Week in Review and Trading Themes Nov. 1 -5

Review – Week of Oct. 25 – 29

Stocks: Major US indexes were little changed in a week of choppy trading on light volume. Very characteristic of the type of action we would expect to see ahead of major events and news. Drill down a bit and we saw sector movement that is consistent with growth expectations – for the most part, cyclical sectors led and defensive sectors lagged – with the exception again of financials, which face the uncertainty of the foreclosure issues.

Bonds: More weakness here, but the week ended on a positive note for bonds. The benchmark 10 year Treasury finished the week above its 50 day moving average price, the long bond below, and the Dow Jones investment grade index closed right on the 50 day. TIPs saw some selling after the negative yield auction, and munis were sold off hard

Commodities: Gold staged a recovery rally Thursday and Friday on a reduced volume of contracts. Oil was down fractionally and remains trendless. Agriculturals continued to move up. Natural gas exploded higher and gained over 20% for the week.

Currencies: Like stocks, the US, Aussie and Canadian dollars, as well as the euro, saw choppy back and forth trading. Sterling and Yen rose, the Swiss Franc retreated again, but overall the currency picture was one of uncertainty ahead of news.

Trading Themes for Nov. 1 – 5

Our broadest theme, making the right call on the inflation/deflation question and positioning our portfolios accordingly, remains a matter of debate. Economic data was a mixed bag but tending toward optimism, however analysts whose opinions we respect remain divided among both camps. Once again, when in doubt on this, my tendency is to look to the adults in the room, aka the bond market. While not conclusive, it appears to me to be leaning toward the inflation side, but that brings us to…

Economic Calendar: The coming week will be a busy one, with UE claims, personal income and spending, ISM, and of course the FOMC the day after mid-term elections. We face, as Marc Chandler pointed out, a high level of event risk this week. Risk = opportunity so, for those with strength of conviction in their positions, leverage may be considered. For those less certain, hedges may be in order. I tend toward the latter.

Stocks: Mixed technical picture on the SPX and Dow industrials, bullish on the NDX and Dow transports. Earnings have generally been good, economic data has been improving. The concern over banks is a drag on stocks but there are fundamental reasons to be bullish on equities, and I maintain a normal allocation for the coming week, but have a hedge on due to the aforementioned event risk. A pullback is a definite possibility; a number of overseas markets have already pulled back following strong advances.

(click on charts to enlarge – note that we go to daily data for this week)

Bonds: Treasuries remain in a downtrend but will almost certainly be moved by the FOMC and other events this week. I remain a bond bear both on the technical indicators and on the expectation that improving economic conditions will limit QE and yields will back up. I am considering taking profits in my long TIPs position while holding my short Treasuries position.

Commodities: Precious metals (ex-platinum) and agriculturals remain in strong uptrends. Oil continues to trade in the range, natural gas is volatile. While I maintain a short position on gold, it is on a very short leash. Looking for a possible short on oil but no signal yet. Also looking for an long entry point on grains but need to see some more consolidation first.

Currencies: Readers know I have been anticipating US Dollar strength so we won’t belabor the point. A daily chart follows which shows that this is by no means assured – my longer term charts are in previous posts. For now a higher low has held but a short term downtrend remains intact. My position in not changed – bullish on the US Dollar – but here we have the highest event risk of all, ahead of the FOMC.

 

To sum it up: cautiously bullish on stocks and the US Dollar, bearish on bonds, cautiously bearish on precious metals, neutral on oil, and everything subject to change in a week that will bring much news – and no doubt a surprise or two.

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

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