And what a week it was for equity and commodity bulls. As mentioned in a previous post, we got a Dow theory buy signal and new 52 week highs on all the major equity indexes, as well as the CRB. The generally accepted explanation: a stronger than forecast Republican showing in the mid-terms, a new QE progam about 20% larger than consensus expectation, and a positive surprise on private sector job creation. To tie it all together, once again we can look to the US Dollar. Let’s take it by asset class
Review: week of Nov. 1 -5
Stocks: Strong across the board with every S&P sector posting gains for the week, led by a 7% pop for the previously lagging financials, which were seen to benefit from Fed largesse as well as some easing of fear from the foreclosure issues. The rest of the picture was pure rotation to growth, as the next best sector performers were the cyclicals, while defensive sectors brought up the rear. Small caps outperformed their large cap cousins, and emerging markets outpaced foreign developed markets.
Bonds: The Treasury yield curve steepened rather sharply following the Fed, the long bond closing with a 4 handle as the benchmark 10 year yield fell nearly 2% on the week. TIPs, munis and corporates moved very little as they all consolidate at high levels.
Commodities: As mentioned above, the CRB index reached a new 52 week high on Dollar weakness. Oil jumped 7% to close just above $87, with $0.25 of the April high. Gold shrugged off a high level consolidation to power on to a new all time high. Copper, considered to be a good economic indicator, gained nearly 6%.
Currencies: Uncle Buck, to use Dave Fry’s pet term, was the star of the show last week – and not in a good way. It dropped to a new year to date low after the Fed, before recovering Friday on the jobs report. The Swiss Franc and the commodity leveraged Aussie and Canadian dollars posted strong gains, while the euro advanced modestly and the Yen slipped.
Trading Themes: week of Nov. 8 – 12
Stocks: We had a strong price price move last week and while volume was not particularly impressive, it was higher than the previous week, and the last 4 weeks of cumulative volume in the SPX were higher than any previous 4 week period going back to June. I do not have a weekly buy signal on the SPX just yet in my own longer term indicator, but we are extremely close. A near term consolidation or even a small correction after the move we just saw would be perfectly normal, but I remain bullish on equities and will likely add to long positions on any modest pullback.
Bonds: My position continues to be bearish on long term Treasuries, and I see no reason to buy or sell anything else in the bond market for the coming week. High yield is still trending positively, but isn’t more attractive than equity. I continue to hold a short position on the long bond, as well as a position in TIPs. So long as they are both working, we’ll let ’em work.
Commodities: My speculation that we were going to get a significant correction in gold was wrong, as it appears to only have been a brief consolidation. I closed out my short position with a small loss and at this stage am near term neutral on gold. Oil is at the top of the range, and is trading off the Dollar rather than fundamentals. Agriculture and industrial metals are trading more on fundamentals and both are bullish.
Currencies: While the US Dollar, as mentioned above, reached a new near term low, it did close above 76. Carl Swenlin has a technical study of the Dollar posted at Stockcharts.com where he makes the bearish case. I’m not so certain, for a few reasons – one of them having to do with the fact that the Dollar index is a relative measure in which other currencies are factored. To be bearish on the Dollar is ipso facto a bullish position on those other currencies. Let’s take a quick survey.
The euro is 57% of the index, and we should note that it closed in the lower half of last week’s range, just above 140. Spreads on the euro do not look supportive of these levels, and rates on peripheral country sovereign debt continue to look problematic. At some point the broader markets are going to start paying attention again, because there are many unresolved issues there.
The next largest weighting is Yen, where the BOJ is determined to arrest the decline, followed by Sterling and the Loonie, where the former is fundamentally uncertain, while the latter is more levered to commodity prices. More broadly, while there are fundamental reasons to be bearish on the US Dollar, they seem to me overdone. Economic data continues to suggest the US is slowly recovering, and the new House majority appears in no mood for fiscal laxity.
In summary, for this week I remain cautiously bullish on equities and commodities, bearish on long term Treasuries, neutral pretty much everywhere else. For charts, please refer to Dave Fry’s ETF Digest.