The stock market’s window dressers seem to have broken the pane this week, as the close of May trading ended with a resounding micro crash, putting a close to a wildly volatile week and a dismal month for the SPX. The drop in the final half hour was blamed on a ratings downgrade of Spanish debt, which followed a “failed” government bond auction and bank consolidations earlier in the week. With Spain replacing the now given up for dead Greeks as the obsession du jour, and Spanish banks effectively shut out of the interbank lending markets (as reported in FT), news flow continued to overwhelm fundamentals as a driver of stock prices.
The SPX finished with a slight gain for the week and an 8.5% loss on the month, settling below the 200 day SMA. Volume and price volatility both dropped steadily through the week, as the heavy panic selling abated and stocks appeared to catch a bid prior to the late Friday scare. Major foreign stock markets saw similar action, as we observe once again that inter-market correlations tighten in the face of risk aversion.
US Treasury bonds gave up some gains, as investors appeared to find the yields had just gotten too low. In the commodities, crude oil found support and closed just under $74, while natural gas actually posted gains for the week and the month. Gold was May’s biggest winner. In currencies, the US Dollar and the Euro continued to move in opposite directions, toward what looks like the gravitational pull of parity (I definitely closed out of my dollar long positions too early!).
Market conditions remain uncertain as the major directional trends of the past year have either ended, or corrected before continuing. In the short term, that is the larger question investors have to answer in positioning their portfolios. My own view is neutral at this point in time – I see no reason to reallocate significantly, and maintain a high allocation to cash pending some clearer directional signal. Look for more news out of Europe to drive market action in the short term. The possibility of a banking crisis remains, and you don’t want to be heavy in risk assets in that kind of situation.