August 23, 2016

The major stock market averages surged at the open (Dow +44 pts; SPX +.38%). Nine of ten market sectors are in the green, led by materials. Semiconductors continue to power ahead (SOX Index is up nearly 21% this year). Energy is bouncing back as oil moves higher. European stock markets are poised to close up 1% and Asia was mostly up overnight. WTI crude is trading up around $48/barrel on nothing more than speculation that OPEC will freeze oil production at current levels. Bonds aren’t moving much this morning. The 5- and 10-year Treasury yields are trading at 1.14% and 1.55%, respectively. The VXTLT (volatility index for long-term Treasuries) is down around 12, which suggests very little volatility in long bonds in the next 30 days. 

The SPX is bumping up against its all-time intra-day high of about 2,194 again. That record was set on the 15th of this month. Since then, the index traded down 1% and is now making another run at the high. Since the 15th, energy and materials sectors have been the clear leaders. 

Fundstrat’s Tom Lee, who has been right about the market this year, said in a CNBC interview yesterday that investors should stick with dividend-paying stocks. “The real asset allocator today is an income fund.” He suggests finding “reasonably priced stocks with good dividend yields.” The technology sector is a good place to look, and it does well when the market begins to sense investment spending picking up. Separately, technical analyst Carter Worth suggested tech will lead the market going forward. He notes the sector’s relative (to the SPX) P/E multiple is 1, which is historically low. He also points out that the sector’s relative dividend yield is at .75%, which is “near a record high.” He says both metrics suggest tech is under-valued.

Medical device and pharmaceutical companies are negotiating with the FDA over user fees for the next five years. The draft agreement, which will be submitted to Congress in January, includes a 68% increase in fees paid to the FDA for its drug & device approval services. Companies like Pfizer (PFE) and Johnson & Johnson (JNJ) want a quicker approval process and the FDA says it needs more funding to meet the demand efficiently. 

US new home sales surprised everyone by surging 12.4% in July from prior month levels to an annualized rate of 654,000 units. That annualized pace represents a 9-year high, and also a roughly 30% gain from year-ago levels. I’m thinking this number gets downwardly revised next month, but even so it could signal improving demand for new homes, which will push more homebuilding activity. We learned recently that new housing starts (groundbreaking on new developments) are at 5-month high. We know that the inventory of new homes for sales has shrunk to 8-month lows. 

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