The stock market rally off the February lows initially was led by the usual combination of short-covering, oversold bottom-feeding, and speculation (on “junk”). But then market action started showing signs of improving market breadth and a rotation back into higher quality companies — the types of companies with characteristics Sabrient typically seeks in our GARP (growth at a reasonable price) selection process. It is notable that price action for the S&P 500 was very similar during 2015 to what occurred in 2011. When it happened in 2011, the market quickly got back on track to start 2012, but this year, it took until mid-February before markets launched a concerted recovery, and it was a few weeks after that before the flight to quality began.

Economic reports continue to show mixed but mostly positive results, and yet investors are seemingly unconcerned about the Fed talking up the possibility of a June rate increase, and some market commentators suggest that investor are now embracing another rate hike as a sign of more robust economic growth. However, from my vantage point, the fed funds futures have not changed very much.

In this periodic update, I give my view of the current market environment, offer a technical analysis of the S&P 500 chart, review our weekly fundamentals-based SectorCast rankings of the ten U.S. business sectors, and then offer up some actionable ETF trading ideas.

Market overview:

Last week, technology and biotech led the market surge, with the Nasdaq gaining +3.4% for the week (the most since February), while financials gained +2.6%. Notably, Tech, Healthcare, and Financial sectors make up 50% of the S&P 500, thus serving to boost that index, as well. However, for the month of May, it was all about the Nasdaq, which rose +3.6% while the Dow Industrials gained less than +0.1% and the S&P 500 large caps gained +2% (total return basis), as did the S&P 400 mids and S&P 600 smalls. The Technology sector gained +6% for the month, while Financials gained +1.8% after a late surge. Not surprisingly given the aforementioned, Growth outperformed Value.

The Commerce Department revised its first-quarter GDP estimate up to 0.8% from 0.5%. In addition, the final reading for the University of Michigan Consumer Sentiment survey for May was a solid 94.7. Then on Tuesday, the Conference Board Consumer Confidence came in at 92.6 for May, which is decent, but the Chicago PMI report for May fell to 49.3, which is the sixth time it has registered below 50 (the dividing line between manufacturing activity expansion and contraction) during the past 12 months. Other important reports due out this week include ADP employment, PMI manufacturing, construction spending, and ISM manufacturing on Wednesday, and then Friday brings the Government Employment report and ISM services.

Home price appreciation has been strong — albeit with help from the Federal Reserve’s asset-inflating monetary policies. Both existing and new home sales and prices in April were considerably stronger than expectations, and sales of new homes are the strongest since way back in January 2008. Moreover, the median price of a new single-family home hit a record high ($321,100) in April, while the average price of an existing single-family home is near the all-time record from June 2015.

Nevertheless, the slope of the domestic yield curve remains pretty darn flat, as global liquidity continues to seek the safety and higher returns of US Treasuries. The 10-year yield closed Tuesday at a 1.83% while the 2-year closed at 0.88%, indicating a spread of 95 bps, which remains below the 100 bps threshold of concern.

Fed funds futures are indicating only a 22.5% probability of a rate hike in June. Although it has risen significantly, it is still relatively low. Many economists give a June rate hike more like a 60% chance, but the fed funds futures show the consensus of many smart traders with money on the line, and it tends to be quite prescient. However, the probability rises to nearly 60% come July, and then 62% for at least one hike by September, and 77% probability of at least one rate hike by December (and 33% chance of two rate hikes by then).

The US dollar closed the month of May with a +3.2% gain against a basket of 16 currencies, as tracked by the WSJ Dollar Index, thus ending three consecutive months of declines. Still, for the year, the dollar is down -2.5%. Oil eclipsed the $50 mark on Tuesday as it attempts to test resistance at the October high ($50.90), but then closed the month at $49.10/bbl. Gold lost -5.8% during May. The CBOE Market Volatility Index (VIX), aka fear gauge, closed the month at 14.19, although intraday on Tuesday it briefly touched the 15 fear/complacency threshold before falling back late in the day.