Has the Time Come for a Market Correction?!

The February employment report is the only economic figure that stands in the way of the Fed hiking rates come the next FOMC meeting. And because of that, the monthly employment report – more than ever – will take center-stage in capital markets this coming week. Economists’ projections call for 190 thousand new jobs with the unemployment rate being stable at 4.7%. Hourly wages are expected to rise by 0.3%.

This past trading week ended up after a troupe of senior Fed speakers spoke almost daily about the chances of a March rate hike. Fed Chairwoman, Janet Yellen, said on Friday that the Fed is likely to raise rates at its coming meeting on March 15th in the event the economy continues to show its strength. A rate hike, were it forthcoming, would be the third in the last 10 years, the Fed now retreating from the strategy that had prevailed at the depths of the Great Recession in 2008, i.e. keeping rates at drop bottom levels until the economy recovered.

Last week, indexes recorded technical movement that was significant, the S&P 500 breaking up the 2,400 point level – with the Dow Jones, for the first time, scaling past the 21,000 point level. The S&P 500 didn’t fare as well, ending off at the 2,383 point level, but that notwithstanding, it still had gains of 0.7% to show on the week. The Dow Jones ended the week up 0.95% at the 21,005 point level, the NASDAQ rising 0.58% on the week.

The market seems to have been milked dry. The bears will like the thought that with two major events behind us – Trump’s first congressional address and the high valuation Snapchat (SNAP) IPO – and with Yellen now signalling that we’re in for three hikes this year, it’s the ideal time to “sell the news” and finally enter a price correction phase. Traders are trying to hold on tight to the rally, but the higher the market climbs, it’s becoming harder for them to feel at ease. The bulls will also be happy to see a correction at this point, a lot of stocks looking overly stretched.

The crude market is also likely to command a lot of attention this week, traders awaiting figures from OPEC and other crude producers participating this week in the CERAWeek energy conference. Traders are waiting to see whether crude can hold its ground above the $51-$52 point level. Many a trader are saying that energy stocks are the safest place to be in the market this coming week. Crude ended at the $53.33 barrel level this past Friday, falling an aggregate 1.2% on the week. All-in-all, energy stocks have lagged this year. The energy sector (XLE) is trading off 5.5% year-to-date, the only big sector trading in the red this year save the utilities sector (XLU). In the event crude breaks up the $54 level, energy stocks are likely to set out in pursuit as they try to close the gap with the other sectors.

Technology stocks were one of the main drivers behind the latest record-breaking Wall Street rally – and despite growing evidence that stock valuations are expensive, the sector still remains one of investors’ top preferences given their expectations that American firms will engage in a new round of capital spending.
A cut in corporate taxes, along with the introduction of new limits on regulation, i.e. the platform being pushed by President Trump, is expected to give companies cause to spend more on cloud technology, factory automation and smart communication, something likely to add to the coffers of Silicon Valley firms.

The strong performance of large stocks like Apple (AAPL) and Facebook (FB) helped push the tech sector to the top of the list of leading sectors year-to-date with gains of 10%, compared to index-wide gains of 6%. In February, investors injected $325 million into the XLK Exchange Traded Fund (ETF), which tracks the tech sector. It could be that a certain correction is needed, though in our view, buying in is a wise move in the face of any retreat, seeing that we like the sector’s chances of performing solidly in the next two-three years. The success of wirelessly connected smart devices in homes, stores and factories have led to a huge reservoir of data that creates more demand for computing power for the data’s analysis and for more places for cloud storage. According to the IDC research company, outlays for cloud computing are expected to grow by 21.5% year-over-year until 2020, almost 7 times information technology spending.

An improvement in the job market and in consumer confidence were also behind investors’ optimism about the tech sector, which in its own right, also helped offset concerns about high valuations. After an almost 8-year rally in the American stock market , almost all of the market sectors are traded at earnings multipliers (PEs) higher than their long-term averages, though no sector is now pricier than the tech sector. The strong tech stock performance has led the PE on the S&P 500 to hit 17.9, compared to its 10-year average of 14.5.

The tech sector has traded above its mean PE for a year already, and over this period, has soared 28%. Those bullish on the sector believe that momentum is growing. S&P 500 tech sector earnings grew 12.3% over Q4 2016, more than those of any other sector. Analysts expect the growth pace to even hit 13.6% in Q1 of this year.

Encouraging earnings reports and optimistic forecasts from leading tech companies like Broadcom (AVGO), Skyworks (SWKS), and Applied Materials (AMAT) signal that for the sector, significant growth is right around the corner. Take for example, Micron (MU), which soared 3.5% on Friday after raising its 2017 earnings forecast on Thursday.

Have a great trading week!

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