Last week we saw significant movement in the financial markets, much of it disconcerting. After a long string of mostly bullish weekly outlooks, we're turning more cautious for the coming week, as first quarter earnings reports come in. This should be an interesting period in the markets. First, let's review where we've just been.
Last Week in Review
Stocks: The major US indexes were flat to slightly off for the week, with a few of them finishing on distinctly weak notes - most notably the Russell 2000. S&P sectors showed a defensive look, with most losing ground on the week and consumer staples out in the lead. The industrials were particularly soft, perhaps on concerns about energy prices (many investors don't realize there is considerable overlap between the S&P industrials and the Dow transports). Foreign stock markets for the most part were more robust, except Japan, which understandably continues to come under pressure.
Bonds: It was a tough week in the US Treasury market as yields on maturities from 5 years and out continued to move up. Unlike conventional issues, TIPs came back on Friday to finish nearly flat overall. Municipal yields also advanced from the previous week. Like their public sector counterparts, investment grade corporates were discounted a bit, but lower grades found a bid.
Commodities: Gains nearly everywhere but the big story here continued to be crude oil, as WTI was marked up another 4.6%, finishing just under $113 a barrell. Even so, the Brent-WTI spread widened another 2.5%. Precious metals also roared ahead, silver pacing the way with a better than 8% move and gold reaching a new all time high. The Dow Jones grains index also moved up for a fourth consecutive week, with corn reaching a new post-crisis high.
Currencies: The US Dollar index continued to slide, moving below 75 for the first time since the November 2009 bottom. It has now retreated in 11 of the last 15 weeks. The euro now stands at $1.448, Sterling at $1.638, Aussie at $1.056, Loonie at $1.046. Among majors, only the beleaguered Yen lost ground against the Dollar. The weakness in the greenback is remarkable and is pushing the relentless advance in commodities. Suspicions that traders would sell the news of the expected ECB rate hike did not materialize.
The Week Ahead
Stocks: With little economic news and ahead of earnings reports, the S&P 500 traded in narrow ranges on lackluster volume, opening and closing prices staying very close until Friday, when sellers appeared to gain the upper hand. The 1340 level formed solid resistance through the week and prevented the index from reaching the Feb. 18th high. The VIX bottomed and picked up 4.4% on Friday. Six of the nine sector SPDRs and 13 of the 30 Dow Industrials show the double topping/rolling over type of price action that is typically seen at a resistance level, and signals indecision in the market. It's quite normal to see in the week before quarterly earnings; indeed we have seen this type of trading several times during this bull market, and with the exception of May-June 2010, it always resolved back to a continued advance in short order. At some point that will no longer be the case, but at this particular stage we have to look at data, and on balance there is little to suggest a change in the macro trend.
For the coming week, we will of course need to keep a careful watch on earnings, and more importantly how the market reacts to earnings. My thinking here is that there is little advantage in trying to front run, so I will be looking for a successful move above the SPX 1344 level to add to long equity positions. A failure would keep me on the defensive and overweight cash. Blue chips on my watch list for possible longs include Alcoa (AA), Boeing (BA), Morgan (JPM), Kraft (KFT), 3M (MMM), Travelers (TRV), and United Tech (UTX). Click to enlarge:
Bonds: Bond investors will understandably be nervous after the recent week's action, but there is no reason to panic. Below I have rolled out again, as I do from time to time for the sake of perspective, the long term chart of 10 year yields (click to enlarge). Prudent risk management probably calls for at least giving some consideration to reining in duration, but there is no debacle here yet. An argument could be made that reaching for yield in exotic locations is riskier than staying in quality and laddering out.
Commodities: What more can be said about commodities, especially oil, at this point? Readers know that I have been a skeptic on oil all the way up, and may recall my spectacularly ill-timed short call just before the Arab world blew up and touched off the current rally. What I see is a market trading on momentum and fear, and while I have traded that type of action before, this one has moved far along already and is too dangerous for my liking. Dian Chu's article on Cushing storage and other issues, while debatable in some regards, does point out the disconnect with the fundamentals. We have all seen this type of disconnect go on farther than we thought possible. That may well be the case here. Being fond of old traders' axioms myself, I note that the best remedy for high prices is high prices, but the timing - as always - makes the difference between winning and losing trades. Click to enlarge:
Currencies: The US Dollar is the big problem - or gift, depending on your positioning. Technically it just looks ugly. Fundamentally, a confluence of fiscal irresponsibility, interest rate differentials, and carry trading are keeping it on the ropes. As long as this situation continues, it will underpin the current trends.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AA, BA, JPM, KFT, MMM, TRV, UTX over the next 72 hours.
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