The post-election bearish trend in the U.S. financial markets continued last week, as we saw U.S. equities post a fourth consecutive weekly loss. However by week's end there were glimmers of hope.
Stocks: The major indexes were all down for the week, with the Russell 2000 taking the worst of it with a drop of nearly 2.3%. However we did see what looks like the beginning of a short term reversal. Breaking down the week's trading, Tuesday saw a rally attempt on low volume that failed intraday, followed by another sharp selloff Wednesday on increased volume. Thursday's trading was largely inconclusive. Friday morning the market traded lower again, but a heavy buying surge came in before noon. After a small mid-afternoon pullback the market pushed higher again, closing near the high for the day.
The S&P sectors were all off for the week, with the industrials, materials and tech sectors off more than 2%, and the health care and consumer discretionary stocks at the top of the table. For Dow Theory followers, the transports confirmed the bearish signal in the industrials by undercutting the September low.
In global markets, eleven of the twelve single country indexes we follow were off for the week, the lone exception being Japan's Nikkei. Japanese shares rallied on a big drop in the yen, as news of a sharp contraction in the Japanese economy led to speculation of policy easing. Elsewhere, markets appeared to join in the growth fears that have driven down share prices in the U.S. Brazil's Bovespa was off more than 3%, with Germany's DAX and the London FTSE index not far behind. The Shanghai composite, which recently had been showing sign of putting in a bottom, made a new low on a weekly closing basis.
Bonds: Bond yields were generally flat to slightly lower on higher grade paper. Municipal yields, which fell after the election, backed up slightly. Also rising were junk bond yields, as historically narrow spreads continue to expand a bit.
Commodities: WTI crude prices drifted higher in choppy trading, closing the week just under $87. Gold on the other hand drifted lower after failing the test of the 50 day SMA the prior week, but remain above $1,700. Copper and the industrial metals stabilized after a two month slide. The grains continue to trade sideways.
Currencies: The dollar index traded in a very narrow range over most of the week, but advanced on Friday. The euro came off support around $1.27 but could not build much in the way of momentum. Sterling bounded off the 200 day SMA at $1.585. The Aussie and loonie slid against the greenback, the latter falling below par, both falling below their 200 day SMAs. Finally, yen, as noted above, moved much lower, reaching its lowest level since April.
Economic and earnings news was not terrible, but not particularly encouraging. October retail sales contracted slightly more than expected, with ex-auto sales flat. PPI, both core and headline, came in negative, when a slight positive was expected. Perhaps most concerning, industrial production and capacity utilization both contracted, adding to concerns about a weak economy. In earnings news, Dell posted very weak results that point to continuing weakness for the PC sector, while retail giants Wal-Mart (NYSE:WMT) and Target (NYSE:TGT) guided in opposite directions - the former lower and the latter higher.
Stocks: We mentioned above that there was an apparent turn in the market Friday. The outlook for U.S. equities presents different pictures, depending on the time frame we look at. This is presented visually in the charts below. Without going into an extended discussion, here is my take: I think we have a short term tradable bounce on our hands. Longer term, we're not out of the woods yet. That is the way I plan to play it.
The week ahead will see light volume with the holiday in the U.S. I will be looking to put on a long side swing trade but will be watching it closely. In the short term, we will see resistance at the 200 and then the 50 day moving averages. In the longer term, we really need to see moves above the September highs on the major indexes to give us the green light for getting fully invested. Whether that happens in anyone's guess; as always we'll let the market action guide our positioning.
Bonds: In recent articles I have mentioned that we were looking at the big correction in utility stocks as an opportunity to roll out of some of our fixed income positions in the income portfolio. Last week we did exactly that, selling out of some shorter duration paper and buying a couple of blue chip utility names that offer attractive yields and good risk/reward profiles. If we can get some capital appreciation in the deal, so much the better, but we're in it for the dividends. In the bond space, the expanding high yield spreads could get us to trade down on the quality spectrum, but it's still much too early in my view. That correction probably has further to go.
Commodities: The commodities for the most part seem to be range-bound and looking for some direction. Until there is some indication of which direction, I don't see much to do here. With the dollar in confirmed uptrend, caution is the word of the day. The PPI numbers we saw, the recession in Europe, contraction in Japan, and the transition in China all suggest that it may be some time before we see bullish signals here.
Currencies: The U.S. dollar index is tentatively on the move again after consolidating the move above the 200 day SMA. Longer term the dollar trend is up, and it is supported by the fundamentals. The U.S. economy, for all its troubles, remains among the world's strongest by most measures, and there is reason to think that we will see a workable solution to the "fiscal cliff" scenario. Not likely an optimal solution, but a workable one.