Week in Review
Stocks: The week of December 6 -10 saw a continuation of the stock market rally, but as the week wore on both price momentum and volume tailed off. Among the major US stock indexes, only the small cap Russell 2000 gained more than 1%. The S&P Financials were by far the strongest sector, rising nearly 4% for the week. In foreign markets, Korean, UK, and several European bourses also added 1% or better, while emerging markets slipped on weakness in Brazil and India.
Bonds: Troubles in this asset class continued, with yields on the benchmark 10 year Treasury rising more than 10% on the week - a notable move. TIPs, munis, investment grade: they all pulled back on the week. Only junk managed to pull out a small gain.
Commodities: Momentum here began to weaken as the bulls showed signs of exhaustion. Prices in all the major commodity groups - energy, agriculture, precious and industrial metals - dropped off in the latter part of the week.
Currencies: The US dollar index added a little under 1% to close just above the key 80 level. Notable losers were the euro, where uncertainty continues to prevail, and yen, where weakness is welcomed as a matter of policy.
The Week Ahead
Stocks: We're still in an uptrend, economic news - on balance - is still leaning positive, and there are no reasons to change from a bullish stance. However, there are three reasons I see for near term caution:
1. Market action shows momentum falling,
2. Selling into year end is not uncommon, and
3. The 10 day moving average of the Arms Index is at the lowest level of the year, suggesting stocks are overbought in the short term.
(click on charts to enlarge)
Bonds: For months commentators have been debating whether the US Treasury market was a bubble. Well, bubble or not, this asset class is shaping up to be a disaster for investors who tried to front-run the Fed after Jackson Hole. For longer term perspective, however, 10 year yields are only back to the levels following the May "flash crash." For investors who aren't traders, the real question for longer term holdings is the inflation outlook. If you accept the inflation thesis, then this is an asset class to avoid; otherwise, the rise in yields might have made Treasuries a more attractive buy. A bet against Treasuries is also, implicitly, a bet against the Fed - something that always makes be a bit uneasy.
While Treasury yields have been relatively volatile, and make for difficult technical analysis, investment grade bonds present a clearer picture, and it doesn't look bullish. The Down Jones corporate index looks like this:
Commodities: As mentioned above, commodities are losing momentum. Oil is particularly significant to the US economy, and on Tuesday it briefly traded above $90 before selling off. Wednesday's API report brought more weakness. At the OPEC meeting in Ecuador, Saudi oil minister Ali al-Naimi expressed a preference for a $70 - $80 price band. While this is no guarantee of lower prices, both technically and fundamentally it's difficult to be bullish on oil. Precious metals and agricultural commodities on the other hand, while consolidating in the short term, remain in strong up trends, but the CRB index looks vulnerable.
Currencies: The US dollar index appears to be entering a short term sideways consolidation, roughly midway between the 50 and 200 day SMAs. With little to move the currencies on the news front (always subject to change at a moment's notice), the dollar is trading more on its fundamentals, and the fundamentals look mostly positive: rising yields, developing economic growth, and at least a brief uptick in balance of trade. At the risk of further belaboring a point, we need to watch the trend in correlations between the dollar and various risk assets.
Overall, while I still lean bullish on stocks and bearish on bonds, this might be a good week to stay on the sidelines rather than initiating new positions, except for special situations like B of A (BAC).
Disclosure: Author is long a variety of equities and short Treasury bonds