Option expiration week brought us a bumpy ride in the markets. Following on the prior week’s low volume run up, stocks drifted near the top of the trend channel before gapping down on Friday’s open and falling all the way into the close on heavier volume. No stick save there, but prices did firm up in the final hour. An interesting divergence occurred: the VIX, which had been rising through the week, presaging a market drop, actually reversed in the morning and fell later in the afternoon. This suggests that the market is not going into panic mode, but retreating in an orderly fashion. Overall, the SPX was down a modest 1.2% on the week.
Drilling down, the week’s sector rotation was defensive, with consumer staples leading and financials bringing up the rear. Major foreign stock markets traded narrowly and within their ranges, with a downward bias. The Korean market continues to be a top performer; though it dropped nearly 4% on Friday, it remains in a short term up trend.
Bonds once again found bids, with most flavors coming out ahead: Treasuries across the maturity curve, investment and lower grade corporates, developed and emerging market sovereigns, and munis. The only broad class left out of the bond love-fest were TIPS, as investors appear to be buying into the deflation theme and shunning inflation protection.
Currency markets gave us an interesting picture. The recent trend of US Dollar weakness combined with euro and Yen strength continued into a sixth week. The Dollar and euro moves appear to be counter to their primary trends, while the Yen is in a longer term, broader rally. The Dollar has now met resistance in the 89 area three times since November. My hunch, and it’s nothing more than that at this point, is that it will make another run at breaking through that level. I also think the euro is going to resume its downtrend because, frankly, the fundamentals remain poor and the policy reponses even worse.
Commodities weren’t very exciting, unless you were in ag futures, which have been enjoying a nice rally. Oil and gas remain in a trading range, as do the metals. Gold sold off a bit more and is continuing to consolidate in the 1,200 range, leaving the longer term up trend intact.
Looking ahead, there were no sure fire trading signals that I could see for the week, hence I’m staying put in my positions for now. Though Friday’s drop may have made us feel a little uneasy, there doesn’t appear to be any reason to head for the life boats. It seemed like a fairly conventional mid-summer option expiration day. As always, we’ll react as markets dictate.