Financial markets in the U.S. saw another period of relative quiet last week, even with the FOMC meeting and a plentiful menu of economic data coming out both here and abroad. Let’s break down the numbers.
Stocks: The major U.S. indexes all recorded losses for the week, prompting some speculation that the market was disappointed by the inaction of the Fed. The Dow Industrials were off 2.6%, the S&P 500 2.8% and the NASDAQ and Russell 2000 more than 3%. The selling was concentrated in the first three trading days and volume on the way down was not particularly notable. Support seemed to come in later in the week as the losses were pared on Thursday and Friday, with the last trading session seeing a pickup in volume. Every S&P sector except for basic materials recorded a weekly loss, with the defensive sectors down only fractionally while the damage in energy, tech and financials was more substantial.
All 12 of the major foreign indexes we monitor finished in the red. The Shanghai composite reached another new low, and is back to levels last seen in March 2009. In troubled Europe, the DAX composite was off nearly 5% and the CAC 40 more than 6%, but both are still well above the September lows.
Bonds: Long term Treasury bond yields fell back sharply after rising over the prior three weeks. The ten and thirty year are back below 2% and 3% respectively, with the fives still well below 1%. TIPs and corporate bonds were steady, and even junk was relatively immune to the selling in equity markets. Meanwhile municipal yields fell again as market continues to bid up tax exempt bonds.
Commodities: Commodities recorded another losing week as crude oil and gold sold off sharply. After a bid drop on Wednesday, West Texas Intermediate finished more than 6% lower at $93.78. Gold fell by a similar amount, finally finding support at $1,575 – roughly the bottom of the three year trend channel. The other precious metals saw larger losses. Grain prices reached new year to date lows. Copper was down another 6% and industrial metals overall were off nearly 5%.
Currencies: The U.S. Dollar Index had a big week, finally pushing above 80 on the third attempt since coming out of the summer trading range. The euro meanwhile broke $1.30 to the downside before ending the week just 48 pips above that level. The other major currencies were all down against the greenback, with Yen putting in the strongest relative performance of the group.
The past week was brought as FOMC minutes and a variety of economic data. As expected, the Fed affirmed the status quo and gave no indication that any new policy moves are imminent. The view seems to be that the economic recovery in the U.S. is proceeding, if slowly, and with little threat of inflation. Unemployment claims data supported that view, but retail sales data from the Census Bureau and the Fed’s own industrial production numbers came in well below forecasts. On the positive side, Philly Fed and Empire Manufacturing both beat expectations, suggesting a more robust economy in the northeast.
Stocks: In last weekend’s article we detailed the convergence of the primary moving averages and current price levels on the major U.S. equity indexes. As of Friday’s close, the S&P 500 and NASDAQ had fallen below both the 50 and 200 day, and the Dow Industrials and Russell 2000 were just holding the 50 day. I am still concerned about the failure of the market to build on October’s strong move, and the lack of a “Santa Claus rally” (compare the last two years). Friday’s trading action was not particularly encouraging, as the market opened up strongly but saw the gains begin to slip away after the first hour of trading. At the closing bell, the market had gone nowhere on a surge in volume.
Market breadth is deteriorating, particularly on the NASDAQ, currently the weakest of the major equity indexes. With the NAS slipping, we are seeing weakness in tech stocks on the NYSE as well. IBM, a recent market leader, had a rough week, falling 5.6%. Fellow tech stalwart Intel (NASDAQ:INTC) fell more than 7% on big volume. Bellwether Apple (NASDAQ:AAPL), churning sideways since July, dropped another 3%.
With the market failing to generate any positive momentum, my cautiously optimistic outlook on U.S. equities had shifted down to neutral. The long positions we put on in October are all below our average cost basis at this point but, as they are long term positions in blue chip names, we’re holding. The market is struggling, and needs to firm up here, but it’s not all negative. GE, Verizon (NYSE:VZ), Merck (NYSE:MRK) and Pfizer (NYSE:PFE) are among blue chips that are acting well (disclosure: we are long PFE). However with the general weakness in global markets, falling bond yields, and a rising dollar, we’re back on the sidelines looking for a lower entry point.
(click on all charts to enlarge)
Bonds: As covered above, U.S. Treasury bond prices rallied as yields fell. The ten year yield undercut the November low, while the thirty year did not, but both are still above the early October bottom. The current level of yields for high grade bonds, in the face of slow steady improvement in the domestic economy, underscores the level of risk aversion in the financial markets. I won’t belabor the point about the longer term risk to bond purchases at current prices; suffice it to say we’re not buying.
Commodities: The CRB commodity index has returned to the early October lows around the 295 level. Commodity bulls should look for it to find support there and turn back up. My longer term view for much of this year had been that commodity funds would be a buy around 300 on the CRB. We got down to that level and saw a ~9% rally in October, but the index has given it all back. With oil seemingly unable to hold a price above $100, natural gas continuing to take out previous lows, and precious metals rolling over, leadership in the commodities could pass to the industrial metals and grains. They led on the way down, and if they can hold current levels, may signal the way back up. Copper has put in a series of higher lows, which is a positive. We are looking to enter a long position in the PowerShares fund (NYSEARCA:DBC) if the CRB turns up from here. If support doesn’t come in, it could have much farther to fall.
Currencies: After trying and failing to break above 80 in early October and again in late November, the U.S. Dollar Index finally eclipsed that mark last week. The euro slipped under $1.30 for the first time since early January before ending the week at $1.3048. The dollar continues to display an inverse correlation with equities, so we will continue to watch it. If the dollar steadies it should put a floor under the stock market, but a continuing dollar advance may be troublesome for both equities and commodities.
Disclosure: I am long PFE.