After weeks of volatility to the upside and the down, the markets settled down a bit last week. With little economic data and few major news events coming our way, there were no drivers of directional trading. Let’s dig into the details.
Stocks: The major U.S. indexes spent the first full week of December consolidating the prior week’s recovery from the November correction. The Dow Industrials and Russell 2000 gained more than 1%, the S&P 500 and Nasdaq composite less. Volume on both the NYSE and Nasdaq contracted from the prior week, as traders stepped back to re-assess the prospects going into year's end.
All four indexes remained above their 50-day moving averages, with only the Dow above the 200-day. Every S&P sector except for basic materials recorded a weekly gain, with the financials, priced for a systemic crisis, leading the way. Global markets didn’t follow the U.S. to the upside; of the 12 major foreign indexes we monitor, only Brazil’s Bovespa and the French CAC40 managed fractional gains for the week.
Bonds: The Treasury bond curve continued to steepen as yields on the long end recover from the panicked buying we saw in November. The ten and thirty year remain above 2% and 3% respectively, if just barely, while the fives remain well below 1% and short rates are pinned to the floor. Investment grade corporate bond yields pulled back slightly after a four-week rise, while lower grade yields also fell as buyers continued to bid up prices. Market appetite for municipal paper remains strong, with prices reaching another new post-crisis high, while TIPs remain in a five week consolidation.
Commodities: After a small rally attempt the prior week, commodity prices returned to their losing ways. WTI crude oil colosed the week just under the $100 mark, which has proven to be a significant resistance level. Grain prices and agricultural commodities fell back to the losing side after a one week respite, with live cattle dropping nearly 4% over the week. Copper and industrial metals were off fractionally, and the precious metals were down again - except for palladium, which is in a sharp two-week rally.
Currencies: The U.S. Dollar index was nearly unchanged for the week, but trading was choppy. The euro also moved very little against the dollar, with the market pausing to digest the implications of the latest round of emergency meetings. The markets for the major currencies in general were fairly quiet, with no dramatic moves during the week, and most slipping modestly against the greenback.
The past week was light on economic data. The Census Bureau reported a contraction in October factory orders, which doesn’t bode well for growth, but the number was generally in line with expectations. On the positive side, the week’s unemployment claims numbers – both initial and continuing claims - beat consensus forecasts, indicating that the very slow improvement in employment continues.
Stocks: In last weekend’s article we noted that the severely oversold readings of November had been relieved at the end of the month, and forecast a relatively quiet trading week. We did see volatility contract, as the VIX fell back below 30. With things settling down, there are still a few salient features that appear on the charts – most notably the ongoing failure of the S&P 500 to get through its 200 day moving average. Meanwhile, the 50 day is coming up from underneath current prices. The Nasdaq Composite and Russell 2000 are showing the same pattern as the S&P.
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We will probably see another week of relative quiet, but soon enough are likely to get the next directional move. With both primary moving averages converging on the current price range, there will be a move above the 200-day or a move below the 50-day, and the outcome will set the tone for the next trading cycle. My business is not to predict the direction, but to let the market show the trend and trade with it.
I have often made the point, taken from William O'Neil and proven by experience, that if we are going to have a sustained rally in equity prices, we will need to see leadership emerge in the market. Most of the leading growth stocks of the last bull run have either topped or broken down. Regular readers know that I often pointed to five Nasdaq-listed names in this regard: Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX), Green Mountain Coffee (NASDAQ:GMCR) and Lululemon (NASDAQ:LULU). All five made huge runs off the 2008-09 bottom into the 2011 top, and a scan of the charts shows that of the five, only Apple has not broken – and it doesn’t look very robust at all.
Current market leadership is coming from the likes of IBM, McDonald’s (NYSE:MCD), Southern Co. (NYSE:SO), and Eli Lilly (NYSE:LLY). These are mature cash cow businesses, but not the type of big growth names on which major bull markets are built. I’m still looking for the new growth leaders to emerge.
We have been legging into long-term equity positions since early October, as my outlook has been cautiously positive on U.S. equities, and have been able to spot some good swing trades. But the current situation calls for a wait-and-see approach. For those shorter-term swing trades, I’m not seeing any high probability setups for this week. For longer term holdings, the uncertainty is keeping us on the sidelines and holding cash until the next trend shows itself.
Bonds: U.S. Treasury bond prices beyond five year maturities really seem to have topped, even with the ongoing concern about the European banking system. A top in bonds would tend to support the bullish equity outlook if money rotates out of fixed income. It’s not going to happen overnight, and if Europe does blow up it may not happen for some time, but current bond prices are a poor risk/reward proposition in the long run.
I would also be cautious about municipal bonds. Our muni holdings have been in the portfolios (we hold them in both the income and total return portfolios) for quite a while, and because they are held for current income, we aren’t concerned by the run up, but aren’t going to be doing any new buying at these prices. Indeed the entire bond market looks very rich at current prices, except for the risker sectors. It has been a very long run for bond bulls, but we must surely be nearer the end than the beginning.
Commodities: The commodities just can’t seem to generate any upward price momentum, and with West Texas crude failing to hold $100, at least for the moment, the forward prospects don’t appear very favorable. Look for the CRB index to re-test the 295 level. If it can find support there again, my outlook could change. Gold is also beginning to falter; the parabolic August move looks suspiciously like it could have been a top, and since then gold has put in a series of lower highs. However, in the longer term, it has only come back into the price trend channel so, technically, then, gold looks just OK for now. There isn’t a sell signal here, but it should be watched.
Currencies: The U.S. Dollar index is consolidating again, having made strong advances in September and November. With the viability of the euro as a going concern still something of an open question, and Chinese growth slowing, we could see more of the same in the near future. Markets have become accustomed to a weak dollar, but the index may have put in a bottom in 2008. It will take some time to re-adjust to a strong dollar so we could see some turbulence in the markets while the adjustment takes place. In the near term, look for another attempt to get through 80 on the index as a potentially bearish signal for equities, and a move back toward the mid 70s as bullish.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.