In last weekend's article, I wrote that the financial world would "have its attention diverted to Jackson Hole…but my suspicion [was] that the market may be underwhelmed." Underwhelming may be a suitable term to summarize the event, which did produce a number of very interesting papers, but there was some immediate impact on the markets. ECB Chairman Draghi, citing pressing concerns, skipped the event altogether, while Fed Chairman Bernanke offered that "the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery" without delving into specifics. Let's look at the market action over the last week:
Stocks: U.S. equities continued to consolidate the gains of the summer rally - none of the major indexes moved more than half a percentage point on the week. Most indexes finished slightly to the downside, except for the Russell 2000, which posted a fractional gain, but the market turned broadly higher on Friday. All of the major indexes remained above their 50-day moving averages, with the Dow above 13,000, the S&P 500 above 1,400, and the NASDAQ above 3,000. Once again, we saw pronounced weakness in the Dow Transports, which have broken decisively below their 50- and 200-day moving averages, and in the Dow Utilities.
S&P sector action again was mostly negative; the healthcare stocks put in another very small gain, joined this time by the consumer cyclicals. At the other end of the sector table, the industrials brought up the rear with a loss of one percent.
Moving abroad, 11 of our 12 major foreign indexes were down for the week, and the 12th - Germany's DAX composite - was exactly flat. Four of the indexes - Canada's TSX, Japan's Nikkei, Hong Kong's Hang Seng, and South Korea's Seoul Composite - broke down through their 200-day moving averages after topping those marks earlier in the month.
Bonds: One segment of the markets where the Jackson Hole symposium did appear to have a material impact was in bonds, which rallied nicely into month end. Treasury yields fell sharply on Friday, particularly the five-year note, which opened the week yielding over 70 basis points, and closed under 60bp. Longer-dated paper also moved, but less dramatically; the 10-year note closed to yield under 1.6%, while the long bond was under 2.7%. TIPS also rallied, as did corporate bonds, but municipals were more subdued.
Commodities: We might also credit the Fed with helping to extend the summer commodity rally. The CRB commodity index posted its ninth weekly gain in the last ten, in spite of the fact that WTI crude oil again failed at the 200-day MA. Natural gas on the other hand tested its own 200 day from above and bounced off it; there seems to be good support at $2.70. Gold had another good week; it came back to test the 200 day on Friday morning, before moving up 2% by the close. It was gold's best monthly close since February. Silver, platinum, and palladium also eclipsed their 200 day marks as there was a strong bid for precious metals. Copper continued to track sideways in its trading range, as did the grains, but we began to see some emerging strength in the softs.
Currencies: The U.S. dollar index, which had been consolidating around 81.5 after a couple of sharp declines earlier in the month, ended on weakness after moving to a new summer low under 81. The euro continued to trade above $1.25, even as European policy makers offered little indication of progress on the debt crisis. One of the larger moves among the major currencies was seen in the Canadian dollar, which went to $1.014.
Last week's economic calendar held few surprises, apart from across the board positive numbers in the Case-Shiller 20 city index, which supports the view of a nascent recovery in housing. Industrial data was less positive; although July factory orders showed a year over year increase of nearly 3%, non-defense capital goods fell 4%. Unemployment claims continued to show little sign of improvement. The consensus view after the Jackson Hole symposium seems to be that some form of monetary accommodation is all but certain. There is less agreement as to whether it will produce the intended effect. There were no major earnings announcements.
Stocks: The action in the U.S. equity market over the last couple of weeks has been very inconclusive. With the major indexes above their primary moving averages, it's difficult to be too bearish, but with the often difficult month of September ahead, as well as an upcoming election with very divergent views on fiscal and tax policy, and uncertainty regarding monetary policy, the market seems to lack much conviction. Adding to the uncertainty: economic growth, while positive, is not robust, and the last quarter saw revenue misses and cautious outlooks from a number of blue chips.
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There are some positives, however. Corporate earnings continue to be reasonably good, and bulls appear to have the Fed on their side. Growth, however uninspiring, is keeping the economy out of recession, and the important housing market is coming off the bottom. My overall outlook for equities continues to be cautiously positive, and highly selective. My scans are not turning up a lot of attractive stocks, but I like those we already own, and might be more inclined to add to existing positions, such as MSFT, PFE, and PG - which made a new 52-week high Friday - than to open new ones. Another stock from the consumer staples sector that I currently find interesting is ADM. In recent years, this unglamorous stock has been a fairly reliable buy around $25 and a sell around $32; it recently pulled back into the high 24s, and promptly turned up again.
Bonds: In recent articles, I have been suggesting that the correction in bond prices might be viewed as a buying opportunity, rather than a harbinger of doom. While it's early, that outlook appears to have been validated. However, we kept our powder dry, watching another correction that is still ongoing: utility stocks. Solid blue chip utilities like ED and SO, which had become overbought, now have higher yields than popular bond funds like LQD. Income investors who consider moving into equity - even blue chip utilities - should understand the additional risk that comes with moving down the balance sheet. However, with bond yields at generational lows, alternative income generating strategies have to be considered.
Commodities: As a confirmed commodity skeptic, based on a broad European recession and slowing Asian growth, I have been surprised. Perhaps I shouldn't be; my own recent articles have expressed the view that commodity investors would be front-running additional monetary easing. However this is another area where we are seeing uneven movement. Where the moves in the grains were based on fundamentals, the move in oil was not, and I continue to maintain the outlook that lower oil prices are ahead. If that outlook is correct, it would suggest avoiding popular broad commodity funds such as DBC and GSG, which are heavily weighted to oil. Gold, meanwhile, is trading more like an alternative currency. While I think such things as the nod to gold in the Republican Party platform are nonsense, we nevertheless maintain an allocation to the barbarous relic. It is the only commodity play I presently find attractive in a diversified portfolio.
Currencies: Friday's trading saw the U.S. dollar marked down in anticipation of monetary easing by the Fed. This has brought the dollar index to what looks like a key technical support level: the confluence of the 40 week (200-day) moving average, the bottom of the current trend channel, and a previous resistance level (see accompanying chart). We could find out some of the details after the Fed's September meeting, but the coming week brings meetings of the ECB and Bank of England. While the BOE is unlikely to move the markets, the ECB could be significant. The story reported in the German press, that Bundesbank president Jens Weidmann has threatened to resign in protest against ECB bond buying, should lead us to think that some significant program is in the works.
As it is difficult to imagine that there will not be some form of substantial easing by the ECB after Draghi's stated commitment to "do whatever it takes." Look for the Bundesbank to protest loudly and then to capitulate, and for the dollar to firm up. A breakdown through the current level on the dollar index would be surprising, and from a technical view, could open up much lower levels.
Disclosure: I am long MSFT, PFE, PG, LQD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.