Summary
Last week's reversal to the upside in bond yields, mixed stock prices and
firm performance in precious metals set up an interesting end to the year's
first quarter.
Interest Rates
It remains to be seen whether last week's upside reversal in Treasury
yields kicked off a major near-term spike in rates, at the longer end of the
curve in particular. However, at minimum, the reversal probably did mark an
important bottom. Across the entire curve, the week as a whole looked as follows:
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TREASURY YIELD CURVE AS OF 03/26/04
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90-Day 2-Yr. 5-Yr. 10-Yr. 30-Yr.
Date Bill* Note Note Note Bond
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03/26/04 0.93% 1.56% 2.77% 3.82% 4.76%
03/19/04 0.92% 1.52% 2.74% 3.77% 4.71%
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Change +1BP +4BP +3BP +5BP +5BP
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*Coupon-equivalent yield.
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The reversal was more dramatic than week-over-week results capture. For
instance, last Wednesday, the on-the-run 10-year and 30-year issues finished
the day at respective yields of 3.71% and 4.66%, having traded at even lower
yields during the session. As I write this, the current levels are 3.90% and
4.82%. So against last Wednesday's closing levels, we're talking about
respective increases of 19 and 16 basis points. This is indeed meaningful over the
time period involved!
This Friday, the Labor Department will release employment data covering
March. The consensus forecast for the payroll survey is an increase of 110,000
to 120,000 jobs, versus the paltry 21,000 gain in February. However, there
are rumors beginning to float around that the reported growth in March payroll
employment will be a much larger number. Of course, similar rumors were
floated in advance of the January and February employment reports, only to be
proven completely wrong.
This said, there is now so much statistical static ("static" being a
euphemism for something more like "garbage") imbedded in the data that one of
these months, there is going to be a major surprise. It could occur from nothing
more than the catch-up of what are some serious seasonal-adjustment
distortions I believe remain in the numbers.
Bond yields have had a good bounce up from last week's levels, and they
may adjust upward still further by the time Friday rolls around. But it is
highly likely the entire Treasury curve would be hit pretty hard by an especially
strong employment report. This is because of the major, major deal Greenspan
and the Fed have made of employment growth vis a vis continuing accommodative
monetary policy.
In addition, the growing belief the Fed will not alter rates at all
during 2004 has emboldened hedge funds in particular with regard to their highly
leveraged debt-market "carry trades." Any significant jolt to this psychology
could roil the fixed-income markets in a very material way! And, because of
various "interconnects" in the equation, trouble in the debt market could
definitely spill over into stocks.
The Stock Market
Last week, my seven-measure tracking group registered an average gain of
0.2%. Three components rose, three fell, one was unchanged. I believe this
result qualifies for my earlier description of "mixed."
Through last Friday's close, the group was down 0.2%, on average, for the
year. Year-to-date returns ran in a relatively range of +2.9% for the Russell
2000, to minus 3.6% for the NASDAQ 100. Of more interest, however, is where
the group was last week, versus where it stood on 3/5, which was the last time
some of the components set 52-week highs.
As of the close on 3/5, the tracking group showed an average year-to-date
gain of 4.3% (median = +4.8%). So over the ensuing three weeks, a strong
quarter had turned into one with returns that were flat overall.
Stocks are very strong at the moment, something I thought possible as
last week was coming to an end. But the quarter has a couple days yet to run.
Where only three weeks ago it would have been expected that money mangers would
not want to show much/any cash at quarter-end, this may no longer be the
situation. We will see soon enough if this rally helps skew quarter-end "window
dressing" a little in the other direction.
From last Friday's research missive (3/26, "Buy the Dips or Sell the
Rallies?"):
"Yesterday's [3/25's] rally had the CNBC crowd frothing at the mouth ...
The gains were indeed spiffy -- my tracking group advanced an average 2.1%
(median = +1.7%) -- but based on the technical picture I now see unfolding, I
don't believe this advance will have much staying power. Based on very rough
calculations, here's what I see as the 'best case' for the immediate future:
Projected Maximum
03/25 ---------------------
Close Points Price Change
------------------------------
DJIA 10,219 194 10,413 1.9%
S&P 500 1,109 22 1,131 2.0%
NAZ Comp. 1,967 43 2,010 2.2%
-----------------------------------------
[NOTE: As I write this, today's respective DJIA, S&P and NAZ highs remain
comfortably within the above parameters and are: 10,350, 1,123 and 1,996.]
"...Here's what I see setting up for the next few months. At the moment,
this 'big-picture outlook is rough ... and will need some tightening up along
the way. But here goes:
"New lows (lower than this week's lows), by early
to mid April.
"These new lows are then followed by a decent but
doomed rally ... I am talking about something that
could turn out to look devilishly like a major
'failing rally.' For the sake of argument right
now, let's say this process runs into May --
perhaps well into May -- before it is complete.
"Then, the stock market segues into what will be
a decidedly bad June-July period."
I was asked over the weekend what I thought "lower than this week's [now
last week's] lows" were. I really don't know, but here is one thought.
Last week, the NASDAQ Composite got down to its 200-day moving average
before it rallied. The DJIA and the S&P 500 did not make it to their 200-day
averages. But I think they will before what I've called the "decent but doomed
rally" above commences. If so and the NASDAQ Composite follows in direction,
it is likely to violate its 200-day measure, as might the Dow and the S&P.
Based on end-of-last-week values, here is what respective "matches" as well as
violations of 3% and 6% would have entailed.
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200-DAY MOVING-AVERAGE VIOLATIONS --
VALUES PROJECTED FROM CLOSE ON 03/26/04
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% Decline From
MA Violation/ 03/26 Close At
Resulting Price Violation Of:
03/26 --------------- -----------------
Measure Close 0% 3% 6% 0% 3% 6%
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DJIA 10213 9842 9547 9251 3.6 6.5 9.4
NAZ Comp. 1960 1901 1844 1787 3.0 5.9 8.8
S&P 500 1108 1059 1027 995 4.4 7.3 10.2
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In addition, the recent behavior of respective two-week rates of change
indicate that the recent/current pullback is of the "major" variety.
Historically, these have had a tendency to reach negative rates of 75% to 90% before
rally phases ensue. As the following table indicates, this has not yet
occurred, on balance.
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DJIA, S&P 500 AND NASDAQ 100 -- TW0-
WEEK COMPOUND ANNUAL RATES OF CHANGE
-- 14 WEEKS ENDED 03/26/04
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Week S&P NASDAQ
Ended DJIA 500 100
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2004
03/26 -7% -25% -25%
03/19 -64% -66% -74%
03/12 -58% -43% -50%
03/05 -6% +33% -15%
02/27 -10% -2% -22%
02/20 +7% +3% -25%
02/13 +41% +40% -14%
02/06 +7% +3% -43%
01/30 -24% -18% -64%
01/23 +30% +57% +20%
01/16 +60% +107% +372%
01/09 +40% +84% +283%
01/02 +39% +60% +96%
2003
12/26 +106% +68% +62%
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Gold/Silver
From the missive dated 2/17 ("The Markets -- By the Numbers"):
"So far, the 2004 rise, then decline, in the prices of physical gold and
silver, as well as in the better stocks that underpin the XAU, have been very
much in line with the expectations I've expressed over the last several weeks.
The correction has probably run its course. If so and in the case of gold,
it will generally have been well contained in the $400 - $410 range. While it
may take additional consolidation and base building before an assault is made
on the prior highs, I am looking for a bullion price of, say, $450 to $475 by
late spring to early summer."
The above still represents my general views. Moreover, last week's
up-tick in near-month gold to above $420 is not only constructive action, but it
also remains consistent with my price objective of $450 to $475 in the time
frame outlined above.
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