatility in developed markets but ultimately was contained domestically.

Trouble Down Under

The situation is not contained in Australia, where it is surreal to see the unemployment rate stay below 6% given how much the trade relationship with China has grown in the past 15 years. According to the Australian government, China was Australia’s #1 export destination and #1 import partner last year, accounting for 23.2% of all Australian trade volume in 2015.

As China sneezes, Australia is likely to catch a cold.

Australia Government Bond versus Australia Inflation Rate Chart

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

The Australian inflation rate is very low and falling, while Australian 10-year government bonds hit an all-time low in early May at 2.23% on news of the surprise interest rate cut by the Reserve Bank of Australia to 1.75%. I think those short-term rates may be headed lower, along with 10-year Australian yields.

Australian Dollar Versus United States Dollar - Weekly OHLC Chart

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

Such monetary policy moves as well as falling inflation and government bond yields have pressured the Australian dollar, which closed the week at U.S. $0.71794. I have a high degree of conviction that the AUDUSD exchange rate will take out the 2008 low near 60 cents and near the depths of the coming Chinese recession it may trade close to 50 U.S. cents. My guess is that we will make fresh 52-week lows by the end of 2016 and the 60-cent target will come in 2017, with 50-cents being the intermediate-term target. Needless to say, those targets are a long way from here, although I think they are coming.

Sector Spotlight:

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

‘Bots, Crowds, and Markets – Who’s in Charge?

by Jason Bodner

We all know in some way or another that we contribute to and participate in crowd think, whether it’s offering an opinion at a gathering, participating in a survey, or voting. But did you know that the odds are great that you unwittingly helped decipher old texts? Believe it or not, it’s actually true. If you’ve ever logged into a secure website, and were faced with the sometimes frustrating process of having to prove you’re not a spam-bot, then you may just have helped translate a document hundreds of years old.

In 2009, Google and several other companies wanted to digitize a trove of old documents for archiving. This process uses a technology called OCR, or Optical Character Recognition. It is the electronic conversion of images of typed, handwritten, or printed text into machine-encoded text. It works really well, except when the scan is of poor quality, or a portion is smudged or blurred. There are also cases where the font is so old it’s not in use anymore. For instance, this passage is tough for OCR to read:

Blurred Text Image

The solution to this problem was elegant, simple, and genius. Create a security protocol that won’t allow you to proceed to your website unless you translate these problem texts for them. The program is called reCAPTCHA and bots can’t read the text, because these words are the ones computers already can’t read!

reCAPTCHA software is used by thousands of big-name companies. The project managed to digitize 20 years of daily New York Times in a few months. That’s billions of words, captured a few words at a time. Here’s a typical example:

Captcha Image

As you type these two words, you just helped make the world a better place without even knowing it!

Crowds have a notoriously bad reputation. I have repeatedly made reference to Charles Mackay’s classic book Extraordinary Popular Delusions, And The Madness Of Crowds. This text does a wonderful job pointing out the downside of crowd-think. But to present the other side of the story, there are many examples in which the crowd is more effective at tackling a problem than one or even several experts.

In 2011, for instance, video gamers collectively helped solve a molecular puzzle for identifying an enzyme to help fight AIDS. Foldit and Phylo are examples of citizen science games that use the collective power of hundreds of thousands of gamers working to solve a problem like analyzing DNA. The same logic is being used to learn war tactics from crowds playing massive multi-player war games. This was used by the U.S. Navy to help model Somali Pirate tactics. Zooniverse is an example of a website where you can register to take part in crowd sourcing projects to tackle pretty much anything.

What “Mr. Market” Sees Before Anyone Else

What about crowds and markets? Have you ever heard of “Mr. Market,” that all-knowing and powerful mythical being who seems to know everything before anyone else? In January of 1986, long before robo-investors took over, the space shuttle Challenger tragically exploded. The stock market saw immediate selling in the shares of the four main contractors involved in building Challenger. Three companies finished the day with relatively minor losses But one company sagged 12% that day. Traders clearly held that company accountable, yet no one knew the cause for a long time. Washington initiated a Blue Ribbon commission. After six months, it became clear that those traders were right.

It is reasonable to assume someone out there has way more information than your or I do. We can see the effect of “Mr. Market’s quick trigger finger without always knowing the cause of the move.

Mr. Market Image

Do sectors show us any examples of this? Let’s look at last week’s positive parade of S&P sectors:

Standard and Poor's 500 Sector Indices Changes Tables

All 10 sectors traded higher last week. In fact, all 10 sectors traded higher on both Tuesday and Friday, while nine out of ten traded higher Wednesday. Last week saw a continuation of strength in Information Technology, finishing up 3.6%. As we can see in the chart below, that sector still has some ground to cover before it eclipses its highs from autumn 2015. The Financials index also rallied 2.62% last week. Healthcare rounded out the top three with a +2.18% performance. Consumer Discretionary has recently seen its magnitude and pace of weakness slow markedly, coming in as the fourth strongest sector last week.

It is interesting to note how resilient Healthcare seems to be, with a lot of media posturing over what Hillary or Bernie might do to healthcare if they land in office. The fact remains that people get sick. And with news of a superbug of antibiotic resistant bacteria we will never be short of need for medical care, especially if this is “possibly the end of the road for antibiotics,” as CDC Director Tom Frieden proclaims (source: Washington Post, May 27, 2016, “The superbug that doctors have been dreading just reached the U.S.”).  As an astute colleague of mine points out, if you don’t pay the piper, the music stops. Make it hard for drug companies to make money, and guess what? They won’t make drugs! Is the Healthcare rally another example of Mr. Market showing his knowledge beforehand?

Time will tell…

Standard and Poor's 500 Yearly Sector Indices Charts

Despite the sector strength of the past week, the volatility of single stocks is still elevated. When reacting wildly to their specific earnings or corporate announcements, some stocks saw huge drops last week.

I’ll leave you with one final thing to ponder:

The demand for relevant data among algorithmic traders is on the time scale of moments or fractions thereof. This is certainly helping to drive the market’s wild moves. Computers are interpreting data and trading. This won't stop as more and more people with a formula will flood the market. Technical indicators are the main focus for high-frequency traders as they claim that the fundamentals lag significantly – oftentimes quarterly, which seems like the span of time between ice ages in market terms.

On a business trip last week, I encountered several quantitative portfolio managers discussing their frustration with the market. Some noted how the elevated volatility may be here to stay while some noted how it has dissipated. Some commented on technical “signal quality degradation.” This tells me not only that the “algo space” is crowded, but that the signals they all rely on are less predictable.

Henry David Thoreau said. “Men have become the tools of their tools.” Have we arrived there yet?

A Look Ahead:

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

Why America is Still the World’s Oasis

by Louis Navellier

With the two dismal Presidential choices facing America during an election year, you would think the market would be down; but there was a certain amount of euphoria in the market last week, going into the Memorial Day weekend.  Any time you think America is facing challenges, consider the alternatives….

Europe is faced with chronically slow growth and a series of threats of secession.  Over the last five years, Greece has threatened to exit the euro-zone several times, and now Britain is voting on an exit from the European Union on June 23.  Imagine what America would be like if states kept threatening to secede?

Rio De Janeiro Image

Brazil is being encouraged to cancel or postpone the summer Olympics in Rio, at the same time Brazilian President Dilma Rousseff is scheduled to go on trial over charges that she disguised the size of the country’s budget to make the Brazilian economy look healthier in the run up to her 2014 election.

Venezuela is in even worse shape, with acute shortages of food.  Its currency, debt, and domestic oil industry are all at risk of imploding.  The International Monetary Fund expects that Venezuela’s GDP will contract 8% this year after contracting 5.7% in 2015.  The IMF is also forecasting inflation in Venezuela to reach 1,642%, making the bolivar essentially worthless.  Since Venezuela has an acute shortage of rice and beans to feed its population, a hamburger at a nice hotel now costs the equivalent of $170 as the black market has exploded.  Locals hoard U.S. dollars and affluent Venezuelans have already relocated to America.

OPEC nations have been in trouble after a year or more of very low oil prices.  In the past year, OPEC members’ gold reserves have dropped almost a third, according to the IMF.  In February and March, OPEC members sold over 40 tons of gold according to the IMF.  According to the World Gold Council, Venezuela has the 16th largest reserves of gold at roughly 36 tons; but Venezuela began selling its gold reserves in March, as Chinese and Russian investors in Venezuela will likely insist on gold payments.

Negative interest rates in Japan have fueled a stock buy-back frenzy, because cash in the bank causes an erosion of capital.  Japanese companies are now being criticized for their cash reserves as being a waste of capital.  Japanese citizens are now buying safes to hoard their cash at home, since rates are negative.

Over in China, the yuan is approaching a 5-year low.  The Chinese appetite for commodities seems to be related more to speculation than industrial demand.  (Ivan Martchev has outlined the problems in China above.)  China seems to be heading toward a currency devaluation and perhaps a deep recession.

All this chaos around the world can actually be good for the U.S., since we remain an oasis in a chaotic world.  As a result, I expect foreign capital will continue to pour into the U.S., largely because our interest rates are higher than much of the rest of the world, and our economy is growing slowly but steadily.

U.S. Economic Indicators Are Starting to Recover

Last week, the Commerce Department announced that durable goods orders surged 3.4% in April due largely to an 85% surge in aircraft orders.  Orders for auto and other vehicle parts also rose a healthy 3% in April.  Economists were expecting a 0.7% rise, so 3.4% was quite a positive surprise.  Also, the March durable goods orders total was revised up to a 1.9% increase, up from the 1.3% previously estimated.

News from the housing market last week was also very encouraging.  Last Tuesday, the Commerce Department reported that new home sales in April surged 16.6% to an annual pace of 619,000, the largest monthly jump in 24 years!  A 52.8% surge in the Northeast led the way, followed by an 18.8% rise in the West and a 15.8% increase in the South, while new homes sales declined 4.8% in the Midwest.  Median home prices have risen 9.7% in the past 12 months and the supply remains tight at a 4.7-month supply. New home sales this year are now running 10% higher than they did a year ago, so it appears that the housing boom, fueled by low mortgage rates, will continue.  This is good news for future GDP growth.

On Thursday, the National Association of Realtors (NAR) announced that its pending home sales index rose 5.1% in April to 116.3, the highest level in over 10 years.  The NAR index surged 11.4% in the West, 6.8% in the South, 1.2% in the Northeast, and declined slightly in the Midwest.  In the past 12 months, pending home sales are still up 2% in the Midwest, so the housing market is clearly very healthy.

We’ll see what the May jobs report looks like on Friday, but it appears we’ve dodged a recession for now.


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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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