Market Week in Review, August 2 – 6

A week of summer trading brought little excitement to markets. The major averages added less than 2% on light volume, ending with a choppy Friday session that dropped at the open and rallied into the close. The SPX closed above the 200 day MA and remains in an uninspired rally. Inside the index, health care was the leading sector, building on the pop from that perennial dog Pfizer and its earnings report. All ten sectors gained on the week, with the financials bringing up the rear.

Bonds continue to be in a world of their own, and the Treasury yield curve continued to get steeper. There are plenty of analysts who think this love affair with fixed income will end in tears, but the deflationary fear has investors hunting for yield and settling for pittances – witness IBM’s three year note going to market at 1%.

The US Dollar decline extended to a ninth consecutive week and breached the 200 day, with the euro, Yen and commodities up on the other side. Since the start of June, the short dollar / long euro pair trade has been a winner. Oil gained a little for the week, retreating on Friday, while the natural gas rally corrected sharply and seems to be finding resistance at the $5 level.

Looking ahead, next week’s economic calendar doesn’t figure to bring us much in way of market movement. Tuesday’s Fed Open Market rate decision is a foregone conclusion: no change. There isn’t a compelling bull or bear case, so there aren’t any obvious trading themes for the coming week.

There are some interesting rumors and speculation about new Fed QE moves, mortgage forgiveness programs, and other dubious public policy actions. Some of these are rather…unsettling, but we need to wait and see if anything comes of them. The mortgage deal, in particular, could be rough on the mortgage backed bond market. Let’s hope it remains only a rumor – so far apparently Treasury has denied it.

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