The much anticipated meeting of European leaders in Brussels did not produce a comprehensive resolution to the region’s sovereign debt crisis, but it did enough to set off a vigorous rally in risk assets. Let’s break down the numbers, and cast a look at the road ahead.
Stocks: After choppy trading ahead of the Brussels meeting, U.S. equity markets moved up to record a fourth consecutive week of gains. The Dow Industrials, S&P 500, and NASDAQ all closed above their 200 day moving averages. S&P sector action showed large recoveries in the stocks that sold off hardest during the summer correction: materials posted a gain of nearly 8%, financials 7%. Tech, industrials and energy all added between 4 and 6%, while the defensive sectors recorded smaller gains. The small cap Russell 2000 moved up nearly 7% but remains below the 200 day. Volume was healthy.
Global markets participated in the rally. The Euronext 100, as one would expect, advanced better than 4%, but the largest gains came from emerging markets: Russia up over 10%, Brazil nearly 8%, India and China more than 6%. We saw gains of 4 to 5% in Toronto, Sydney, Seoul and Tokyo, and nearly 4% in London.
Bonds: Treasury yields across the curve continued to move up off the summer lows. The five, ten and thirty year bonds are all above their 50 day MA’s as flight to safety trades are unwound. On the other hand, yields on corporate paper of all grades fell over the week, particularly on the more speculative grades. There was not much action in the TIPs and Munis; prices for both are off the current year highs but both trade in a fairly narrow range.
Commodities: Commodities recorded their third up week in the last four, with the CRB index advancing nearly 4%, thanks largely to a 7% rise crude oil, which moved up to touch its 200 day MA before closing at $93.63. Prices were weak nearly everywhere else. Copper jumped more than 14%, nearly erasing the summer swoon that brought it all the way down to $3. The grains posted a much smaller gain, while the meats, sugar and coffee all sold lower. All of the precious metals posted strong gains.
Currencies: The U.S. Dollar index broke both the 50 and 200 day MAs, falling back into the trading range it had broken out of two months ago. All of the major global currencies gained against the greenback.
The past week brought us a mixed bag of U.S. economic data, but the big driver was the European situation. The domestic picture was inconclusive and somewhat contradictory. New home sales exceeded consensus forecast, but Case –Shiller was lower. Conference Board consumer confidence came in well short of expectations, but Michigan consumer sentiment was better than expected. We also saw a continuation of the trend of personal spending outpacing personal incomes. Perhaps most significant, durable goods orders beat the consensus number.
Stocks: With the most recent advance, the S&P 500 has nearly all of the ground lost in the correction that began in the last week of July – a period of 13 weeks. With one trading day left in October, the market is on track to record its best month in nearly a quarter century. At this point the market looks overbought in the short term – the NYSE McClellan Oscillator hit the mid 90s on Tuesday and Thursday – and on the intermediate term summation index. The oscillator and summation index on the NASDAQ look similar to the NYSE.
(Click on all charts below to enlarge) After calling the market turn on October 4th, and going long several attractively priced stocks in the weeks since, our outlook on equities remains bullish. However the easy money coming off the bottom has been made, and in the short term the market may have gotten ahead of itself. We still like the prospects for equities going into the end of the year, and still have a few more stocks on our watch list that will eventually be added to the portfolio, but a short term pullback or consolidation at current levels would come as no surprise. For this reason our outlook for the coming week is to hang back and watch the price and volume action, with an eye on the action in bonds and the U.S. dollar, before committing more capital.
Bonds: Treasury bond prices have corrected in recent weeks, and may be putting in a short term bottom at current levels, but we’re still not buying. We’re also not selling short – the ProShares short ETF (NYSEARCA:TBT) has made a 25% move off the bottom and, while longer term prospects may still be reasonably good, most of the gravy is gone in the short term. It will be more difficult to make money in that trade from here. Corporate bonds also look overbought in the short term: the iShares investment grade (NYSEARCA:LQD) and junk (NYSEARCA:HYG) funds both made new highs last week. REITs are also moving into overbought territory; my article two weeks ago mentioned that we liked REIT prices at those levels, but we have seen a 10% move since then, so this is another area where an investor now has a more difficult decision about choosing an entry point.
Commodities: The developing slump in the U.S. dollar has fueled a rally off the bottom in commodities. At this point it seems that our long term outlook for a bottom and entry point at 300 on the CRB index was valid. The index is now more than 8% above that level, so this is yet another market where we see a short term overbought condition and a more difficult read on an entry point. Technically, the CRB also presents an intact downtrend, with a series of lower highs and lower lows since April. My current position is to look for a pullback on the CRB that makes a higher low, as a signal to go long.
Currencies: We noted above that the U.S. Dollar index has broken below the primary moving averages and moved back into its previous trading range. After sharp declines on Wednesday and Thursday, the index seemed to find support on Friday at 75. With strong support at 74 and little new information expected to come our way on the global economy and financial system, it is difficult to see a catalyst for a move much lower. My suspicion is that this will cap the rallies in risk assets near current levels for the short term. On the other hand, there aren’t many reasons to believe the dollar will move back up in the near term. After three months of dramatic moves in the markets, we may be due for a relatively quiet period in the coming weeks.