Entering the Holiday Trading Doldrums

Week in Review

It was a generally lackluster week in the financial markets. There was little news or impetus to drive movement, and it seems many investors are winding down at the end of an eventful year. There isn’t much to review, so we’ll keep this brief.

Stocks: As we anticipated last week, the autumn rally seems to have run its course, and there was little movement one way or the other. Intra-day price bands were narrow and volume uninspiring. All of the major stock averages posted fractional gains, but nothing to create any excitement. Financials, the prior week’s leaders, were this week’s laggards.

Bonds: There was a little more activity in this asset class, as the beaten down bond sectors staged small recovery rallies in the latter part of the week. Longer term Treasuries, investment grade corporates, and munis all got a nice bounce, but all remain below their 200 day moving averages. The damage has been severe.

Commodities: As with stocks, there was not much action in most of the commodity groups, which are consolidating at recent levels. Oil continued to roll along, trading under $90, and remains in a narrowing 18 month long price channel.

Currencies: The US Dollar began the week with a selloff on Monday, and spent the rest of the week gaining it all back. The euro, as usual, was the Dollar’s mirror image, rising on Monday and giving it all back, as did the British Pound, Swiss Franc, and Yen. Again, nothing remarkable here.

The Week Ahead

Stocks: The Arms Index is turning back up from its lows but in the short term stocks still look a bit overbought. With no catalysts in view for either buying or selling, especially now that the tax question is settled, the coming week presents few high probability macro trading ideas. We do need to keep in mind that the market can get pushed around on light volume when many of the traders are on holiday, but those types of moves usually don’t last, and seldom are the beginnings of new direction in the markets. When the market isn’t telling me to do anything, I simply watch and wait.

(click on charts to enlarge)

Bonds: Readers who are interested in the long term Treasury market should have a look at  this fine analysis from Carl Swenlin, which looks at the long bond from the technical side. Like myself, he is a bond bear. My stance, as regular readers know, has been bearish since early October. The bull run after Jackson Hole in August was overdone in the extreme, as the yield on the 30 year reached as low as 3.52%, which we had not seen since March of 2009 when it looked like the global economy was near collapse.

Clearly the fundamentals no longer justified such a low yield on the long bond, as economic data apart from employment show a budding recovery. On both a fundamental as well as a technical basis I turned bearish and went short. Now we are at 4.4% and while I remain bearish, the easy money has been made in this trade, and I will probably close out my shorts and turn neutral as we approach 5%.

On a technical basis, it’s difficult to argue with Swenlin, as the charts are simply busted, but again, the easy money has been made, and it’s likely to be a trader’s market from here on out. We should also keep in mind that there is an as yet unresolved mess in the eurozone, and policy makers will return from their holidays to take up the matter anew. Any sign of trouble will make things difficult for US Treasury shorts. For these reasons I suspect, absent the appearance of real inflation, that there will be easier ways to make portfolio gains in the new year.

Commodities: My sense is that the commodity markets are at an inflection point. The rally in most groups has run out of steam, and they are looking for the next catalyst to give a directional signal. Absent that, commodities have a slight upward bias, and they are drifting higher, but the action is lackluster. This is an area to watch for a signal, but unlike equities, holding commodity positions in a directionless market has a carrying cost as contracts have to be rolled. I currently have no open positions.

Currencies: The US Dollar continues to show strength, with most other major currencies trading sideways to down. Technically the Dollar remains in an up trend, which should have some bearing on equity and especially commodity markets. As with the bonds, any renewed stability  fears in the eurozone will support this trend, so there could be a couple of drivers of Dollar bullishness: rising US yields and a falling euro.

In summary, for this week I am neutral on pretty much everything, holding my long equity and short Treasury positions, and watching for the next trading signal.

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