The European summit this past week was credited with setting off a powerful advance in the financial markets, as investors bid up shares on the final day of a difficult quarter. Will this mark the start of a larger advance, or will the enthusiasm prove, as it has so many times before, to be short lived?
Stocks: U.S. equities opened the week sharply down, then saw choppy trading through the middle of the week. On Thursday, as the European summit closed its first day, stocks rallied in the afternoon. Friday's trading opened with a big move up, the S&P 500 gaining 2% in the first fifteen minutes of the session, and continued to advance into the close. When the closing bell sounded, the large cap index had gained 2% on the week and 3.7% for the month of June, while the small caps added 3% and 4.8% respectively. However the impressive performance was not enough to salvage the quarter: the S&P ended Q2 with a loss of more than 3%, while the small caps shed nearly 4% and the NASDAQ dropped 5%.
Four of the nine major S&P sectors recorded gains of at least 2% on the week, with the energy stocks leading the way on the back of Friday's tremendous move in oil prices. In general the more aggressive sectors led, but impressive gains were recorded across the board: even the laggard tech sector picked up .85% on the week.
The bullish wave extended around the globe, as ten of our twelve major foreign indexes recorded weekly gains. The losers were Brazil's Bovespa and the Shanghai Composite. Even with Friday's advances, the steep losses earlier in the week could not keep those indexes out of the red.
Bonds: The U.S. bond market was relatively unshaken by the commotion; yields on the five and ten year Treasury notes actually fell on the week, while the long bond yield rose only slightly. The fives remain under 75 basis points, the tens under 1.7%, and the long bond under 2.8% -all of which represent near term resistance. Corporate bonds continued to advance, with the Dow Jones corporate bond price index reaching another new high. Junk bonds in particular were bid up on the newly found risk appetite; several popular junk ETFs broke out to new highs Friday. Munis were nearly flat, while TIPS posted a small rise in yield.
Commodities: It was a big week for the deeply slumping commodities: oil made a 8% move Friday to close just under $85. Natural gas, which has been coming off the April bottom with some strength, did not advance as sharply, but did break the January reaction high above $2.80. Gold, which had been slipping again earlier in the week, rallied to close near $1,600 - just under the 50 day moving average. Copper also put in a strong week. One of the most impressive moves came from the grains, where the heatwave in the heartland drove the price of wheat up more than 12%, and corn more than 14%.
Currencies: We also saw big moves in the currencies, as the very crowded euro short trade was hammered by the surprisingly positive developments coming from the European summit. The U.S. dollar index came all the way back to the technical support level of 81.50, while the euro approached resistance at $1.27. All of the majors gained against the greenback, but the Yen had a distinctly weak tone, as it failed to hold the 50 day moving average. Most of the other majors also remain below their longer term moving averages as well, though several are in position to challenge them.
Last week's economic data brought some key indicators on the health of the U.S. economy. There was more evidence that the moribund housing market is coming off the bottom. Durable good orders for transportation equipment surprised to the upside, though non-transport related orders disappointed. Chicago PMI slipped a bit, but remains above 50. Unemployment data continues to trend the wrong way, and measures of confidence and sentiment are moving down as well. Of course the big, market moving news was the euro zone steps toward placing all member nations' banks under the direct supervision of the ECB.
Stocks: We are starting to see an interesting trading pattern develop in the U.S. markets. In each of the last three weeks, volume has surged on Friday, with price moving to the upside. Last week's close finished just above the short term resistance level of 1,360 on the SPX, and above the 50 day MA as well. It was the first weekly close above the 50 day since April, when the market was just starting to break down. Technically, the market appears to be in decent shape here, although it reads overbought in the short term with the McClellan oscillator back near +80.
Fundamentally, is a different story. We are seeing an erosion in earnings estimates as economic conditions deteriorate, particularly in Europe. One of our core holdings, Ford Motor (F), last week issued a very negative guidance, citing global business conditions. Ford is among the U.S. firms with a large European exposure that are being adversely impacted.
However there are still a number of stocks that are acting well even in this environment. A stroll through the charts of several blue chips reveals a number of breakouts: GE, which is back in the vicinity of the February 2011 top. Kraft Foods (KFT) also made a big move, as did Conagra (CAG) and Potash (POT), which have powerfully come off bottoms over the last couple of weeks. Other notable upside movers were in the financial and energy sectors.
Overall, I still see this as a choppy market typical of summer trading action, and one that continues to be driven more by events and news than by fundamentals. I am still a bit wary of jumping in, even with a number of my favored energy stocks beginning to move. Actual business conditions are not great, if not terrible either, and we have seen these types of reaction moves to European events reverse quickly. With a short holiday week ahead in the U.S., we are likely to see light volumes and possibly wide price spreads. My plan is to take the week off, from a trading perspective, and see where we go as July progresses. Historically July can be a difficult month for stocks. I am optimistic in general, and did like seeing a strong price move on volume, but need to see a little more before committing capital here.
Bonds: While the winds blow here and there in the financial world, the bond market remains ever serene. Although we did see some movement to the upside in Treasury yields last week, there remains little indication that rates will come off very low levels any time soon. The longest lived and most hated of bull markets continues to run. We've heard it all: bonds are terrible, living on borrowed time, a disaster waiting to happen. Perhaps it's time again to take a look at my 25 year chart of the ten year Treasury note yield. No sign of concern there. While eschewing Treasuries in favor of higher yielding paper, I am running an income portfolio that is almost entirely invested in fixed income, and sleep well at night.
Commodities: With the dollar pulling back and commodities deeply oversold, we saw the largest weekly gain in the CRB index since 2009: 6% on the week and 4.5% on Friday alone. Some of the individual numbers were detailed above in the Perspective section. It was a strong move across the board, bringing the CRB just up to its 50 day MA. For all of that, the index is only back to mid May levels, but does appear to have put in some kind of bottom. Volume on many of the contracts was huge, as buyers took advantage of what looked like bargains in many commodities. After being bearish on commodities for a long while, my interest had picked up here, particularly in the agriculture related area. It's a bit extended at present, but we could find ourselves opening a position in the total return portfolio in something like the PowerShares ag fund (DBA) on a successful re-test of the $27.25 - 27.50 area.
Currencies: Once again we saw plain evidence of the ongoing correlations between the U.S. dollar, the euro, and risk assets. One of the things that happened last week was a drubbing of the very crowded short euro trade. With that condition worked off, the dollar index is right back to support in the 81.50 area, still above the 50 day MA. It would not be at all surprising to see the dollar roll between 81.50 and 83 for some time, as the fundamental situation has not changed all that much. In terms of the euro, while last week's tentative agreement on bank re-capitalization and supervision was certainly a development of major significance, it did little to address the underlying problems that brought the EZ to this point. My suspicion is that we will see the euro come under pressure again, perhaps soon. This could cap the rally in risk assets.