April 22, 2014

Equities appeared to have rebounded last month, but the performance was split. That theme has continued into April as numerous influences impact the markets, globally and domestically. Bonds have been little changed and the currency market has reversed somewhat. While there has been little in the way of real domestic news to impact the market on a macro level, the same cannot be said from an international standpoint.

Concerns about growth in China, and expectations for stimulus in that country, was a contributing factor to the “see-saw” movement in the market last month. Another contributing factor was the Russia/Ukraine situation, which raised fears that the Crimea would not be the only acquisition candidate of Russian President Putin.

The S&P 500 Index (SPX: 1,872.34) added 0.7% in March and the Dow Jones Industrial Average (DJIA) appreciated 0.8%. However, the Nasdaq Composite Index (COMPQ) dropped 2.5% and the Russell 2000 Index (RUT) slipped 0.8%. Stellar per-formances were recorded by the Dow Jones Transportation Average (DJTA) and the Dow Jones Utilities Average (DJUA), which jumped 3.1% and 2.6%, respectively.

Russell 2000 Index (RUT)Russell 2000 Index (RUT)

Given the performance of the benchmarks, we believe that traders and investors were confused and lost about direction. Additionally, it was a very frustrating month for traders, whom had a difficult time making money.

Commodities Generally Weaker

Following the tensions in Eastern Europe commodity prices were generally lower as concerns about economic activity slowed demand for energy and other resources. West Texas Intermediate Light Crude May 14 Futures (CL/K4: $101.56) descended 1.1%.

Gold futures, which rallied to a peak on March 17, turned lower, and the precious metal ended the month with a declined of 3.3% as geopolitical tensions eased. Changes in weather conditions, especially in the western part of the US, helped to reduce some commodity prices from their recent highs. Live cattle, feeder cattle, oats, coffee, lumber, and sugar were all lower by the end of March.


The US Dollar Index (DXY: 80.24) was slightly higher month/month, but the real story is found when you look at the action that occurred during the month. Strength was exhibited against the euro, Japanese ¥en, British Pound and Swiss Franc. The Austrian and New Zealand dollars were stronger against the “greenback.”

The Fed

We feel like we are getting mixed messages from the Federal Open Market Committee (FOMC). First they are tapering and talking about a time line for increasing rates and then they are saying that economic conditions foresee them remaining accommodative for a longer period of time.

This has led to the debate of whether the Fed should be transparent or not. Furthermore, the back and forth comments has led to volatility in the markets as traders and managers adjust positions based on the headlines.

The benchmark 10-year T-note has been volatile, but the trading range has been narrowing, thereby narrowing the range for the yield. As March ended the implied rate was 2.723%.

The Economy

There was apparent moderate improvement in the economy last month, as the weather improved across most of the nation. This was evident in some store sales as well as the Employment Situation Report. Analysts and economists are anxiously awaiting the first read on the Gross Domestic Product (GDP), scheduled at the end of the month.

In the meantime, there is plenty of other information to keep them busy. Concerns about food inflation, due to draughts and harsh winter conditions, have been echoed by analysts and consumers alike. Despite the negative talk, the Consumer Confidence Index rose to 82.3 from 78.3 in February.

Consumer Confidence Index (Source: Conference Board and Olympian Group of Companies)Consumer Confidence Index (Source: Conference Board and Olympian Group of Companies)

Equities, A Deeper View

While some of the major benchmarks rose to new all-time highs last month, others did not. In fact, we have seen a disconnect between some of the indices, which has crossed into April. These divergences caused negative performance for the advance-decline indices as well as the percentage readings for stocks trading above their respective 200-day moving averages.

The strongest industry groups in March included regional banks (+4.1%), semiconductors (+3.5%), banks select (+3.4%), oil & gas equipment (+3.4%), and oil & gas exploration & production (+3,3%). The weakest groups included biotechnology (-12.9%), computer software (-5.9%), pharmaceuticals (-5.5%), software & services (-5.3%), and home-builders (-4.3%).

What To Watch For

As we begin the earnings reporting season traders will not only be analyzing the numbers but also the comments from CEO’s and CFO’s with respect to the expectations for the next few quarters.

Market performance has not been impressive, despite the fact that some of the benchmarks set new all-time highs late last month. Volume has been rising during weak sessions and declining during positive sessions, a sign and characteristics of distribution.

As we stated at the end of 2013, the new year would likely be more challenging, and more of a stock pickers market. We are not seeing the performance, both in percentage returns and breadth, that investors became accustomed to last year. It is more difficult to find candidates than it was before.

Careful examination of the market, sectors, and stocks and the implementation of defensive strategies has been working for us, and we intend to follow the same plan until other opportunities present themselves.

Michael J. Levas has been in the investment management business for over twenty years and is the founder,senior managing principal & director of trading at the Olympian Group ...