Market Week in Review, August 9 – 13

Time to put the wrap on a tough week in the US stock market, a disconcerting five days of trading which saw reversals on the major indexes and averages. The SPX lost nearly 4% for the week and gave up the 50 day SMA. Within the index the action was as we might expect for a week of risk revulsion: defensive sectors held up best, cyclical sectors lost the most.

The damage was worst in the tech sector, and within tech, in chips and semis. Xilinx and Altera, the happy twins of chip land, were pounded down nearly 10% and have given back the big gains of early July. Small caps and overseas markets also took some big losses.

Another set of reversals was seen in the currency markets, where the US Dollar broke its sharp summer downtrend with a 3% jump while its mirror image, the euro, sold off hard on renewed debt fears. Treasury bonds continued to melt up in a flight to perceived safety, the long bond breaking out on Fed news with the yield settling decisively below 4%; meanwhile the 10 year yield dropped below 2.7%. Munis benefited from another slug of federal funds to state and local governments.

Investment grade corporates were essentially flat after having gone straight up since late May, and junk paper fell back a little from multi-year highs. Looking at the charts, corporate bonds – like equities –  are under distribution, especially in the lower grades, and appear to be ripe for a fall. I would urge those invested in corporate bond funds and ETFs to be very cautious here.

Commodities were caught up in the risk off trade and fell almost uniformly, with oil futures falling back toward the $75 area and natgas also sliding. Oil has been battling to gain, and then hold the $80 level since October 2009, and failed once again. A fairly reliable recent pattern has been to buy around $70 and sell above $80. Any break above or below that $70 – mid $80s range will signal a directional change and give us a long or short trading opportunity.

The stock market is under distribution, and has been, going back to the end of last year. Have a look at the SPX chart below, and examine the volume bars inside the ellipse. Note that the red bars are taller than the dark bars, while the price bars have made made no overall progress during the entire period. In spite of the back and forth action, the SPX closed Friday below the price level of that first tall red price bar in December. That, my friends, is what distribution looks like on a stock chart. It’s a warning signal of a market that has little support for a strong bullish trend. My outlook is still for a rally later this year, but right now we maintain a defensive bias.

(click on chart to enlarge)

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