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Weekly Market Call – 7.20.2018

 

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We continued to see many crosscurrents in the markets last week.   The financials, industrials and technology stocks continued to lead in the United States. Small companies also rallied faster than their large cap brethren.

The financials have recently displayed an uptrend but in early 2018 we saw a bit of a decline and experienced a consolidation phase. Last week we discussed how the financials could start rising and we have actually seen a spike up in relative performance from a 63-week average.

 

 

The industrial sector has many similarities to the financials lately, lagging since early this year but currently trying to reinvigorate which could be a positive sign for our economy. Tech is continuing its rally and leading in the markets, even breaking into highs and continuing to outperform other sectors.

 

 

For a deeper study, Wealthnet examined the intra-day volatility in the markets from 1982 to 2018 and compared it to the close-to-close volatility and the findings are dramatic. We found that S&P 1500 stocks had intraday volatility twice as volatile as close to close volatility.

 

 

 (Wealthnet Investments, LLC S&P 1500 stocks as of 7/17/2017, S&P 1500 Constituents from Optuma Database)

What does this mean? If you are an investor putting stop orders, resting in the market you are likelier to get stock taken out in the middle of the day. There is an upward slope in intraday volatility but close-to-close is relatively the same. If intraday volatility is twice as much as close to close volatility investors would need to reduce their position size by approximately half to keep the same impact to their portfolio.

Diving back into the markets, let’s focus on what is happening with trade and the international vs. domestic markets in the USA.

 

Export Markets Are Testing Lows Since Election

Last week’s market call included the 10 largest countries that export to us. I created a ratio of their stock markets compared to the USA since the election. If you recall, we saw an outperformance in those companies over the U.S. immediately after the last election, but they have recently accelerated down, and we are where we were before the election. These markets are testing what the impact will be on these import countries and if the impact is less than expected we could see a significant outperformance of those stocks because most market players are betting against international markets.

 

(Source: Wealthnet Investments, LLC Export Country Index. Database from Optuma)

 

Chinese Stocks Relative Trend Breaks Downward

China’s stock market had a nice outperformance relative to the US but has recently broken a trend line. Which means they are no longer outperforming currently and we haven’t seen tons of buying stepping up. Japan has been underperforming and recently turned to the downside as well.

 

 

Commodities are continuing to trend downward. We saw a break below key moving averages and commodities are testing a support level.  Gold continues to lag. We are seeing a downward trend and is continuing to move lower. Agriculture commodities have been the worst performing commodities and energy has been the best.

 

A Unique Health Care Stock Interests Us

A stock that interest us is IQVIA Holdings Inc. It is an outsourced R&D company for big pharma and biotech companies. The company is a result of a merger between IMS Health and Quintiles, which allowed them to get data and technology information that is unique. Because of their service model, they have developed strong customer relationships. The stock is also trading at reasonable valuations with an earnings yield of 5.3% compared to the S&P 500 4.9%. and has good growth prospects ahead.

 

(Source: Morningstar Direct Database, 7/17/2018)

 

Taking a closer look at the micro-level. The stock broke out from a resistance level at 106.33 and could have a return to support at 106. We believe we could see the share price pull back ahead of earnings expected to be released on July 21st. Longer term, we estimate that company can continue to grow earnings as pharmaceutical and biotech companies continue to outsource their R&D to IQVIA.

 

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