Markets closed out the month of February by making a stand at key support levels. Sellers had pressured stocks, but buyers stepped in to preserve the uptrend, encouraged perhaps by positive economic data. Let's look at the numbers.
Economy: The last week brought good economic news in a number of areas. Q4 GDP was revised up from slight contraction to slight expansion - a revision of only 0.2% overall, but positive nonetheless. Housing saw a fairly robust Case-Shiller 20 city index number, as well as an upside surprises in new home sales and pending home sales for January. New home sales were well above the 400k mark. Unemployment was another positive area, as the prior week's claims came in at 344k, when the forecast was for over 360k. The February ISM index and Chicago PMI also came in better than expected, and the Michigan consumer sentiment continued its upward trend.
The consumer presents something of an odd picture, as we also saw the ongoing trend of lower personal incomes (remember the expired tax relief) and higher personal spending in the week's data releases. This suggests consumer credit is expanding, which we should be looking for in future data. On the negative side, we saw an unexpected contraction in January construction spending, as well as a drop in durable goods orders. However the drop in durable goods was due largely to an expected fall in aircraft; ex-transport durable goods were actually up nearly 2%.
Stocks: The major US large cap indices were all positive for the week, recovering ground after a sharp Monday selloff. The Dow Industrials closed February above 14,000, the S&P 500 above 1,500, and the NASDAQ above 3,150. The small cap Russell 2000 finished the week with a fractional loss, but held support at 900 during the selloff. All of the major indices held key support levels in the correction, and the Industrials and Transports both went to new highs on Friday.
In sector action the telecom stocks, led by a nearly 3% gain in Verizon (VZ) shares, and the recently weak consumer discretionary stocks, led by a better than 5% advance by Home Depot (HD), paced the field. The financials brought up the rear, as Citigroup (C) and Wells Fargo (WFC) both sold off more than 1%. Global markets had a generally good week, as nine of our twelve country indices posted gains. Highlights include Japan's Nikkei and the London FTSE index going to new multi-year highs, Brazil breaking a long run of weekly losses, and Shanghai bouncing off near term support at 2,300.
The recent correction is something we have been expecting, and to this point it has not broken the upward trend in US stocks. Some of the trading action over the last few weeks has been a little unsettling, and I'm not certain we're out of the woods here, but let's not overthink it. The market just took a hit and didn't buckle. That is a positive. Here are some of the stocks that caught my attention over the last week:
- Apple (AAPL) broke near term support and fell below $440 Friday - not good
- Dollar Tree (DLTR) broke strongly out of a four month range on heavy volume, as management shared an optimistic outlook on the impact of fiscal policy on its business
- Intel (INTC) shares had a good week after the announcement of the chip giant's alliance with Altera (ALTR); the stock looks like it is ready to try to break higher - a move above $21.50 would be bullish
Bonds: In recent weeks I have been suggesting that bonds had found a short term bottom. Last week's action lent support to the idea. The ten and thirty year Treasury yields continued to back off from recent highs, with the ten year closing the week well under 1.9%, and the long bond coming back under 3.1%. The five year note closed under 80 basis points.
As a result, several popular bond funds enjoyed very good weeks. The iShares long term Treasury fund (TLT) rose more than 1.82% as over 47 million shares traded - the highest volume in several months. Whether this is a short term reprieve or the start of a new advance remains to be seen, but I continue to see bonds as unattractive at current yields. The economy continues to grow, albeit slowly, and it's difficult to see much upside for fixed income in any variety.
Commodities: The overall trend in commodities continues to be down, as the S&P GSCI commodity index broke its 200 day moving average Friday, and is now in negative territory for the year to date. The April WTI crude oil contract, which was challenging $99 just a couple of weeks ago, traded just a few cents above $90 Friday. The contract now sits at near term support.
Gold attempted to rally earlier in the week, and briefly rose back above $1,600, but gave back all the gains and closed fractionally lower. Silver and copper both also went to new lows for the year. Among the few bright spots in the commodities were the grains, and live cattle, all of which made solid moves off of recent bottoms, but several of the softs made new lows. All told, the commodities continue to look weak. We could see short term bounces in some areas, but the larger outlook is poor.
Currencies: The surging dollar index broke higher after consolidating near the top of its trading range earlier in the week. Friday had the look of a short term reversal as volume dropped off and the dollar could not hold the intra-day highs. The euro meanwhile traded under $1.30 for the first time since early December, finally closing the week at $1.302. Likewise the British pound briefly traded under $1.50 for the first time in nearly three years. All of the other currency majors except the yen traded lower against the greenback as well.
Given the political theater surrounding the fiscal "sequester" this is instructive. The US economy has continued to expand - if ever so slightly - in the face of ongoing policy incompetence (or perhaps negligence is a better term), and remains one of the world's better performers among developed nations.
- The stock market has weathered its first serious test of 2013 and, so far so good - but we need to see the small caps get on board, as well as new highs on the S&P 500
- Bond yields continue to look steady; aside from that, there isn't much of note going on in fixed income
- Commodities may offer a tradeable bounce at current levels, but don't stay in too long - the larger trend doesn't look attractive
- The dollar is likely to be tested in the coming week after breaking out, and the outcome is likely to give us some insight into the direction of markets for the rest of February
Good luck, and good trading.