Dow Jones Industrial Average
Standard & Poor’s 500
Nasdaq Composite
Week 47 Recap
There was a lot of talk about stock market bubbles entering the week, and while there may have still been a lot of talk about stock market bubbles exiting the week, it still didn’t stop the S&P 500 from scoring its seventh straight weekly gain. In the process, it also established a new record closing high, as did the Dow Jones Industrial Average, which had a Sweet 16 party closing above the 16,000 level for the first time ever.
The Nasdaq Composite started the week with a 37-point loss. That slide was precipitated by a selloff in many of the high-beta momentum stocks that came under fire in a Barron’s feature story for having bubble-like valuations. In a true sign of the underlying bullish bias in the market, the Nasdaq finished the week nearly six points higher than where it began the week.
To be sure, the buy-the-dip trade was alive and well once more, prevailing in the face of concerns about the suggestion in the minutes from the October FOMC meeting that the Fed could slow the pace of its asset purchases in coming months if the data proved consistent with its outlook for ongoing improvement in labor market conditions.
The aforementioned acknowledgment caused a bit of a hiccup on Wednesday, yet the market wasted little time making up the losses that followed the release of the FOMC Minutes. Its resilience was attributed generally to two reasons: (1) the idea that the Fed didn’t really tell the market anything in the minutes it didn’t already know and (2) the notion that the market is perhaps growing more comfortable with the Fed’s position that a tapering isn’t a tightening and that the fed funds rate target is apt to stay at the zero bound even well after the Fed ends its asset purchase program.
Separately, some weak inflation data this week in the form of the CPI and PPI reports seemed to support the market’s thinking that the Fed won’t curtail its asset purchases before the end of the year. That thinking has the potential to change with the November employment report (out on Nov. 6), but with total CPI up 1.0% over the last 12 months — the smallest rate of increase since October 2009 — it is clear that the Fed is still falling well short of meeting the inflation side of its dual mandate.
Another key happening related to the Fed is that Janet Yellen’s confirmation as the next Fed chairman appears imminent after the Senate Banking Committee gave her a thumbs up this week. The market likes the thought of continuity in leadership, so it wasn’t lost on participants that Fed Chairman Bernanke told the National Economists Club that he agreed with the views Ms. Yellen expressed in her testimony at her confirmation hearing.
Notably, only four out of the ten economic sectors closed the week higher; however, they were four of the market’s most influential sectors by weight. The winners of note included the financial (+1.7%), health care (+1.6%), energy (+0.7%), and industrials (+0.6%) sectors. The week’s biggest laggard was the rate-sensitive utilities sector (-1.8%).
Longer-dated Treasury securities enjoyed a positive session on Friday as stocks rose, but the yield on the benchmark 10-yr note climbed five basis points on the week to 2.75%. Another loser of note this week was gold, which dropped 3.40% to $1243.00/oz., broadsided both by the weak inflation readings and rumblings about a tapering.
The week ahead will be a short week due to the Thanksgiving holiday on Thursday.
Summary
Moving forward, there will be key data such as Core CPI, Existing Home Sales, PPI and Unemployment Claims. On Tuesday, Ben Bernanke is due to speak at the National Economists Club Annual Herbert Stein Memorial Lecture. It would be interesting to hear what Bernanke has to say in such a sentiment-driven market. With the exception of unexpected macroeconomic data or adverse news by the Feds, we should see another up week again.
Direction for Week 47 – UP
Yes, we all know that the market is due for a correction. I was right for the weekly market call, but I am also getting increasingly confused by this sentiment driven market and scared of the overdue correction. Volumes were ridiculous for the whole week, with volumes not higher than 700m for any trading session.
FOMC Meeting Minutes sent a chill down market’s spine with hints of tapering from the Fed. This is a rare phenomenon where good news can be bad news. E.g. good news will prompt the Fed to taper and this is definitely not a good thing for the market right now.
VIX
VIX was almost flat for the week with a slight gain of 0.57%. Heading into Wed’s session, VIX also went up with Monday and Tuesday being bearish. Many thought that this week would be the kick start for the overdue correction. However this was not as the bulls closed off the week with a vengeance.
Among the leaders for the week, Health Care and Financials were leading ahead with gains of 1.7%. Energy was a distant third with gains of only 0.65%. On the other hand, Utilities were lagging with losses of near 1.8% while Materials and Technology lost 0.41%.
This was a week where the indices made between 0.14% and 0.65% and S&P 500 and DJIA made history, breaking above key emotional level of 1800 and 16000 respectively. However the made up of the market wasnt as bullish with Health Care and Energy, both counter-cyclical sectors, led the market for the week.
Technical Updates
With the market at a high after a strong bull charge, the end is in sight for the bulls. Why would I say that? Volumes. Volumes are getting ridiculously low on the NYSE with Friday’s volume just 606m. Technically, it seems that the indices’ 20D moving averages are acting as good support for the run up now. I still stick to my view that a correction is near, but I think that there is still further upside to the market.
Bond Market
The Week in Review – Longer Durations Lag:
- Longer dated Treasuries lost ground this week as fears the Fed would soon begin to taper its bond-buying program crept back into the marketplace.
- The selling began on Wednesday after St. Louis Fed President James Bullard indicated a strong November jobs report would increase the likelihood the Fed would begin to scale back its asset purchase plan. Those comments were supported later in the day on Wednesday after the FOMC Minutes signaled a tapering may come in the ‘coming months’ with better data.
- However, this week’s data did not fully support that line of thinking as existing home sales were light (5.12M actual v. 5.20 mln expected), core CPI came in cool (0.1% actual v. 0.2% expected), and Philly Fed missed by a wide margin (6.5 actual v. 11.9 expected).
- Not all of the data was disappointing as retail sales topped forecasts (0.4% actual v. 0.1% expected) and businesses replenished inventories at a faster than expected rate (0.6% actual v. 0.4% expected).
- Selling had the biggest impact on the long end of the curve as the 30y tacked on +6bps to end the week @ 3.838%. Thursday’s selling ran the 30y up to 3.938%, its highest since August 2011, but late-week action managed to shave off 10bps.
- The 10y added +5bps this week, settling @ 2.752%. Thursday’s action tested the neckline of a potential inverse head and shoulders pattern off the September lows, but so far a breakout has yet to materialize. A breakout through the 2.800% area targets the September highs near 3.000%.
- This week’s action in 5s was lackluster as a choppy trade produced a +1bp uptick to 1.353%. Traders continue to monitor the 1.400/1.450% area as resistance there is helped by the 50 and 100 dma.
- Upfront, the 2y shed -2bps to 0.291%, ending at its lowest level in over a month.
- Selling swung the yield curve steeper as the 2-10-yr spread widened to 246bps.
- Monday’s Data: Pending home sales (10).
- Monday’s Auction: $32 bln 2y notes.
Macroeconomic Data (Week 48)
Summary
After the past 2 weeks with alot of FOMC member’s speeches and testimony, the market is getting increasing fearful. A sign of fear would be the counter-cyclical counters leading the week and the low volumes for the past week.
I made the wrong market call one after another for the DMA, this are just signs of the market getting irrational and sentiment driven. I could no longer draw on rational factors to deduce the direction. This market is sentiment and news driven, I shall let them decide the direction and do day trades on them. My gut feel is that the bulls will continue to push the market higher by abit this week.
Direction for Week 48 – UP
