ETF Periscope: Sentiment on Main Street at Odds with Jubilation on Wall Street

Thunder is good, thunder is impressive; but it is lightning that does all the work.” — Mark Twain

If you go by Wall Street’s scorecard, the economy seems to be going gangbusters, as evidenced by the upward trajectory of the major equity indices.

The Dow Jones Industrial Average (DJIA) gained 1.1% last week, and is about 100 points off of its all-time highs. The S&P 500 Index (SPX) added 0.9%, and at 1,759 continues to shatter its own recent highs.

Finally, the Nasdaq Composite (COMP) was up 0.7% last week, and, while still a ways off from its “tulip-mania” days circa 2000, the tech-laden index continues the year’s strong and mostly steady uptrend.

So far, this earnings season has proven to be something of a happy surprise. Based on those companies that have already reported, the current third quarter may prove to be the strongest one so far for 2013. With the majority of the S&P 500 companies beating earnings consensus, investors probably can’t find too much to complain about if their portfolios contain a high correlation to the SPX.

The current leg of this year’s equity market uptrend resumed course once the most recent muddle of government shutdowns and threats of default, prompted by D.C.’s debt-ceiling theatrics, was at least temporarily put to rest.

But investors may want to take note of a couple of indications that the economic health of Wall Street is not necessarily being mirrored on Main Street.

If these indicators are indeed something of a harbinger of a troubling trend, as opposed to an anomaly, the next quarter’s earnings reports may prove to be in high contrast from those of the Q3 season, and in a negative way.

First off, consumer sentiment appears to be taking a dive, hitting the lowest numbers in ten months. The University of Michigan/Thomson Reuters Consumer Sentiment Index, a widely regarded sentiment index, dropped over 4% from September’s numbers, coming in at 73.2%.

According to a survey that accompanied the report, the rise in negative consumer sentiment arises from wariness over the seemingly endless political bickering and government budget-wrangling emanating out of Washington.

And with yet another round of acrimonious budgetary negotiations scheduled for the beginning of 2014, investor mistrust as to the state of the economy could result in more cautious spending of discretionary income. 

So keeping vigil around next month’s consumer sentiment report, in an effort to see if the trend continues, might not be a bad thing.

A second potential indicator of economic fragility might be seen in another sort of sentiment report, this one reflected in builder confidence.

A couple of weeks back, the National Association of Home Builders/Wells Fargo Housing Market Index revealed a 2% drop in optimism among the nation’s homebuilders of new, single-family homes.

Though the low interest rates currently in place should continue to grow this segment of the economy, it is possible that consumer trepidation regarding Washington’s lack of leadership may cause them to hold off not just discretionary spending, as reflected in the consumer index, but also major purchases, such as homes. 

If a negative trend begins to develop among the nation’s homebuilders, who have been primarily an optimistic lot for much of the year, then Wall Street might find a strong reversal in trend as soon as Q4 earnings season comes into focus. 

What The Periscope Sees

Each week, the Sabrient SectorCast ETF Rankings rate each of the ten U.S. industrial sector iShares (ETFs) by Sabrient’s proprietary Outlook Score. The rankings are revised on a weekly basis.

Somewhat like a broken record, the rankings for the past week again placed the Technology Sector firmly in the top spot of the SectorCast ETF Rankings. It scored a near perfect 95, though its lead appears to be challenged by the Financial Sector, which scored an impressive 91 in the rankings.

Among the Technology Sector’s top ten ETFs in terms of assets, FDN (First Trust Dow Jones Internet Index Fund) leads the pack, up a staggering 41.42% year-to-date.

Here is a list of FDN’s top ten holdings by percent, which, taken together, represent slightly more than 50% of FDN’s total holdings as of the first week of July, 2013:

1 - Google (GOOG):  +9.94%

2 - Amazon (AMZN): +7.09%

3 - eBay (EBAY): +6.15%

4 - Priceline (PCLN): +5.72%

5 - Yahoo (YHOO): +4.69%

6 - Salesforce (CRM): +3.91%

7 - Netflix (NFLX): +3.69%

8 - Akami (AKAM): +3.09%

9 - LinkedIn (LNKD): +3.04%

10 - Facebook (FB): 3.01%

ETF Periscope

Full disclosure:  The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”

Disclaimer: This newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Sabrient. Sabrient makes no representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results. 

ETF Periscope
daniel / Tag: SPX, DJIA, NASDAQ, COMP, GOOG, AMZN, EBAY, PCLN, YHOO, CRM, NFLX, AKAM, LNKD, FB, consumer sentiment /