The market may not be in a bubble but there have been pockets of such. The Biotech sector, 3D printing stocks and battery power stocks do seem to have “bubble” characteristics. Those bubbles also seem to be bursting. Biotechs which surged at the dawn of 2014 have now given back all of their gains from earlier in 2014. 3D printing stocks are now down 30-40% off of their highs of late 2013 and battery power stocks have recently taken one on the chin. While the market continues to struggle with new highs it is important to try and break down some of the internals of the market in order to see if this rally still has steam. Keep an eye on the bubblier portions of the market along with the performance of small caps vs. large caps and how the most shorted stocks perform against the broader market. A break down in these areas could portend a break down in the broader market and coincidentally make for a healthier market.
Since Janet Yellen’s comments about an earlier than expected rate rise in the US the best performing sectors have been financials and semiconductors while biotech and consumer durables/apparel have been the biggest losers. Surprisingly, utilities and telecom services have hung in there quite well. If we have had a seismic shift in the market post Janet Yellen’s comments we would expect the winners and losers to continue in these same directions. We will be keeping an eye on these sectors especially the financials.
FINRA is investigating the trading of Puerto Rico’s municipal bonds. As you may or may not know Puerto Rico is in sore financial shape. They were however able to access financial markets and float $3.5 B worth of bonds last week. Those bonds were to be sold in denominations of $100,000 or more in order to make sure that institutional buyers or very large investors were involved in the transactions. The authorities wanted to be sure that all investors involved were aware of the possibility of default by Puerto Rico. In the last several days transactions have been made below that threshold indicating the possibility of smaller investors getting into these bonds at par value. Red flags have gone up at FINRA and here at Blackthorn. Just last week I had a client ask me about these bonds as he received a phone call from an investment firm trying to sell him Puerto Rico muni bonds. We are not making an investment call either way on these bonds. We are just making you aware. Caveat emptor.
The market ended the week on a sour note with Friday’s close being a real clunker. Was the selloff from Friday morning’s highs about geopolitical risk or something more? We will find out next week. Charts are looking a bit rough. A break of the 1840 level on the S&P 500 could bring further selling. Will we get saved by end of the quarter window dressing?
US Treasuries had a back up in yield this week as Janet Yellen made comments about earlier than expected rate rises here in the US. Gold and Treasuries have been the flight to safety trade as Ukraine heated up. Now they took the brunt of the hit as Ukraine cooled off and Yellen promised higher rates sooner. Treasuries and Gold conintue to be our temperature gauge for both for rates and geopolitical risk. Keep an eye on how they act this week.
The Fall and Winter are the best performing seasons for the stock market but April is a standout if we look at monthly performance. Could we be in for one more move higher in the market before the summer doldrums kick in? Summer is statistically the worst season for gains in the stocks market. (Hat tip to Bespoke Investment Group.) http://www.bespokeinvest.com/
To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .
A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill
Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.