Sunday Recap: Whither are we wandering?

When I first started this blog, one whole week ago…I thought that it would be a useful exercise and a chance to help focus my thoughts, but this past week was a challenge. Up and down with most of the large indices saved from another down week by the powerful move on Friday. Generally positive domestic economic news with sprinklings of the trouble and American fliers yet again in harm’s way in Iraq (with a tacit partnership with Iran no less.) Europe showing signs of strain as their economies weaken and the latest Tsar pounds his overly large breasts and declares he will not bow to the will of the West and launches his own sanctions on imported foodstuffs.

Just out of curiosity, did anyone else ever suspect he’s dealing with a heck of Napoleon complex? He’s of average height but tends to surround himself with shorter people. His successor/predecessor, Dmitry Medvedev, is all of 5’4”. Can you imagine Medvedev trying to kiss Michelle Obama on the cheeks at some White House reception? I’m betting some nice young Marine would love to pick him up so he could reach her.

So for all of the action last week, where could the market be heading now? I honestly haven’t the faintest idea and neither does anyone else. So this week we’re going to focus on the descriptive because:

  1. I leaving for a trip home tomorrow and don’t have the time to do an in-depth valuation breakdown
  2. You probably wouldn’t read it anyway

After crawling out of an ice cold lake in the Adirondack mountains, I’ll try to devote the time to answering this question but for now, look at charts of 2000 and 2007 and remember that if this is a topping out process, you have time to trade it. They generally take a year to resolve themselves.

Broad Indices:
When you examine the chart below, you’ll notice on pattern almost immediately (because I sorted the list to show it.) The list has been sorted by one week returns so you can see the trend; small and mid-cap benchmarks generally outperformed their large cap brethren. In fact, they were generally on a positive trend for the week while large caps needed Friday’s strong action to lift them into the black.


As you can see in the chart, SPY lost ground to IWM nearly every day in this short month, but the pattern is perilous. Momentum wise, IWM’s short and long term momentum scores bottomed out in the single digit percentile rankings on 7/31 while SPY only bottomed out on 8/7. The better performance could simply be the first round of bottom feeders, technicians or Johnny come-lately’s deciding that the move back to prior support at the 200 day exponential moving average is a good buying opportunity.

International Markets:
China continued another strong week as the relative stability of what could be the largest (by population anyway) oligarchy in global history seemed a better deal than could be found elsewhere. Europe continued to be dragged lower as investors discount the expectations for stronger growth and the anxiety over an expanding trade war.


Domestic Sectors:
No clear themes emerged from Friday’s action with the possible exception of “the last shall be first” as those sectors that have lagged the over the last three months began to find bidders, most noticeably utilities as selling pressure seems to have exhausted itself while higher-margin tech stocks with their strong YTD performance eked out only minor gains.

I have more analysis on utilities in another posting that will be going up shortly. The real question is how long before advisors decided the utilities are already overbought (what do you think….Wednesday?) and decide to rotate into whatever other more defensive sectors haven’t participated as much? Will consumer staples finally have its day?


Fixed Income
Treasuries, Treasuries, Treasuries. Get them while they’re hot! The real question is how much the new military action in Iraq could conceivably cost? Humanitarian aid is not cheap (neither are hellfire missiles.) How long before we can get details on the costs and the potential change in Treasury issuance for 2014/2015 to cover it? More Treasuries=lower prices? Treasury yields seem to have found their way back down to where many economic prognosticators feel our long-term GDP growth rate is somewhat stable. Will a new war and increased government spending help lift the economy out of the doldrums?


The final chart I’ll leave you with this week is my risk-proxy of JNK/IEI. As you can see, it’s stabilized but remains in its downtrend channel. Have high yields spreads finally reached a level to draw investors back into the market or will outflows continue?


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