Week in Review and Trading Themes for Oct 25-29

Review – Week of Oct. 18 – 22

Stocks: Major US indexes were up fractionally for the week and, as many readers will already have heard, we had a bullish “golden cross” on the SPX 50/200 day simple moving averages. Volume was respectable but nothing remarkable. Foreign developed markets were flat and emerging markets pulled back on the week.

Bonds: The benchmark 10 year Treasury finished the week very close to where it started, near the bottom of the weekly trading range and just above the prior week’s close. The long bond was pretty much the same, as was the Dow Jones investment grade index. Munis and TIPs were also little changed for the week.

Commodities: Gold fell ~3%, silver ~4%, most base metals also gave back 1 -2%. Oil and agriculturals were flat. Natural gas was pounded down nearly 6%. Sugar was the winning commodity trade again with another rise of better than 4% on the week.

Currencies: The US Dollar index broke its two month slide and rose fractionally. The Aussie and Canadian dollars, Sterling, Swiss Franc and euro all retreated on the other side, with the Yen nearly flat for the week. No doubt the SNB were relieved to see the Franc drop by more than 2% after throwing huge sums into attempts to arrest its rise.

Trading Themes for Oct. 25 – 29

Our macro theme of trading off moves in the US Dollar remains intact, and the calls we had made in recent weeks – long equities and short gold and bonds – are winning trades at this stage. Here’s what looks probable for the week ahead…

Economic Calendar: The coming week brings data on home sales & mortgage apps, durable goods, and consumer sentiment. Looming large just over the horizon are mid-term elections, G-20 in Korea, and the Fed. In what has been a news-driven market environment, these developments require careful watching.

Stocks: Moderately bullish technical picture continuing to develop with the SPX moving average cross and the earlier bullish MACD cross. I do not personally give much weight to 50/200 day but do watch 20/40 week crosses, which are a slower signal that gives fewer head-fakes (it’s essentially the same as a 100/200 day). We don’t have a SPX buy signal there yet, and are still below the April high.

(click on charts to enlarge)

Inter-market correlations should always be considered; here’s how I read it: with bonds and precious metals retreating from what look like overbought conditions, there could be some rotation into stocks. We have been calling, however, for US Dollar support around 76 and indeed that is what we have seen over the past two weeks, so we must take into consideration the possibility that the dollar has found a durable support level and will reverse up. Dollar strength has been a bearish signal for equities (we already saw some weakness in the Morgan Stanley developed and emerging markets indexes) so here we have a caution signal. Overall, there is no strong signal either way so my trading position on equities for the week is a hold.

Bonds: Here the technical picture is much less ambiguous. Charts of both the 10 and 30 year Treasuries show numerous bearish signals, while charts of investment grade corporates and munis show a topping pattern. TIPs look due for a pullback after a spike up but otherwise that chart shows a long uptrend is intact. I am short the long bond and will remain so for now.

Commodities: This sector is a mixed bag. Oil remains in a year long trading range between $70 and the mid $80s, and shows little sign of breaking out. With the Dollar firming, and cousin natural gas continuing to break down, I don’t see a bullish case for oil; indeed it is on my watch list as a potential short, but no there are no trading signals here. Agricultural commodities on the other hand are showing some strength, and look to me like they are consolidating at current levels, but the bias is bullish. Again, no trading signals here for me.

Gold  – and it’s more volatile cousin silver – have looked ripe for a correction on Dollar support and so far one appears to be getting under way. I am short gold and remain so for the coming week, but this is a position I am watching with extra care. It bears mentioning, since so many traders and investors seem to have an almost religious zeal when it comes to gold, that I am pretty much agnostic toward the precious metals over the long run. This current short is just a trade for me and if it works, fine; if it doesn’t, we’ll close it out and that is fine too!

That’s it for this week. Good luck, happy trading, and be careful out there.

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