Week in Review
Stocks: The week just ended saw a reversal of recent trends. The major US stock indexes gave back a little over 2%, developed foreign markets a bit less, emerging markets quite a bit more. All of the S&P sectors except energy lost ground on the week. Financials, the prior week’s leaders, were last week’s laggards.
Bonds: Treasury yields rose across the curve, which flattened somewhat as the shorter maturities jumped. The long bond yield finished at the 50 day moving average. Bonds of all types sold off, municipals in particular seeing a sharp decline.
Commodities: The CRB Index pulled back from recent gains, but there was a good bit of divergence among the various commodity groups. In the upward trending food group, grains backed off from near term highs, while livestock showed strong gains. In energy, both oil and gas lost ground. Precious and industrial metals – with the notable exception of copper – also fell.
Currencies: In a week that saw the G-20 pushing out more empty platitudes, the US Dollar staged a recovery against its major counterparts – the euro in particular – and there you have an short explanation for the reversal in risk assets and the relative under-performance of emerging market stocks.
Trading Themes, Week of Nov. 15 – 19
Stocks: After reaching a new two year high, the SPX pulled back modestly, as we suggested it might do in last week’s trading themes. Volume contracted from the prior week, breadth indicators continue to be positive, and the uptrend since August remains intact, so there is no technical indication at this point that what we saw last week was a false breakout. I still don’t have a long term SPX buy signal but only because of the financials; stripping them out, my buy signal is there, as it is on the NDX and the Dow. Overall my stance is bullish ex financials and interest rate sensitive utilities. For the coming week my open stock positions are a hold, and as we pull back toward the 50 day MA and find support, that would be a good point to add to long positions or open new ones. The principle here is that on a breakout, you wait for the consolidation to buy. The common pattern is for stocks to come back toward the breakout level before continuing to rally, and that is usually the favorable entry point. There is always the chance that the breakout was false but again, I don’t see any reason to believe that in this case. In any event, we will find out soon enough.
(click on charts to enlarge)
Bonds: There isn’t much new to say here – Treasury bonds continue to act poorly as yields back up. Regular readers know I have been warning about this for weeks as we got a short term sell signal on the long bond. There are only two areas where I maintain a long position in bonds: TIPs in longer term portfolios where we want to keep an allocation to fixed income, and closed end muni funds we bought at deep discounts for income oriented portfolios. However, be aware that levered bond funds are very sensitive to increases in short term rates. My overall stance on bonds, needless to say, is still bearish.
Commodities: The CRB index, and many individual commodities, remain in uptrends, and last week’s correction did little more than relieve overbought conditions. The primary exceptions to the bullish trends are in oil and natural gas, where my reading is neutral on the former and bearish on the latter. In the metals and agriculture, as with stocks, we could see more consolidation or even a correction without breaking the primary uptrends. My basic stance here is also bullish and for most commodity ETF trades, we can buy on support near the 50 day MA.
Currencies: The US Dollar index remains in a primary downtrend, but is fighting back. Technically, it has weathered the storm to this point without breaking to a new longer term low. Fundamentally, increasing bond yields coupled with the still very tenuous situation in the euro zone are supportive of Dollar strength. This is something we have to watch carefully, as the Dollar has been driving movement in the other asset classes. The near term signal will be whether the index can break above the 50 day MA. In that case we would expect to see weakness in the commodities, and would have to watch stocks to see how they react, but I don’t anticipate that in the coming week.
In summary, we are seeing financial markets reposition from a deflationary stance to an mildly inflationary one. This leads me to be generally bullish on stocks and commodities, but for the coming week I will be waiting for continued consolidation at near term support for a buy signal. It also leads me to be bearish on bonds in general, and I continue to hold open short positions in long term Treasuries.
That’s all for now…Good luck and Happy Trading!