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For Many, July Was an Ugly Month.

For many July was an ugly month.  Perhaps one of the few positives to write is the narrative is rising about the narrowness of the market where only 5 or 6 stocks have contributed to the year to date return for the averages.  Over 60% of NYSE listed securities are now trading below their 200 day moving average.  The narrowness is akin to such myopic eras of 2007, 2000 and 1993.

If one has to be reminded, commodities have imploded trading at the lowest level in13 years, collapsing 10% in July, the largest monthly drop since September 2011.  Oil had its largest monthly drop since November 2008.

The drop has severely impacted the 93 energy companies that comprise the Russell 2000 which have plummeted 25% since June and 35% in three months.  These issues are off about 67% in a year.   The short interest in the Russel 2000 energy issues represent about 10% of the shares outstanding, more than double the 4.5% of the overall index according to Bloomberg.

Regarding the S & P 500 energy index, Bloomberg writes the 18% drop in this index is the greatest since 2008 and the index is trading at the steepest discount to the S & P 500 since at least 1992.

July’s data was mixed.  Friday’s release of the second quarter’s Employment Index (the most inclusive measurement of wages and benefits) rose the slowest pace since records commenced in 1982.  Wow!

Is the data accurate given the current low unemployment rate?   The data does not correlate with other statistics indicating a nascent wage increase.  It also does match the opinion of the Federal Reserve.

The wage component of Friday’s employment data will now be even more closely scrutinized.  As noted several times, weekly jobless claims are hovering around 40 year lows.  Typically such data indicates latent wage pressures but is the 35 year low in the labor participation rate (LPR) preventing such increases?

Home and auto sales were great in July.  Historically these sectors lead the economy out from recessions.  Will these segments be the catalyst for a strong second half of the year?

As indicated above, market breadth is the narrowest in 15 years.  Such narrowness suggests one of two things…a market drop or money gravitating into the other issues at the expense of today’s myopic dominating leaders.

If history is to serve as guide relating to the positive implications of rising employment and home prices, I could argue market breadth will widen.  As noted in prior remarks, I can envision a potential market melt up given the dearth of ownership and perhaps the outright shorting of a large portion of the market.


Unfortunately only history will indicate if such does occur.

Last night the foreign markets were mixed. London was flat, Paris up 0.72% and Frankfurt up 0.95%.  Japan was down 01.8% and Hang Sang down 0.91%.

The Dow should open flat.  Chinese and Greece stocks fell, a decline that is not duplicated in European equities.  Oil is down again extending July’s 18% decline.  The 10-year is off 3/32 to yield 2.20%.

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Ken Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.