Last week brought us some interesting action in the currency and bond markets, not so much in stocks or commodities. All the major US stock indices finished at new post-crash highs. The SPY was up for the week, but the high came on Tuesday on a closing basis. The daily candlestick chart shows a “doji” on Wednesday and a “bearish engulfing” on Thursday, with volume continuing to be light, so the technical picture is somewhat bearish. Within the S&P 500, financials, industrials, and consumer staples are strongest, while energy and utilities are weakest. On a global basis, US stocks lead; foreign developed and emerging markets remain below their January highs in Dollar terms.
In the commodities, oil and precious metals are in sideways consolidations. Industrial metals are showing more price strength, while agricultural commodities are weaker, with the primary moving averages rolling over. Things get more interesting in currency land. The Dollar resumed its advance after taking a breather from its sharp December – January rally. Meanwhile the Euro continues to fall, with much of the action driven by news – will Greece get a bailout or not? Which Eurozone nation will be next? Perhaps more significant, the Yen has broken sharply down through a year long rising price channel. With the dollar rising, carry traders may be returning to the Yen, and Japanese policy makers seem only to happy to accommodate them.
Bonds had a tough week, as we noted previously, but it couldn’t really be called a rout. The 30 year Treasury is back around where it started the year, while the 10 year is a little stronger. Perhaps nothing more than a case of indigestion during a week when a lot of supply came into the Treasury market, but it bears watching. The foreign treasury ETF is also back around break-even for the year, while munis joined in the sell-off. It seems that sovereign credit risk is the theme of the moment in the developed markets. Meanwhile, investment grade corporates, junk, and emerging market bonds are holding up just fine.
Overall, it looks like the stock markets are either taking a break after an impressive run, or simply have run out of momentum. The speculation is that all the shorts have been flushed out, and the longs are all in, so where will the new buying come from if the rally is going to continue? My equity position is unchanged: there is no reason to go short here, but no reason to enter long either. Wait and see is boring, but looks like the most prudent course at this stage. Further breakdowns in the bond markets might shift my fixed income allocation to cash. In currencies, I’m staying long the US Dollar, as it looks like it has room to run. A lot of analysts hate it, but as one of them put it, right now it’s the dog with the fewest fleas.