On the economic data alone, or the press release following the FOMC meeting, last week was not particularly remarkable. It was in most regards more of a continuation of the trend that has been in place for some time. And yet it seemed that there was a perceptible turn in the markets, reflected in some of the commentary, as though we are entering a new phase and leaving the old one behind. Is this perception or reality? Let's break down the numbers.
Stocks: U.S. stocks broke out of a month long period of lackluster trading with a strong and broad advance. All of the major equity indexes except the Russell 2000 advanced more than 2% for the week, the small caps came in at 1.6%. Volume picked up, and though it was not very heavy, it was the most we have seen in this year of low volume trading. One of the notable characteristics of the week's action was that three of the indexes crossed "milestone" levels: the Dow Industrials finished above 14K, the S&P 500 above 1,400, the NASDAQ composite above 3,000. Inside the S&P sectors, financial stocks led the way with a weekly gain of nearly 6%, tech and industrials added more than 3%, and only the utilities posted a loss.
Nine of the 12 foreign equity indexes we follow posted weekly gains, with the strongest moves coming from Europe, where the apparent resolution of the Greek crisis bolstered confidence. Germany's DAX composite, which had been unable to break through resistance at the 7,000 level in recent weeks, powered ahead with a 4% gain to close at 7,157. Likewise the CAC 40 in France, stalled at 3,500, gained 3% to finish just shy of 3,600 at the close.
Bonds: The somnolent U.S. Treasury bond market finally stirred last week after the FOMC meeting, with yields at the long end of the curve rising to levels not seen since October. The long bond yield closed above 3.4%, which we haven't seen on a closing basis since August, before the Fed implemented its "operation twist" program of buying longer dated paper. The ten year finished just a few ticks under 2.3%, the five year above 1.1%. Rising benchmark yields pushed down bond prices throughout the market: TIPS, municipal and corporate paper all sold off to some degree.
Commodities: Oil prices pulled back for most of the week on a rising dollar, but once again buyers came in below $105, and WTI spot closed above $107 as the dollar pulled back. Natural gas appeared to put in a bottom and finished above $2.30. Gold fell hard after the FOMC and fell back below the 200 day MA, but closed above what some analysts see as a support level at $1,660. Copper and the industrial metals index were off fractionally, while the agriculture index rose nearly 3.5% to finish just shy of the 450 resistance level and the 200 day MA.
Currencies: The U.S. Dollar index saw volatile trading before closing the week below 80 and the 50 day MA. The euro rose to just shy of $1.32 and the 200 day, and the pegged Swiss Franc followed suit. Japan's Yen bounced slightly from extremely oversold conditions. The Aussie and Canadian dollars were both up fractionally against the greenback. The biggest mover among the major currencies was the British Pound, gaining .87% against the dollar.
The week's U.S. economic news brought another round of data suggesting a slow recovery in progress. The numbers weren't dramatic, and as stated in my opening comment, nothing that would have surprised any observer who was paying attention. Likewise, the press release following the FOMC statement really amounted to "steady as she goes" but for whatever reason, the market responded as though it saw very good news.
Stocks: In last weekend's article we noted the bull market's third birthday and called the recent trading "the picture of stalled momentum." Thanks - presumably - to the Fed, the weekly charts show like a new breakout, but the only real upside momentum came on Tuesday, as the rest of the week consolidated that day's gain, and we saw some profit taking on Thursday and Friday. Yet here we are at SPX 1,400, territory not seen since May-June 2008, during the headfake rally after the Bear Stearns collapse which was closely followed by the gut wrenching plunge we all vividly remember. Where do we go now?
Although market breadth has looked fairly solid on the way up, the shorter and longer term McClellan oscillators had both been picking up on divergences on both the NYSE and NASDAQ. Simply put, these indicators suggested that fewer stocks were participating in the market advance. However they appear to have bottomed, and in the case of the NASDAQ, turned back up. In short, I like the way market breadth looks here, and I like the volume, so I can't see a reason to fight the tape, which is seldom a good idea. It seems to me there is more upside ahead. That is good news for those of us who have been long but there presents a dilemma for those who stayed on the sidelines. The market has been periodically making advances and consolidating them , without any significant corrections, since mid-December. That is a long run and it would be no great surprise to see a correction at any time. The SPX could easily come back to the 50 day MA (~1,350) without violating the uptrend.
The normal fear is to get in late and take a loss. Even a pull back to the 50 DMA is only a 3.5% drop but a loss is a loss. The simple answer is don't take a loss. If you enter a position and it immediately goes against you, close it and get back in later. Another approach, which I personally prefer, is to take partial positions and build on them. There are more sophisticated strategies such as selling puts at levels that represent more comfortable entry points, but the risk there is that you have nothing to show but the option premium, and lose out on a further market advance. My overall point is that the bull is running and I don't think this is a good time to be out of the market. Timing entry is another matter and everyone must make the choices appropriate to their own investment goals.
(click on charts to enlarge)
In keeping with my recent practice of giving "honorable mention" to a single stock that has attracted my attention during the week, this week's spotlight goes to Research in Motion (RIMM). It may be difficult to call this an honorable mention, as the stock has simply been awful over the past year, and for legitimate business reasons. The question is, at what price does the stock represent good value? This question has inspired much debate, a fair bit of it taking place right here at Seeking Alpha. Good points have been made on both sides, pro and con, but let's take a look at what the market seems to think. The stock was at $70 just over a year ago, but a large percentage of the outstanding float has changed hands under $35, and selling pressure has fallen off as the stock moved under $15. We see a divergence in the MACD and relative strength which show price support, and the Chaikin Oscillator shows money flowing back into the stock. Aside from the chart, what interested me in RIMM were my own anecdotal observations. I know what the market share numbers are, but everywhere I go I still see quite a few Blackberries in hand. The value of the stock is surely something higher than zero. Is it more than the current price? Is there a good trade here? I haven't decided yet.
Bonds: In last weekend's article I wrote "the FOMC meets this week, but any development significant enough to stir the Treasury market from its slumber is a long shot." It's hard to be more wrong when it comes to the bond market. Not that the FOMC, as noted above, did or said anything remarkable, perhaps it's what they didn't say, coupled with the economic data, that led investors and traders to bid the market down. In any case, we took the sharpest losses we have seen in some time. Popular bond funds had a rough week: the iShares long bond fund (NYSEARCA:TLT) down nearly 4%, their intermediate fund (NYSEARCA:IEF) nearly 2% - an entire year's yield for both of them. The investment grade corporate fund (NYSEARCA:LQD) was off 1.7%, while the popular broad market iShares (NYSEARCA:AGG) and Vanguard (NYSEARCA:BND) funds fell .8%. There is still no reason to be too excited about an imminent debacle in the bond market, so let's not get ahead of ourselves buying shorts and so forth.
Even so I have been cautioning investors "that there are better places to put money to work" for months now. Even after this correction, trailing 12 month yields on these funds are not particularly attractive: 2.83% on AGG, 3.43% on TLT, 4.32% on LQD. In my view the prices are not yet where we would be tempted to put money to work. Yields above 4.5% on the TLT or 5.5% on the LQD would be more attractive. Until then we still have the same dilemma, looking for reasonable yield without taking unreasonable risk.
Commodities: Oil seems to be settling into a trading range in the $102 - $110 area. What is noteworthy about this range is that we have what appears to be a "new normal" above $100 for the first time. Also noteworthy is that the stock market appears to be OK with it, and the bond market - despite a good bit of an adjustment - has not thrown a tantrum. We'll see where it goes, but if indeed the price of oil remains around this range for any length of time, we should expect the markets to adapt. Above $110 the picture begins to change again. Much will depend on the U.S. dollar as well, and there is a difficult read. More on that below.
Gold was again sold off after Fed commentary, though not quite as sharply as in January, but it failed to hold the 200 day moving average/long term trend line. I had my finger on the trigger to close out our positions with a modest loss, but the small bounce Thursday and the possible reversal on Friday kept us in for now. Here again we are watching the dollar to get some feel for direction. Agriculture had a decent week, and we saw a strong price and volume move in shares of Canadian fertilizer producer Potash Corp (NYSE:POT). This follows a similar move in January, and the stock has moved onto my watch list.
Currencies: As mentioned above, the U.S. dollar index had a rather volatile week of trading, and it's difficult to get a read on short term direction. In the longer term I am a dollar bull, but last week we saw a violation of the support level at 80 and a so far successful test of the 50 day MA. We also saw the euro test resistance at $1.32 and fail. Marc Chandler has noted the drop off in euro short positions, so we are likely to see another test of that level in the coming week. With the Yen also bouncing from extreme oversold levels, we could see more downward pressure and another test of the 50 DMA in the short term. This should be a positive for our equity and commodity positions.