When Markets Reach New Highs

When Markets Reach New Highs, the Funnel Gets Narrower

by Louis Navellier

July 26, 2016

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

As any stock market climbs higher, the market tends to become increasingly narrow, and that is starting to happen as sales and earnings remain shaky for many stocks, including the #1 performer in the S&P 500 in 2015, Netflix, which reported disappointing subscriber growth in its earnings announcement last Tuesday.

Netflix Image

The money pouring into the stock market is essentially like a funnel and as that funnel gets more narrow, the few fundamentally superior stocks should get even stronger and continue to exhibit relative strength.

As the Fed meets this week, we know from a Wall Street Journal article last Tuesday that Fed officials are becoming more confident that they can raise key interest rates later this year, in part due to improving economic growth.  However, a recent WSJ survey of economists showed that only 23% expect a rate increase in September.  The closer we get to the November Presidential election, the less likely that the Fed will raise rates, unless market rates rise.  This means that the most likely time for a rate hike will be the December FOMC meeting.  Even then, market rates will have to rise first before the Fed can act. (Please note: Louie Navellier does not currently hold a position in NFLX. Navellier & Associates does not currently own a position in NFLX for any client portfolios).

In This Issue

July has been a manic month for stocks.  In Income Mail, Bryan Perry compares the market to the July “running of the bulls” in Spain.  He also points to three key indicators to be released next Friday.  In Growth Mail, Gary Alexander says stocks are rising because the economy is getting better.  In Global Mail, Ivan Martchev examines previous historical correlations that started diverging in July: Which market is right?  In Sector Spotlight, Jason Bodner weighs the bull vs. bear evidence in various sectors.  Then, I’ll conclude with the bullish implications of negative interest rates on the outlook for gold.

Income Mail:
July Marks the “Running of the Bulls”
by Bryan Perry
Mark Your Calendar for July 29 – a Trifecta of Key Indicators

Growth Mail:
Stocks are Rising Since the Economy is Doing Better
by Gary Alexander
August is a Good Month for Stocks – Unless Disaster Strikes

Global Mail:
Is the Commodity Rebound Over?
by Ivan Martchev
Post-Brexit Highs for the Dollar with a Boost from Weak Oil

Sector Spotlight:
The Bears Keep Hibernating
by Jason Bodner
The Biggest Winners Are Defensive/Yield Plays

A Look Ahead:
Negative Interest Rates Are Positive for Gold
by Louis Navellier
Gold Offers More “Income” than $12 Trillion in Sovereign Debt

Income Mail:

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

July Marks the “Running of the Bulls”

by Bryan Perry

The Running of the Bulls or encierro is a practice that involves running in front of a charging herd of bulls that have been let loose on a cordoned-off section of a town’s streets. The most famous running of the bulls is the eight-day festival (July 6-14) in Pamplona, Spain, run in honor of Saint Fermin. The Pamplona encierro has been broadcast live by the public Spanish national television channel for over 30 years, so we can watch in fascination the masses of people (mostly young men) who are willing to try to outrun a half dozen hopped-up bulls, incited by boisterous crowds, without being gored or trampled.

It just so happens that the S&P 500 experienced its own running of the bulls during the same week this year, breaking out to a fresh new all-time high on July 11 with the bulls stampeding over the crowd of naysayers and short sellers. Interestingly and coincidently, there are some stark similarities between the encierro in Pamplona and the current stock market rally: Participants of both have to be 18 years of age, should not be under the influence of alcohol, and are best advised to run in the same direction as the bulls!

The main difference is that the encierro ends after about half a mile, whereas the running of the Wall Street bulls can last months. Looking at a 30-month chart for the S&P (below), the recent upside breakout looks legitimate for a couple of reasons: (1) It’s the first rally all year where there was a distinct pattern of money coming out of Treasuries and moving straight into equities – in all 10 S&P market sectors and (2) The safe haven sectors (like utility, telecom, REIT, and consumer staples) dipped momentarily at the expense of the more cyclical sectors; but as of late last week those sectors were fully re-engaged with the rally as income investors continue to swarm into quality dividend-paying assets on any and all dips.

Standard and Poor's 500 Large Cap Index Chart

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

Meanwhile, high-yield spreads headed the other way as the high-yield/10-year spread plunged 48 basis points to 540 after seeing a 13-basis point decrease a week ago. This spread reached a seven-month low at 567 in late June, and last week's move sent the spread to its lowest level since last September. The narrowing of the spread indicates rising confidence in balance sheet creditworthiness for junk bonds that coincides with a rising confidence in earnings for stocks. I’ve noted several times in this column that junk bonds are significantly more correlated with the equity market as opposed to the bond market, so seeing the spread narrow sharply as the stock market breaks out underlines that correlation.

Bank of America Merrill Lynch Junk Bonds Chart

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

Mark Your Calendar for July 29 – a Trifecta of Key Indicators

Next Friday marks the last trading day of July. More importantly, it marks the first look at second-quarter U.S. GDP statistics, a key rate decision by the Bank of Japan, and the results of the euro-bank stress test.

The U.S. economy is clearly on better footing as economic data have surprised to the upside and financial conditions have also eased recently, suggesting that the U.S. is entering the third quarter on a strong note with solid growth momentum. Preliminary second-quarter GDP figures are due out this Friday and are expected to show an annual growth rate accelerating to a healthy 2.4%, up from 1.1% in the first quarter.

Atlanta Federal Reserve GDPNow Real Gross Domestic Product Forecast Chart

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

The U.S. is clearly in better shape than Japan or Europe, which continue to face deflationary pressures. For the Bank of Japan, Friday’s rate decision – most likely pushing rates deeper into negative territory – comes after a big election win for Prime Minister Shinzo Abe, who pledged to work on a stimulus package with a headline figure of $20 trillion yen (about $190 billion U.S. dollars). The promised stimulus package takes some pressure off the BOJ, but in my opinion, the market has still priced in a rate cut nonetheless.

Over in Europe, the week’s top event will be Friday’s release of banking stress test results with a special focus on Italian lenders, seen as the weakest within the sector due to an estimated $397 billion worth of non-performing loans on their books. UniCredit, Italy’s largest bank by assets—has already undertaken €74 billion ($81 billion) in loan write-downs and capital increases since 2008. With falling profitability and €80 billion ($88 billion) in non-performing loans, its capital cushion barely meets ECB requirements. (source: Wall Street Journal – July 4, 2016 – “Bad Debt Piled in Italian Banks Looms as Next Crisis”)

We’ll also hear about the Fed’s rate decision this week, but it is all but certain we’ll see no change in the Fed funds rate. The Fed will acknowledge improved economic prospects while offering few hints about its next move to avoid repeating the past gaffe of stoking rate-hike expectations. Assuming the Fed passes on a rate hike this week, the Dollar Index (DXY), currently trading at 97.35, will very likely continue to rebound toward its 52-week high of 100.51. Such a move raises forex currency pressure on the earnings of U.S. multinational corporations – which was a primary culprit for dismal first-quarter earnings.

The Fed will not want to set a fire under the dollar when the negative consequences are so immediate. So with the Fed cornered, a potential Italian banking crisis requiring a full measure of European Central Bank intervention, and a Japanese Prime Minister chomping at the bit to keep a campaign promise of boosting stimulus, the U.S. stock market has a “central bank put” in place, similar to the “Bernanke put” that characterized the various rounds of quantitative easing under former Fed Chairman Ben Bernanke.

Under these favorable conditions and in light of the rebound in the junk bond sector, blue chip dividend growth stocks with yields in excess of that offered by the 10-yr T-Note (c. 1.6%) and the S&P 500 (c. 2%) will be torchbearers for income investors seeking rising income based on rising earnings prospects.

Growth Mail:

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

Stocks are Rising Since the Economy is Doing Better

by Gary Alexander

June is Bustin' Out All Over!
The sheep aren't sleepin' anymore!
All the rams that chase the ewe-sheep
Are determined there'll be new sheep
and the ewe-sheep aren't even keepin' score!”

-- From Rodgers & Hammerstein’s “Carousel” (1945)

The economic statistics for June have been almost unanimously positive.  On July 8, we learned that the economy added 287,000 new jobs in June.  That goosed the stock market to new highs.  Last Tuesday, the Commerce Department announced that housing starts rose 4.8% in June to an annual rate of 1.19 million.  Then on Thursday, the National Association of Realtors announced that existing home sales reached an annual rate of 5.57 million, the fastest annual rate since February of 2007.  Also on Thursday, the Conference Board announced that its index of 10 leading economic indicators (LEI) rose by 0.3% in June.

As a result of these rising numbers, the S&P 500 is up 3.63% for July as of last Friday’s close, reaching an all-time high of 2175.  Year-to-date, the S&P is up 6.4% and the DJIA is up 6.6%.  That’s a far cry from the dismal situation on February 11, when the S&P 500 was down 10.5% in the first six weeks of 2016.  Putting those numbers together, the S&P is up 19% since February 11 – not bad for a scary year.

The recovery on Wall Street has a lot to do with the recovery on Main Street.  The economic statistics are beginning to look far healthier than they were last winter.  According to economist Ed Yardeni, in his morning briefing last Monday (“Fairest of them All,” July 18), the Citigroup Economic Surprise Index has “gone vertical” – up from a low of -55.7 on February 5 to +25.1 last Monday, the highest reading since January 13, 2015.  As of July 19, the Atlanta Fed’s GDPNow projects real second-quarter GDP at 2.4%, more than double the upwardly-revised 1.1% growth rate for the first quarter of 2016.  (The first official estimate of second-quarter GDP comes out this Friday from the Bureau of Economic Analysis.)

Not to claim that we see everything in advance here, but I boldly predicted a much higher second-quarter growth rate by looking at history (see my April 19 Growth Mail, “There Will be Growth in Spring”).  In that column, I charted GDP growth by quarter over the last 10 years, showing that the winter quarter was nearly always weak, while the second quarter was much stronger.  From 2006 to 2015, the first quarter averaged an anemic 0.15% growth rate while the second quarter was 16 times healthier, averaging +2.4%.

The pickup in business may not be visible if you haunt the malls of America.  More and more of us are buying through the Internet – for superior selection, easier price comparisons, rapid delivery, and a chance to avoid the drudgery (to most males, anyway) of haunting the aisles of a store looking for what we want.

According to Ed Yardeni (in the same July 18 briefing), the percentage of General Merchandise, Apparel and Accessories, Furniture and Other Sales (GAFO) attributable to e-shopping in May hit a record 27.6% of total GAFO merchandise, up from a 10% market share in 1999 and 20% in 2011.  Pretty soon, that number will hit 30%.  Amazon’s second annual “Prime Day” sale on July 12 saw global orders surge over 60% (year over year), “exceeding Black Friday as the retailer’s busiest day of the year.”  Amazon said it sold more than 90,000 TV sets, over 215,000 rice cookers, and over three times as many Amazon devices!

In short, a recession is not on the near horizon.  In the Freedom Fest (July 13-16), Barron’s economics editor Gene Epstein argued against those predicting “economic Armageddon” (an exact quote from an opposing panelist).  He told the audience there that each of the recent recessions was preceded by (1) an inverted yield curve and (2) a spike in new unemployment insurance claims.  Neither is happening now.

Initial Claims for Unemployment Insurance Change Chart

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

The current yield curve is flatter but positive, with the 10-year Treasury note yields 125 basis points more than three-month T-bills.  The U.S. stock market has risen lately, Epstein says, because it remains the best place in the world to place your money for income or growth.  He wrote in this weekend’s Barron’s edition that “The yield on the WisdomTree Dividend Index, which covers the nearly 1,400 companies that pay cash dividends, is at 3%, even though the yield on the 30-year Treasury bond has plunged to 2.3%.”

With July nearly in the books, it’s time to weigh the outlook for August, at least in historical terms.

August is a Good Month for Stocks – Unless Disaster Strikes

August is the start of hurricane season – in nature and in the markets.  Last year, we saw a pretty scary August (down 6.3% in the S&P 500), based in part on a collapsing market bubble in China.  Five years ago, we saw the worst correction in this bull market as August began with an S&P downgrade of U.S. debt ratings and Congress ending their month-long highly-contentious debate over the debt-ceiling with the passage of the Budget Control Act of 2011 (enacted August 2, 2011).  In the following week, in four consecutive days (August 8-11), the Dow rose or fell by at least 420 points each day.  Remember that?

Here are a few other Augusts when the market went haywire, ruining our plans for a trip to the beach:

  • In August, 1974, the Dow fell 10.4% after Nixon resigned the Presidency in disgrace.
  • In August, 1990, the Dow fell 10.0% after Saddam Hussein invaded Kuwait.
  • In August, 1998, the Dow fell 15.1% when a falling Russian ruble caused a big hedge fund to fail.

Outside of those market hurricanes, August is usually a rather placid market month.  Using the Dow, the Investor’s Almanac says that August was up in 80% of the years from 1901 to 1950.  Even in the Great Depression, August 1932 was up 35% and August 1933 rose 13%.  In modern times, the strongest bull market of the century began in August of 1982, with an 11.5% gain, followed by a booster shot in August, 1984, rising another 10%.  Recently, since 2000, the S&P 500 rose in August in 10 of the last 16 years.

The big market hurricane of early August 2011 was Category 4, but it’s important to recall that the S&P 500 chart was jagged (wide swings up and down) while staying between 1100 and 1300 in all of August and September, 2011, but now it is up over 100% since its intra-day low of 1074.77 on October 4, 2011.

Despite a Treasury debt downgrade in 2011, U.S. Treasury yields have fallen since 2011 and the dollar has risen to the euro and most other currencies.  On August 1, 2011, the euro traded at $1.426.  Today, the euro is around $1.10, or 23% lower.  In addition, government spending as a percent of GDP is down.

Government Discretionary Spending Chart

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

The 2011 Budget Control Act and the Budget Sequestration of 2013 worked.  Discretionary spending is down sharply as a percent of GDP, according to a May, 2016 Heritage Foundation study.  As the above chart shows, discretionary spending in defense and non-defense decreased almost in tandem since 2010.

Dismal Augusts of the past were caused by a Presidential resignation (1974), invasion of Kuwait (1990), a hedge fund crisis (1998), and a budget showdown (2011).  A crisis of that proportion is not on the near horizon.  While our two major party Presidential candidates provide their choice this year, the chains of the Constitution blessedly limit a President from forcing their agenda down our throats without the complicity of Congress, so there’s a good chance our Republic (and our market) will survive.

Global Mail:

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

Is the Commodity Rebound Over?

by Ivan Martchev

One of these two camps of risk assets is sending the wrong signal: Emerging markets and junk bonds, or commodities – and more particularly, oil. While crude oil and commodities in general have weakened notably in July, both emerging markets and junk bonds finished on a high note last Friday. Emerging markets can be replicated in the MSCI Emerging Markets Index, while commodities can be measured by the CRB Commodity Index or by the price of crude oil as the most important commodity. In this chart, the Emerging Markets Index (in red) roughly replicates the oil price (black line) until the last month.

Emerging Markets Free Index Chart

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

The correlation between emerging markets and commodities in general is not surprising as a great many emerging markets are commodity-driven economies. Most of Latin America, Russia, and Indonesia come to mind. Strong commodity markets and a strong oil price used to be a sign of concerted global economic growth. I suppose the opposite is also true, where many global economies are now weak and the U.S. has emerged as a relative island of safety.

This is why when the MSCI Emerging Market Index and the price of oil and other key commodities move opposite to each other (as in the month of July; see chart, above), I am a bit puzzled. Divergences between correlated assets happens in financial markets all the time – I am in the camp that believes markets are not efficient – but the key is how to interpret those divergences, and what’s most important, how to exploit them profitably. In this case I think that risk assets like emerging markets and junk bonds are wrong and risk assets like commodities in general (and oil in particular) are right.

The same is true for junk bond prices and crude oil. While the correlation is not as tight as it is with emerging markets, if we look at the price of the SPDR Barclays Junk Bond ETF (JNK) and the price of crude oil, we see the same divergence where junk bonds rallied in July while crude oil weakened notably.

Barclays High Yield Bond versus Crude Oil Chart

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

Keep in mind that a large part of the junk bond market is energy-related and junk bond defaults are rising with the present default rate at a six-year high, led by the energy sector. U.S. junk-bond defaults spiked to 5.1% of the total outstanding in the second quarter, up from 4.4% in the first. The global high-yield default rate could finish the year at 4.9%, with the U.S. default rate as high as 6.4%, according to Moody’s, who also forecasts the default rate for metals and mining at 10.2% and oil and gas at 8.6% over the next 12 months. Fitch estimates that with present junk bond defaults over $50 billion in 2016, the number can reach $90 billion by year-end (source: July 12, 2016 Bloomberg article, “Energy Failures Push U.S. High-Yield Default Rate to 6-Year High”).

That type of surge in junk bond prices when the correlation between junk bonds and crude oil prices has never been as high as in 2016 (before July) is rather puzzling. Either junk bonds know something crude oil traders don’t know, or one of those two is wrong. Keep in mind that the surge of better than 50% in annual crude oil production in the U.S. was financed via high-yield debt. Also, a lot of that new crude oil production in the shale space is very high cost – in some cases, well north of $50/bbl – so many high-cost producers were producing at a loss for a while in order to make their junk-bond payments.

Fight for the Oil Market Chart

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

While U.S. crude oil production is down to 8.494 million barrels a day for the week ending July 15 – or 1.06 million barrels a day lower than a year earlier – what many are not reporting is that the U.S. supply decline has been absorbed by rising Middle Eastern oil production resulting from Iran coming back onto the global market after the end of their nuclear sanctions. Also, the number of U.S. rigs has been rising for four straight weeks, which is a sign that domestic producers have changed their minds and are taking advantage of the oil price rebound since February, suggesting that U.S. crude oil production may not continue to fall as Middle East crude oil production is ramping up (see July 22, 2016 Marketwatch: “Largest U.S. oil-rig spike of 2016 is bad for prices, good for oil-service firms”).

I am not surprised to see crude trading down to $43.74 on Friday on the September 2016 WTI futures contract, down from $52 last month. I have suspected all along that this rebound in oil was seasonal in nature. Crude oil demand tends to go up in March and weaken in September as there are simply more people living in the Northern hemisphere than in the Southern hemisphere. In 2015 we had a strong seasonal rebound of crude oil prices in March and April, flattening out in May and June, and coming down aggressively in July. This year the rebound started in February, but the weakening is right on schedule.

I think that ultimately in this bear market for energy we may be headed to $20 or lower as a factor of surging global production and weak global demand. I am not aware of many crude oil producers factoring a coming economic hard landing in China – the world’s #1 consumer of oil – into their forecasts. That economic hard landing may come in 2017 as Chinese authorities seem to be encouraging accelerating lending into a busted credit bubble, which for the time being is postponing the unravelling. This may delay the outcome, but I sincerely doubt that China can avoid a hard landing. (See February 3, 2016 Marketwatch article, “Something Broke in China in 2016.”)

If I had to pick who is right in the emerging markets/junk bond and commodity/oil price divergence, I would pick crude oil.

Post-Brexit Highs for the Dollar with a Boost from Weak Oil

We are meeting major “resistance” at 100 on the U.S. Dollar Index, so sooner or later I expect to hear that “the strong dollar is pushing down oil prices.”

United States Dollar Index - Weekly OHLC Chart

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

While the dollar may have a marginal effect on oil prices, in my opinion crude oil supply and demand is far more important than the dollar. While there aren't many commodity-driven currencies in the U.S. Dollar Index, the Broad Trade-Weighted Dollar Index contains many commodity- and oil-driven currencies. These currencies tend to weaken when oil prices are weak and the Broad Trade-Weighted Dollar Index tends to strengthen. There is no denying that there is some Soros-defined reflexivity in play here between crude oil and the dollar, but supply and demand is the more important factor, in my view.

United States Dollar Index versus West Texas Intermediate Crude Oil Prices Chart

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

Therefore, it is not surprising that as crude oil prices have weakened in July, the Broad Trade-Weighted Dollar has strengthened. This broad index includes the Euro Area, Canada, Japan, Mexico, China, United Kingdom, Taiwan, Korea, Singapore, Hong Kong, Malaysia, Brazil, Switzerland, Thailand, Philippines, Australia, Indonesia, India, Israel, Saudi Arabia, Russia, Sweden, Argentina, Venezuela, Chile, and Colombia. It is trade-weighted, while the headline U.S. Dollar Index is not trade-weighted and includes only the Euro area, United Kingdom, Japan, Canada, Switzerland, and Sweden.

Clearly, the Broad Trade-Weighted Dollar gives a better picture of what is going on with the greenback. The dollar is getting a major boost from weak crude oil prices, in addition to Brexit-accelerated deflationary trends in Europe and the coming deflation in China, which will be accelerated if and when the Chinese decide to devalue the yuan more aggressively, which is only a matter of time in my view.

Sector Spotlight:

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

The Bears Keep Hibernating

by Jason Bodner

“…a bear can rest at ease
with just the bare necessities.”

--Baloo, the Sloth Bear in Disney’s “Jungle Book” (1967)

Torpor is a state of physical or mental inactivity. Hibernation – also a form of torpor – is defined as a prolonged period of inactivity. Through evolutionary adaptation, some animals have devised amazing capabilities to preserve energy and deal with extreme conditions during their seasonal rest. For example, a ground squirrel’s heart rate drops from 300 beats per minute to as low as four bpm during hibernation! The squirrel can also flush out freezing materials in the blood, which enables the critter to endure an extreme body temperature drop to -3 degrees C (just shy of 27 degrees F). Even more amazing, the free living wood frog and the Siberian salamander can sustain being frozen for five months. The frog can last up to seven months as a frogsicle. Oxygen flow to the brain can drop to as low as 2% of normal in some hibernating animals, which intrigues researchers as this is closer to having a stroke than taking a long nap.

Hibernating Bear in Motel Image

Before it set new highs on July 11, the equity market had been slumbering in a sideways range for more than a year, but this recent rally has many wondering if the broad-based U.S. equity indices are truly done hibernating. Two weeks ago, we discussed the VIX and its double helix relationship with the S&P 500. The VIX spent some time at sub-12 levels last week (see chart, below). This popular “fear gauge” has sunk to levels not seen in a long time, indicating confidence and drawing closer to “complacency” levels.

VIX - CBOE Volatility Index - Daily Area Chart

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

One interesting thing about human emotions is that they tend to peak when market cycles reach extreme levels. Think of this situation: The market defies logic and rallies significantly in the face of poor fundamentals. Investors think they know that the rally can't last and the market is getting toppy. The market, however, continues to grind higher. Volatility sinks. People are now certain we are near the top. Equities finally sell off and people feel satisfied having “called” it! This lasts for only half of a trading day before recovering in a flat finish. Then the market defiantly continues higher. In disbelief, investors start to feel uneasy about being wrong and start to wonder: Is this rally real? The buying continues. The market continues rising on weak fundamentals and the recovery of some recently beaten-down stocks. An investor feels frustrated at having missed a 5+% rally in the market. When the psyche just can't handle the tension anymore, the investor throws in the towel to chase the rally. That often coincides with the market top as the long expected sell-off finally comes – several weeks later than originally anticipated.

The Biggest Winners Are Defensive/Yield Plays

Looking again at the recent performance of equities, there has been a continued demand for yield in this low interest rate environment. The main beneficiaries are utilities, REITS, and telecom, along with other high dividend-paying stocks. What is interesting about this week is TMT (Technology-Media-Telecom), specifically Infotech, seems to have awakened from an extended sleep. This is due in part to strong earnings of some bellwethers but the strength since February is clearly reflected in the Telecoms.

Standard and Poor's 500 Telcomm Services Sector - Daily Area Chart

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

Looking at the S&P 500 Information Technology index (below), we can see a clear breakout since late June. This, in particular, caught my eye because these stocks are often synonymous with growth. The real fuel for the engine for a bull market is growth, signifying that the economy is sufficiently healthy enough to spur and foster growth based on revenues and not just on cost-cutting measures, like staff reduction.

Standard and Poor's 500 Information Technology Sector - Daily Area Chart

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

Infotech was the clear leader this past week with a 2+% performance.

Standard and Poor's 500 Weekly Sector Indices Changes Table

When we look at the month-to-date performances of the 10 sectors (below), it becomes quite clear who is leading the pack. Information technology is up more than 6% for the month of July thus far.

Standard and Poor's 500 Monthly Sector Indices Changes Table

Shockingly enough, when we look at the past six months, nine of 10 sectors are up double-digits, with only Health Care barely missing that threshold. Again, the top four biggest winners for six months (Materials, Energy, Telecom, and Utilities) are all either recovery stories or defensive/yield plays.

Standard and Poor's 500 Biannual Sector Indices Changes Table

Seeing Infotech awaken from slumber is potentially exciting. I have suspected since the beginning that this broad equity rally has been based upon demand for yield, but if a new player – synonymous with a growing economy – enters a phase of leadership that is a healthy sign. With much of the market concern over the last year dwelling on energy weakness, commodity pressure, currency headwinds, global growth slowdown, bank time bombs, and healthcare uncertainty, it would be a welcome bright spot if tech sparks real combustion for the engine of a bull market. Tech has indeed struggled for some time now. We have seen popular names experience extreme volatility and we have seen popular shorts squeeze higher yet with a run of better-than-expected earnings this may be a key inflection point for growth-related sectors.

In the great 1990 film “Awakenings,” Robert De Niro’s character Leonard Lowe wants to remind everyone that life is a gift, and that they spend too much time dwelling on negativity and bad news. As we potentially witness an “Awakenings” type of event in InfoTech, we have to wonder if it has legs or will it just lapse back into volatility and uncertainty. It would be a positive sign for a rally to be fueled on strength and growth of technology stocks. Keep in mind what Napoleon Hill said, “Strength and growth come only from continuous effort and struggle.” We shall see…

A Look Ahead:

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

Negative Interest Rates Are Positive for Gold

by Louis Navellier

The European Central Bank (ECB) on Thursday announced that they were leaving their key interest rate unchanged at -0.4%, and the Bank of Japan will announce this week how low yen interest rates will go.

The world’s central banks are staging a worldwide limbo contest – how low can rates go?  It started with negative rates on overnight deposits in European banks, then negative rates spread throughout Europe and into Japan earlier this year.  Then, the maturities for these negative rates moved further and further out.  Currently, the 50-year Swiss and 20-year Japanese government bonds each have negative yields.  The prospect of locking up negative 50-year returns is mind-boggling.  Nobody knows what will happen 50 years in the future, but I’d say it’s certainly likely that inflation will rise above 0% sometime before 2066!

Germany recently auctioned new 10-year government bonds with a negative yield.  Britain’s 2-year government notes briefly hit negative territory and the Bank of England is widely expected to cut rates in August.  Furthermore, 10-year U.S. Treasury bonds recently set record lows under 1.4% and the 30-year T-bond yield fell below 2.1%.  As low as those rates are, global capital is flowing into U.S. bonds now.

For over 40 years, the rap on gold from the mainstream press and Wall Street analysts has been that it doesn’t offer income.  It offers no “earnings,” either; so Wall Street securities analysts say they don’t know how to calculate gold’s intrinsic value, even though gold has been a long-term store of value and a reliable currency alternative in many historic civilizations for thousands of years.  Ironically, a bride in India or a pensioner in Japan knows a lot more about how to value gold than a high-paid financial analyst in New York City.

Gold Offers More “Income” than $12 Trillion in Sovereign Debt

As of early July, Fitch Ratings said that $12 trillion in global debt is now yielding less than zero.  That’s a huge (12.5%) increase since just the end of May, mostly due to the Brexit vote in late June.  Most of the world’s $12 trillion in negative interest-rate bearing bonds are now being issued by Japan, with most of the rest emanating from Europe.  With rates turning negative on two continents – and likely to remain low or negative for many years to come – the opportunity risk of lost income in owning gold is now very low.

Rising Tide of Global Negative Yielding Debt Chart

Japan is new (since January 29) to the negative-rate limbo contest, but they currently are racing to the bottom even faster than Europe.  As a result, investors in Japan have been pouring into gold.  The number of Japanese gold buyers shot up 62% in the first half of 2016.  Many Japanese store their gold overseas.

Negative-yield debt was only $6 trillion at the start of 2016, but you can see two big bumps in 2016 in the above chart: Japan’s plunge below zero on January 29, and the post-Brexit currency crisis in Europe since June 23.  This global trend toward negative interest rates may continue for a long time.  Once nations find that they can charge people to borrow money, they won’t go back to paying people high interest rates.  As a result, these negative rates are a gold mine for governments, and a gold buy signal for private investors.

The mainstream press doesn’t understand this correlation yet.  They keep referring to gold as an “inflation hedge” (in a time of low inflation) or a “crisis hedge” (when we’re in between crises).  Those definitions still apply, but gold’s main historical role has been an all-around currency hedge.  Gold has outperformed all paper currencies over time.  It’s not designed to replace a wisely-selected stock market portfolio, but gold is a viable alternative to low-yielding or depreciating cash or low-yield (or negative-yielding) bonds.


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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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