Having taken a longer range view of the year just ended, and the long range themes for the new year, it’s time to return to our regular weekly survey of the markets.
Week in Review
Stocks: The market began 2011 in a buying mood as the first day of trading saw gains following the opening bell. From there it was choppy trading, with reversals on Tuesday and Friday, the SPX finishing with a gain of a little over 1%. The tech sector led the way with a rise of better than 2.6%, while consumer staples lagged, posting a loss of nearly 1%. Several leading consumer companies, such as McDonalds, Coca Cola and Target, sold off hard on strong volume. Some analyst commentary suggests that these types of stocks could be leading the market in terms of direction, so this is a development we need to watch in the coming days.
Bonds: The yield on the benchmark 10 year Treasury note, after rising steadily since mid October, seems to have found resistance at the 3.5% level, and has been in a range between 3.3 and 3.5 for several weeks now. It closed at 3.32%. The 30 year yield is finding resistance around 4.6%. For now it appears the rout in Treasuries has ended. Corporate bonds also began to find some support in mid December and have staged a bit of a recovery rally, as have TIPs. Munis and foreign bonds, on the other hand, still look weak.
Commodities: The broad CRB index pulled back 2.6% on the week, Commodities that had been rallying most strongly gave back the most: silver nearly 7%, gold 3.6%, the agriculture group 3.4%. Oil fell more than 3% to close at $88.41 per barrel, and could be falling back into that long trading range after a brief break out above $90.
Currencies: The US Dollar jumped nearly 2.6% for the week, resuming its post-election and post-QE rally. The euro, with the holiday cheer having worn off, fell 3.6% on the by now familiar concerns. The Swiss Franc, Aussie Dollar and Yen all saw significant drops as well, albeit for varying reasons.
The Week Ahead
Stocks: In our look at the macro picture for 2011, a good probability of a correction early in the year was a part of the outlook. My sense is that we are looking at it here and now; to that end I took profits on a couple of my energy stocks in the trading portfolio. It may be early, and I can (and probably will) buy them back later, but the moves in some key stocks, as well as the Dollar and bond yields, lead me to think the coming week will see sellers take the lead. Taking 30% and 17% profits in 6 months isn’t a bad outcome. One market I have been watching for several weeks and will mention here is the Japanese stock market. Just looking for now, but with keen interest.
(click on charts to enlarge)
Bonds: As mentioned in the review above, the rise in yields has broken. Although my near term outlook was for the rising trend to continue, and the chart tends to support that view, my longer term outlook is not as bearish as many analysts out there. With the moves in the markets last week, and my profit taking mood, I closed out my short position in long term Treasuries in the trading portfolio, booking a 22% gain in 90 days. For this week my near term outlook is neutral as yields stabilize.
Commodities: My near term outlook here is less ambiguous – and it’s negative. While commodities remain in longer term up trends, they had gotten well ahead of the fundamentals and are due for a correction. In the precious metals group, while the metals themselves are pulling back, the miners’ stocks are getting hammered – Silver Wheaton down 14%, Pan American and Hecla off 11%, Anglogold Ashanti down 9%…all on heavy volume. At this point I have no commodity positions open and, were I feeling more aggressive, would consider trading the short side on a bounce, as the correction looks to have more room to run.
Currencies: Regular readers know I have been a US Dollar bull for some time; to me this trend looks intact. Simply put, the US is – despite all the posturing and rhetoric – getting on with the business of putting its affairs in order. While serious issues remain, as compared to the problems facing Europe and China, the US is in relatively good shape. While I am not much inclined to trade currencies directly, this does set the tone for trading in all the other asset markets, and my position is to trade them with an outlook for a firm Dollar.
In summary, my stance for this week is defensive across the board, overweight cash and looking for the next directional signal.
Good luck and Happy Trading!