Courtesy of Sabrient Systems and Gradient Analytics
Well, it’s official. The old adage about selling in May didn’t apply this year. Instead, larger-cap, higher-quality, and value-oriented stocks continued to lead the market higher. The S&P 500 gained +2.1% during the month and confirmed its tentative technical breakout from the prior Friday with steady progress last week. However, it was tepid at best during the holiday-shortened week, and a somewhat concerning ‘double-low’ confirmation — i.e., on extremely low (and decreasing) volume and with a backdrop of persistently low volatility.
The CBOE Market Volatility Index (VIX), a.k.a. fear gauge, closed last week at 11.40, after setting yet another new 52-week low moments earlier. Although some observers are predicting single digits for the VIX, the greater likelihood is a mean reversion in the form of a spike higher. However, the VIX is not a timing tool, so it could stay low for some time before eventually going higher.
Among the ten U.S. business sectors, defensive sector Utilities is still the clear leader year-to-date, up nearly +14% after a strong showing during last two weeks of May. Energy and Healthcare are in a virtual tie for second place YTD. So, the top three are largely defensive sectors, which doesn’t feel particularly bullish in the traditional sense. However, Technology is making an effort to join the leaders, and it was quite strong during May, up over +3.5%. Consumer Services/Discretionary remains the laggard, and Telecommunications also has been weak. Both of these sectors have consistently ranked at the bottom of our fundamentals-based SectorCast rankings.
Going hand-in-hand with the outperformance of defensive sectors is the low (and falling) yield in the 10-year Treasury bond, which indicates that global capital continues to flow into the safety of U.S. Treasuries. The 10-year yield has now dropped below 2.50% and seems destined to fall further, despite prevailing expectations of the inevitability of higher rates among most of the financial community. In fact, I have read some compelling arguments that we are stuck indefinitely in a low interest rate environment, as the Fed cannot raise short-term rates without tanking the economy. And that’s what the flattening yield curve is signaling to investors.
With forward valuations in equities somewhat elevated but not egregiously so, and with low interest rates encouraging corporations to issue debt in order to continue their stock buybacks, and with central banks…
