Before we launch into our review, a comment – not entirely unrelated – on the long term future. It’s easy, in the light of recent years, to give in to pessimism on our future prospects. This time of year, our colleges and universities send a new cohort of graduates into the world. Having recently attended the commencement of one distinguished institution, I am encouraged for our future. What a fine group of young men and women, bright, earnest and motivated. Will they be better than we were? Our parents and grandparents? Time will tell, but I am optimistic. They really are a terrific bunch of kids.
Now on to the markets. US stocks were higher on the week, led by the small caps, but finished on a sour note Friday, with poor price action and atrocious breadth. The SPX went up to the 50 day SMA and failed on both Wednesday and Thursday, so that would now be resistance for any rally attempt. Most foreign stock markets are in a sideways trading range and, predictably, much of Europe remains a mess. China, long the global markets leader both up and down, continues to act poorly.
Once again, US Treasury bonds were in favor with the safe haven seekers. Commodity prices again were mostly lower, with oil futures ending the week below $72; natural gas, which we commented on more than a week ago, remains oddly contrarian as futures gained nearly 8%. Gold continued its upward trend as investors continued to pile in. This is a danger area I see coming up: gold is for traders who understand it, and I fear a number of individual investors will be punished for jumping into this trade and hanging around too long.
Overall, the market action last week was again primarily news driven, and fear has the upper hand over greed. The fundamentals are not so ugly, except for Europe, but that story, along with nervousness about China and the uncertainty around financial reform, are getting more attention. The technical picture is not so good, with broken trend lines, sloppy chart patterns and primary moving averages rolling over almost everywhere we look. This is still a time to play defense, as the downside risk looks more compelling than the upside reward in risk assets.