The holiday week in the U.S. saw a strong rally in risk assets, after a steep post-election correction, which gave bullish investors more reason to give thanks. Markets worldwide followed to the upside in a broad global rally. Was this a short term bounce or a year-end rally? Time will tell, but let's see if the data shed any light.
Stocks: The major U.S. equity indexes rose between 3.3 and 4% during the short week. Much of the gain came on Monday, but the week ended with a strong price move on "Black" Friday, with the short session ending with a sharp advance into the close. Volume was predictably light. All but the NASDAQ ended the week back above their 200 day simple moving averages (but the NASDAQ did top the 200 EMA).
All but one of the S&P sectors finished in positive ground, with only the utilities posting a loss. Gains of better than 4% were recorded by tech, consumer discretionary, and basic materials. The Dow transports kept pace with the industrials.
All twelve of our single country foreign indexes posted gains for the week, led by Germany's DAX Composite and France's CAC 40 with advances of better than 5%. Hong Kong's Hang Seng index put together a solid gain after pulling back from a new year to date high over the previous two weeks. Japan's Nikkei broke out of a six month trading range on another sharp drop in the yen.
Bonds: U.S. Treasury yields broke a four week slide, with the largest percentage move coming in the five year note. The benchmark ten year note still closed to yield under 1.7%, with the long bond at 2.829%, as thirty year mortgage rates moved to yet another new low. The Fed's program to revive the moribund housing market is clearly showing. Yields on investment grade corporate bonds followed Treasuries to the upside, but the lower grade yields fell as junk was caught up in the risk rally, reversing a one month trend of expanding spreads. Municipal yields also fell as investors reposition ahead of year end in anticipation of changing tax rules.
Commodities: It was a choppy week of trading for most of the commodities, but the precious metals made notable moves, with both gold and silver posting strong gains and topping their 50 day moving averages Friday. WTI crude opened with a solid move up, but ran into resistance just below $90 and its own 50 day, closing the week at $88.24. Natural gas on the other hand broke out to new high ground at $3.90. Copper, like oil, made its move on Monday with the broad risk rally, but could go no further. Likewise the softs. The grains continued to drift sideways with a slight downward bias, which they have done since the drought-fueled summer advance.
Currencies: The U.S. dollar index pulled back sharply Friday, closing at 80.19, giving up the 200 day in the process. The oversold euro rallied to 1.297, ostensibly on the expectation of the latest attempt to "save Greece," or perhaps it was the unexpected gain the German business confidence index. The euro/yen cross rose to its highest level since April, near 106.9. Sterling, the aussie and the loonie all advanced smartly against the falling greenback. All three saw nice bounces off their 200 day moving averages.
The latest round of economic data brought yet more signs that the housing market is coming off the bottom. Both housing starts and existing home sales beat consensus expectations; October housing starts were at the highest reading in four years. Initial and continuing unemployment claims also provided an upside surprise. Black Friday by most accounts seems to have been a good one for retailers. Fear of the "fiscal cliff" continues to dominate the headlines, but the economic data is more constructive.
Stocks: The post-election selloff was commonly attributed to politically driven fears such as fiscal and tax policy, but I have been noting in articles for weeks that the softening earnings and revenue outlooks from the corporate sector have been the real concern. We saw more of that last week, of course with Hewlett Packard's (HPQ) latest debacle, but also with John Deere (OTC:DEER). In that context, the October - November correction looks like a re-pricing of a market that had gotten a little ahead of itself coming off the June low.
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The previous Friday looked to me like a reversal day, as I noted in last week's article, when I called for a tradeable bounce. For those who put stock in technical indicators, note on the chart below that the correction went just beyond the 61.8% Fibonacci retracement of that move from the June low to the September high. We did some buying at the open Monday, and so far have been pleased with the results. Friday's close at the highs, even on the anemic volume of an abbreviated trading day, was encouraging. The coming week is likely to see a test of resistance in the SPX 1,420 - 1,430 area. A successful push through that price band should see a run toward the highs by year's end. All in all, my outlook is modestly bullish to close out 2012.
Bonds: Bond yields continue to chop around in a range, with the ten year Treasury note yield moving in the 1.55% - 1.85% band. Aside from the recent tax driven run up in municipals, which appears to have largely run its course, there is very little going on in the bond space that looks attractive. It is very difficult to find any place to put new money to work here.
Commodities: After basing for three weeks, the S&P GSCI commodity index broke out of a two month down trend last week, led by the precious metals. Gold touched the 200 day EMA on November 5th and reversed up, and broke resistance at 1,740 Friday. With the dollar correcting, we will see whether the commodity rally has legs. Although we maintain a long position in gold, I am still not wildly bullish in the longer term, but so far what we have seen is encouraging. Unless the dollar breaks down hard, which I think is unlikely, it will not be easy going.
Currencies: The dollar index is back to near term support, and in danger of falling back into the range between 78 and 80, where it has so often returned in recent years. The euro is again near short term resistance at $1.30. Elsewhere, the yen looks extended to the downside, but we are likely to see re-test of 84 on the dollar before year's end. With the dollar serving as something of a proxy for the safe haven trade, and the euro a proxy for the risk trade, it will be interesting to see what the coming weeks bring. In the short term, look for continuing dollar weakness to give legs to the risk rally.