It was a relatively quiet week in the markets as we move toward the end Q1 and another earnings season, though growth worries surfaced again in Europe and Asia, and dominated the headlines. Let's break down the numbers.
Stocks: After extending the rally to new high ground, U.S. equities consolidated their gains last week. The NASDAQ ended with a small gain, the S&P 500 a small loss, and the Russell 2000 was nearly flat. Among the major indexes, moves greater than 1% were posted on the NYSE Composite, down 1.1%, and the Dow Industrials and Transports, down nearly 1.2% and 2.5% respectively. The NASDAQ finished above 3,000, and the Industrials above 13,000, but the S&P gave up the 1,400 level. S&P sectors were mostly in the red, with only the two consumer sectors and the techs gaining ground on the week. The worst performance came from the energy sector, with a loss of 3%, in spite of the fact that oil was only off fractionally on the week.
All twelve of the foreign equity indexes we follow posted weekly losses, as indications of slowing economies in Europe and China triggered widespread selling. Losses in excess of 2% were seen in many equity indexes, hitting developed and emerging markets alike.
Bonds: U.S. Treasury bond yields, which had jumped the prior week, moved up further on Monday before reversing course the rest of the week, as the aforementioned economic worries brought a bid back into the market. The long bond yield closed a little above 3.3%, leaving the gap from March 14-15 unfilled. Corporate bond were relatively flat, while municipals, which had recently seen a sharp correction, enjoyed a bit of a recovery.
Commodities: Commodities were down nearly across the board. Oil prices continued to be volatile, again finding good support $105; WTI spot closed at $106.73 on dollar weakness. Natural gas slipped back under $2.30. Gold saw more weakness but reversed at $1625 to close back above the $1,660 level, very nearly even on the week. The industrial metals index turned down, breaking the 50 day MA and re-testing the February low.
Currencies: The U.S. Dollar index fell again, as the euro rose to finish well above $1.32. Japan's oversold Yen moved up to 82.33 after going as low as 84, while the commodity sensitive Aussie and Canadian dollars pulled back. The biggest British Pound was up fractionally, but closed shy of $1.59 after the announcement of the controversial proposed budget.
The week's U.S. economic calendar was light, and dominated by real estate related data. The overall takeaway was that the recovery in that sector is having trouble getting under way, as most gauges of activity fell short of already low expectations. The market was more interested in economic news from abroad. Eurozone PMI fell again in March and is now solidly below 50, suggesting an increasing probability of recession in the stronger economies such as Germany, where manufacturing output has contracted (some European economies are already in recession). Chinese preliminary PMI as reported by HSBC also contracted, falling to a four month low and there as well, sits solidly below 50.
Stocks: U.S. equity markets have retreated, as we suspected they might, toward their 50 day moving averages. Among the major indexes, only the Dow Transports, feeling the effects of high oil prices, broke that mark. Volume contracted on the pullback, but market breadth slipped as fewer stocks are participating in the ongoing rally. In fact a number of breadth indicators are showing signs of rolling over, indicating that we may have reached a short term market top. This is a healthy and even welcome development for a market that had seen an almost continuous advance over the prior 13 week period. Overseas markets were generally much weaker on the aforementioned economic data that show business conditions deteriorating in some of the major economies.
My outlook for this week is cautious, as the market appears to need more time to consolidate its gains and perhaps work off some excesses that have built up over the 13 week run. Over the longer term my view on stocks is still constructive, as the U.S. economy continues to show signs of recovery from the deep recession. The plan is to focus on leading stocks and sectors, areas of the market showing the best relative strength on any pullback, to add to the portfolio. As the overall outlook is bullish, we are planning to buy the dips. Here again, however, the entry timing has significant impact on returns so thoughtful planning is warranted.
(click on charts to enlarge)
There is no "honorable mention" stock for this week, as none have made a distinct impression, though I will mention one name that I have been looking at recently: IT service provider Cognizant Technology Solutions (NASDAQ:CTSH). The company has been creating steady revenue growth and has a healthy balance sheet, and sports a P/E that is not unreasonable for a tech growth name. However the stock has not been able to close above 77, a level it first hit in the October rally, and again has recently run into resistance at that level. While I like the fundamentals, a buy here would be speculative and, to me, represents a poor risk/reward profile. I am looking for either a successful test of the 50 DMA around 72, or new high breakout on volume.
Bonds: After the largest rise in yields this year, the bond market settled back down, thanks in part to the lower global growth outlook. The long bond recovered a considerable part of the ground it lost the previous week, after rising to 3.9%, and finished just above 3.3%. However I think real damage has been done, and barring some serious global economic worries - think Spain here - the outlook for bonds in general and U.S. Treasuries in particular is not very compelling. Note that the 50 DMA line on the long bond yield chart is now upward sloping, which simply presents, in visual terms, the trend that is in place. Now, to be sure, yields are coming up from very low levels which were discounting recession or worse, so we are just moving back toward something more like "normal" - to the extent that there is such a thing. As I have stated several times, I am not looking for a bond market debacle here, just waiting for a more opportune time to put money to work. The recent correction took us part of the way there, but my outlook is for more to come before bonds are a buy.
Commodities: The week's economic news was hard on commodities. It has been some time since I commented on the CRB Index, but note that it has fallen below the the 50 DMA, and relative strength is also below 50 as of Friday's close. This comes as oil remains in the trading range of $102 - $110 that I have identified as a "new normal." It underscores the general weakness in commodities outside crude oil, as well as suggesting that financial markets are adapting to prices above $100 going forward.
Gold settled down after several weeks of high volatility, and there seems to be a real tug of war between buyers and sellers in the 1,650 -1,660 area. It remains beneath the 200 day moving average, but above the bottom of the three year trend channel. Once again last week my finger was on the trigger to close out our positions, and once again buying interest kept us long, as the U.S. dollar pulled back.
Currencies: Somewhat surprisingly, the market bid the euro up, and the dollar down, after the weak eurozone PMI data. Also playing a role in the falling dollar index was the sharp rise in Yen, coming after a prolonged fall in the Japanese currency. The currency moves on Friday coincided with a bid for commodities and gold. The action seems rather suspicious, but with yield spreads in Europe widening, and U.S. yields pulling back, perhaps it is understandable. Whatever the case, the dollar index remains under the key 80 level and has come back under the 50 DMA. This contributes to a positive outlook for commodities and should help to keep the equity and commodity consolidation from turning into a more serious downdraft.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.