Last week may have seemed relatively uneventful on the surface. Not much in the way of big market moving news or heavy trading volumes; among the major indexes we follow only the NASDAQ 100 and gold made moves greater than 1%. Behind the headlines, however, there was plenty of activity to consider.
Week in Review
Stocks: We mentioned the relative quiet in the markets. Stocks attempted a bit of a mid-week rally and the SPX briefly recaptured the key short term 1340 level, only to give it back on Friday. S&P sectors were led by an oversold rally in energy stocks - which also fizzled out by week's end - but beyond this the action brought us a fourth consecutive week of defensive rotation: consumer staples, utilities and telecoms were the only other sectors to post gains. Tech stocks brought up the rear owing largely to the nearly 11% collapse in HP shares (NYSE:HPQ) as well as losses of more than 2% in perennial laggards Cisco (NASDAQ:CSCO) and Microsoft (NASDAQ:MSFT).
Foreign stock markets were also quiet for the most part; a notable winner was the TSX composite in Toronto, gaining 2% on the energy bounce. On the other side Brazil's Bovespa fell another 1% after breaking near term support and appears ready to test the 60K level.
Bonds: The fall in conventional Treasury yields resumed last week, with short maturities dropping the most. TIPs prices pulled back again in what appears to be a shift away from inflationary positioning. Munis also pulled back a little after making a nice month-long run since early April. Corporate issues were little changed. All told, another good week for most bond holders - at least those who haven't been lending to the euro zone periphery.
Commodities: After the dramatic drop at the beginning of the month, the CRB index appears to have found near term support at the 340 level. WTI crude oil has made several attempts to regain the $100 mark but to this point has failed to hold it, so that price looks like it's forming short term resistance. The week's big moves were made in the grains, with both corn and wheat advancing in the neighborhood of 11%, but neither reaching new year to date highs. Amid all of this corrective action in the commodities, the one which remains in an unbroken uptrend dating all the way back to the 2009 bottom is gold.
Currencies: The U.S. Dollar index appeared to be sliding back from recent strength before rallying on Friday to finish above the 50 day MA and the 75 support level. The euro conversely spent most of the week in a small counter-trend rally before giving back most of the gains in the last trading session. After falling together for two weeks, the Aussie dollar gained .8% while the Canadian dollar was off .6% but both remain firmly above parity with the U.S.
The Week Ahead
Stocks: Our theme for stocks going into the summer has been to stay with leading stocks and sectors, but it is growing more difficult every week to find something we like for new money. Market internals are slipping: the NASDAQ and AMEX advance-declines started to roll over in April, now the NYSE appears to have joined them, failing to reach a new high before starting to move back down. We now find less than 50% of stocks trading above their 50 day moving averages, only 35% above their 20 day.
Buyers and sellers have forged a sort of equilibrium for three months now, with neither gaining the upper hand as the SPX has become rangebound. The bullish view is that the market is working off overbought conditions. The bearish view is that demand for stocks at current prices has run out. My own view tends toward the latter - I find most of the stocks I like to be a bit too expensive. Having said that, I do not have a long term sell signal on the SPX from my technical system; in fact, it has not given a sell signal since the March 2009 start of the current rally, though it came very close in Q3 2010. However I do not mechanically follow the system and remain defensively positioned and underweight equities.
Bonds: This has been a good year for bond holders, most of whom have seen the value of their holdings appreciate. One hesitates to disagree with such luminaries as Bill Gross and James Grant but the widely anticipated apocalypse for bondholders has yet to materialize. Maybe it will yet appear (I remain skeptical), but we should always be more interested in what the market has to say, and the market has been bidding up bond prices. Simply put, the bond market hasn't been buying the inflation thesis, and seems more concerned with a faltering recovery and continued de-leveraging. As an analyst who looks at a fair amount of macro data, I find this curious because the data suggest we have a solid (if unspectacular) recovery underway in most areas, but I've been at this long enough to know better than to argue with the market. Long story short: we're holding our bonds until the market tells us otherwise.
Commodities: As with equities, commodity buyers and sellers are stalemated at current levels. The CRB index shows trading in an increasingly narrow range near 340, a previous resistance level. My rather simple view is that a move above 350 will demonstrate a bullish bias, while a break down to the low 330s would signal a bearish bias. Again as with equities, my technical system is long the CRB but here again I am actually positioned to wait for a more attractive entry point, particularly as these are trading positions with negative yield rather than long term holdings. With equities and fixed income my bias is to be long until the market pushes me out. With commodities my bias is to stay out until the market pulls me in.
Currencies: The U.S. dollar has to some extent been the beneficiary of trouble in the euro zone, as well as the rolling over of commodity prices. It is significant that the political theatrics surrounding the Federal debt ceiling did not tank the dollar. Whether the move off the re-test of the long term low will be durable is difficult to say; my suspicion is that this move will have staying power as the U.S. economy asserts its leadership, and Europe continues to fight a desperate rearguard action against serial defaults.
Disclosure: I am long MSFT.