After a rocky start, markets put together a little bit of positive momentum last week amid some modestly encouraging economic news. Let’s break down the numbers.
Perspective
Stocks: The major US equity indexes posted a week of solid gains after reaching new 52 week lows, with most advancing in the 2% range or better. Volume on the week was the heaviest since the big selloff in late July/early August. S&P sector leadership came from the beaten down materials, energy, industrials and consumer discretionary. Tech also had a good week. Defensive sectors lagged, joined by the financials which were nearly flat on the week; only the utilities posted a loss.
In foreign stock markets, the MSCI EAFE index advanced 2% but the emerging markets posted a smaller gain, held back by weakness in the BRICs. The Bovespa in Brazil fell more than 2% while the Shanghai Composite dropped more than 3%; Indian and Russian markets lost less than 2%. In Europe, the DAX, CAC 40 and FTSE all gained better than 3%, and all are up for three of the past four weeks.
Bonds: Treasury yields rose across the mid to longer maturities, driving down bond prices. At Friday’s close, we had a 2 handle on the 10 year and a 3 handle on the long bond. Investment grade paper was also marked down but junk, like equities, rallied after going to new lows. Like their taxable cousins, munis also lost a little, while TIPs advanced slightly, though they seem to be rolling over after a long advance.
Commodities: After a steep decline, the CRB index appeared to find support at the 300 level. Leading the way was crude oil, with a gain of nearly 5%. Copper also advanced better than 5% after going as low as $2.99 on Monday. The grains were little changed; in the precious metals, gold and silver gained while platinum and palladium traded lower.
Currencies: The rallying U.S. Dollar Index stopped just short of the 80 mark and pulled back. Overall the index changed little from Monday’s open to Friday’s close, but over the course of the week it traded in a fairly wide band. The Swiss France dropped another 2% against the Dollar, while the Aussie and Loonie both gained, while remaining below parity. The euro and Sterling were down slightly, Yen was up fractionally.
Outlook
The week brought a number of economic reports that, on balance, painted a slightly less gloomy picture of the economy than we have been seeing recently. The ADP payroll report on Tuesday morning was credited by some analysts for playing a part in the rally that began during the trading session
Stocks: With the first week of Q4 now in the books, we are heading into earnings season. Early reports are a mixed bag. Some, such as tech stalwarts Oracle (ORCL) and Adobe (ADBE), have reported good numbers. A few economically sensitive companies, such as Best Buy (BBY) and Darden (DRI), have disappointed. Along with the financial concerns surrounding the European debt crisis, the uncertain outlook has weighed on stock prices. We find ourselves in sympathy, but have felt that that selling was overdone, and have been looking for opportunities to buy shares of quality companies at attractive prices.
Technically, the market appeared to be washed out on Tuesday morning and I posted a quick note on my Wordpress blog calling a bounce. My longer term outlook is that there is still a great deal of risk in the market, the low may not be in, but we are ready to do some selective buying. I am not quite as keen on buying broad index funds here, as they contain many stocks that will remain under pressure for some time. One stock that has been mentioned in my previous articles is US Bancorp (USB), a major holding of Warren Buffett. We have been kept out by the general market downturn, but see an opportunity here. The stock has been pushed lower along with the rest of the financials, but has held up relatively well compared to the industry, as shown in the chart below (click to enlarge images):
Several of our other watch list stocks are large cap techs. The tech heavy NDX has been the best relative performer among the major U.S. indexes. It has been under pressure recently, along with the rest of the market, but we like some of the valuations on companies that are fundamentally strong.
Finally, let’s take a look, as we do every week, at the SPX. Note that the index is still in the two month range, and has been coming up to the descending 50 day MA, where it finds resistance. If it manages to break the 50 day, we would see that as a positive signal for the broader market.
Bonds: Yields recovering from extremely low levels, and bond prices appear to be rolling over. The bond trade, particularly the Treasury sector, is very crowded, and we have turned negative in our outlook over the last couple of weeks. I believe the money has been made on the long side, and only high yield corporate issues – BB to BBB is the sweet spot – and selected munis are attractive. For those inclined to play the short side via something like the ProShares TBF or TBT, the trade might be there. The technical picture on bonds is increasingly looking weak.
Commodities: The CRB Index is some 20% off the April high. I have been writing for months that somewhere in the area of 300 on the index would be my target entry zone for a long position. Patience has been rewarded, and now that we have seen that level hold in the short term, we’re planning to put some money to work, beginning with a partial position, and building into it if the market goes our way. Gold may also look attractive at current levels, but my view is that the correction probably has farther to go.
Currencies: The U.S. Dollar Index has traded higher in 5 of the last 6 weeks after breaking out of a four month base. However as we noted above, the rally seems to have stalled, at least for a time, perhaps giving the markets some respite. Safe haven demand for the dollar amid the European crisis has been driving this move, but it isn’t the only driver: emerging markets have seen capital outflows, which are reflected as well in the prices of their stocks and bonds. Capital is moving back into the deeper and more stable U.S. markets. An eventual move above 80 on the Dollar Index looks likely. We will have to see whether the nascent bottoming process that we think may be developing in equity and commodity indexes, can survive that kind of move.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in USB, DBC over the next 72 hours.
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