Earnings season began with a handful of reasonably good reports, but concerns about Spanish debt and a softening Chinese economy sent financial markets further into risk aversion mode. Let's break down the numbers:
Perspective
Stocks: All of the major U.S. equity indexes posted losses for a second consecutive week. The S&P 500 recorded its first back to back losing weeks, making it three in the last four, for the first time in 2012. The pullback ranged from 1.6% on the Dow Industrials, to 2.7% on the Russell 2000, as small caps continue to see the heaviest selling pressure. Even market stalwart Apple (AAPL) corrected 4. 5% over the five day span. Market volume picked up somewhat but was not particularly heavy. One of the salient features of the week's action was the dance around the 50 day simple moving averages. As of Friday's close, the NASDAQ Composite and NDX 100 were the only major indexes above that mark; the Composite bounced off the 50 day Tuesday and closed just above it Friday.
All nine of the major S&P sectors pulled back, ranging from 1% for the materials and consumer discretionary, to more than 2.5% for the financials, energy, and health care. There was no clear rotation between defensive and aggressive sectors, as broad selling was seen across the board.
Nine of the twelve foreign equity indexes we monitor posted losses, with the best performance turned in by the Shanghai Composite, even as Chinese GDP growth slowed to 8% - perhaps apropos of this weekend's Formula 1 GP of Shanghai. The other winners were Hong Kong and Australia, extending a run of relative outperformance by the Asian markets.
Bonds: U.S. Treasury bond yields fell for a fourth consecutive week. The benchmark 10 year note is back under 2%, the fives at 0.85%, the long bond at 3.15%. Corporate and municipal bond yields also fell, though less aggressively. Inflation protected bonds joined the party as well; the iShares fund (TIP) finished at a new all time high on a weekly closing basis. Overall, it was a pretty good week to be long the bond market.
Commodities: Commodities continued to slump, as the CRB index posted a loss of more than 1% for the sixth week in the last seven, but held support at 300. Solid support over the past 18 months comes in the 295 - 305 range. Oil, which had broken the 50 DMA the prior week (WTI spot price), tested that mark and failed, closing below $103. Volume was on the light side. Natural gas, which I wrote last week "appears destined to fall below $2," did indeed fall below that price level. Volume on the NG contract was fairly heavy on Thursday as gas attempted to muster a rally, but it failed and closed near the low of the day.
Gold had a decent week, and was up more than 2.5% at one point, but gave back some of the gains Friday. Silver did not fare quite as well. The industrial metals index recorded its seventh consecutive week of losses, with big drops on heavy volume Tuesday and Friday. Agricultural commodities saw similar trading action.
Currencies: While currency trading was relatively quiet to start the week, the Chinese GDP announcement Thursday set things into motion, with the U.S. dollar appearing to be the main beneficiary. The Dollar Index met resistance at 80 but found support at the 50 DMA at 79.33. Most of the action has been in a range between 78 and 80, much of it in an even tighter band between 78.5 and 79.5, over the last ten weeks. The euro tested the 50 DMA just above $1.32 Thursday and failed, giving back most of the week's gains Friday. The week ended with most of the majors off against the Greenback as Friday had an air of risk aversion about it.
Outlook
The week's U.S. economic headlines were again dominated by the employment data. First time unemployment ticked up, while continuing claims fell primarily due to expiration of some extended benefits. The employment recovery is beginning to weaken perceptibly. Consumer and producer prices showed very modest increases, nothing that would cause much concern. The U.S. trade deficit narrowed in February due to both slightly increased exports and more substantially decreased imports. Nearly half of the decrease in imports was attributed to consumer goods.
Stocks: Alcoa (AA) kicked off Q1 earnings season on a positive note, and the numbers overall have come in fairly solid, including money center banks JP Morgan (JPM) and Wells Fargo (WFC). Even so the correction of the December - March rally has completed its second week, with the Dow and SPX beneath their 50 day MAs for the first time over the entire period. All of the major U.S. equity indexes that don't include Apple - the Dow, NYSE Composite and Russell 2000 - undercut their early March lows last week. At the low point of the week the small caps had retraced roughly 1/3 of the move from the November low to the March high, while the large caps had given back ¼ of their gain. So far that looks like a very ordinary correction in a strong bull move. However breaking the 50 day and undercutting a previous low are cautionary signals.
Our investment position is near fully allocated to equities in the main portfolio, and I have been looking for another leg up in the markets based on an improving U.S. economy, good corporate earnings, and the intact market up trend. The further this corrective phase goes on, however, the more cautious I will become. There are a couple of things I would like to see at this point: first, a cross back above the 50 day on the SPX, ideally as early as next week, followed by a move above 1,425 on good volume. I suspect much will depend on the forthcoming earnings reports. A number of blue chips report next week, and we will also get important housing and manufacturing data. It promises to be an important week.
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This week's honorable mention goes to Starbucks (SBUX). The stock has been under accumulation since announcing its Verismo single cup brewing device a month ago. Last week, when the markets were in corrective mode, SBUX gained 6% on strong volume. While it is currently quite extended, this is a stock to watch. I expect good things going forward.
Bonds: Bonds in general, and U.S. Treasuries in particular, have benefited from global growth worries and the softness in risk asset markets. Yields are back down into the range from late last summer to the end of February. Bond funds and ETFs continue to attract money while equity funds see outflows, putting a strong bid into the bond market, and Treasury auctions continue to see strong uptake. This old bond bull will not go down easily. As I find myself in the position of managing a portfolio that is 100% allocated to fixed income, this April bond rally is a welcome respite. The time to prepare for storms is during fair weather, so I will take this time to continue looking at how to position when the bull does finally meet his fate.
Commodities: Commodities have really been the proverbial canary in the coal mine for the risk asset markets, particularly the industrials metals. More about them in a moment, but first let's take a look at the all important energy market. As we outlined above, the spot price of WTI crude is in a narrow channel between support and the 50 day MA. Over the past six months $103 had been a resistance level; after breaking through that resistance in mid February and making the run up to $110, the price has come back to test $103 as a support level, and in the process broke under the 50 day. We should soon see one of two things happen: a successful test of support and a move back above the 50 day, or failure at support and a move down to the 200 day in the mid 90s.
After a nearly continuous three year rise capped by a parabolic move up last August, gold has been in a six month correction. That parabolic move began at ~$1,625, and gold has come back to that level three times since - breaking down to $1,525 (intraday - $1,550 closing basis) at the end of 2011. Most recently $1,625 was re-tested at the beginning of this month and gold has come back up. The next test will be the nearby 50 and 200 day moving averages, which are converging just under $1,700. Gold has some work to do before we see it as an attractive long position for new buys (disclosure - we are long gold in both portfolios as of this writing)
Currencies: After building a four month base in the mid 70s last summer, the U.S. Dollar Index has been quietly building another base in the high 70s over the last three months. Current resistance is at 80 on the index, a level capped the sharp September rally that broke out of the previous base. My suspicion is that we will see another run toward 82 in the coming month. On that basis my outlook for commodities in particular is not very constructive. What it could mean for equities remains to be seen. Bonds should benefit from that kind of move.
Disclosure: I am long AA.
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