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Introduction
This is the second weekly missive that examines the week that was in the financial markets, in an effort to help assess the prospects for the week(s) that will be. This is likely to become a permanent Gillespie Research Associate feature, but a final decision has yet to be made.
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Stocks
The market is highly short-term overbought, with an unhealthy divergence or two starting to manifest themselves. If you were a betting person, a lower market this coming week does not appear the worst bet in the world. The current period looks a good deal like early March, when stocks hit a momentum peak, then experienced a solid sell-off into the April lows.
I'm still deeply entrenched in the secular-bear camp. However, based on market behavior and chart patterns of the last several months, there is no question the next serious, protracted down-leg, when it occurs, will emerge from a well-defined broadening-top formation.
* Last week was very positive in the equity market, likely helped by Friday's expiration in futures and options. The GRA seven-measure tracking group was up an average 1.8% (median gain of 1.7%), with all components rising during the period. Gains ran in a range of 2.9% for the Russell 2000, to 1.1% for the DJIA and the NASDAQ 100.
* For the year to date through last Friday, the tracking group was down 0.9%, on average, registering a median decline of a very similar 1.0%. Going into last week, all of the group's components were in the red for the year. Thanks to the week's rally, three of the seven components moved from losses to gains for 2005 to date. These were: The NYSE Composite, the S&P 500 and the Wilshire 5000.
The following table breaks out tracking group price-only returns for last week, from the March 2005 highs, and for this year through 6/17.
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SELECTED STOCK-MARKET MEASURES
(GRA Seven-Measure "Tracking
Group," Listed by YTD Returns)
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06/17 2005 12/31 Week From
2005 High 2004 Ended 2005
Close Close* Close 06/17 High YTD
===== ===== ===== ===== ==== =====
NYSE Comp. 7346 7441 7250 2.0% -1.3% 1.3%
Wilsh. 5000 12076 12074 11971 1.7% +0.0% 0.9%
S&P 500 1217 1225 1212 1.6% -0.7% 0.4%
Value Line 400 403 404 2.3% -0.7% -1.0%
Russ. 2000 644 645 652 2.9% -0.5% -1.1%
DJIA 10623 10941 10783 1.1% -2.9% -1.5%
NASDAQ 100 1538 1545 1621 1.1% -0.5% -5.1%
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Average 1.8% -0.9% -0.9%
Median 1.7% -0.7% -1.0%
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*2005 closing highs as of March, as of dates shown:
NYSE Composite (3/4), Wilshire 5000 (3/7), S&P 500
(3/7), Value Line (3/7), Russell 2000 (3/4), DJIA
(3/4), NASDAQ 100 (3/7).
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* Based on the most basic screen of technical indicators I look at, the stock market added materially last week to its short-term overbought condition. At present, I am using a template that begins measurements as of last October 4th. This
is just before the Presidential election, which ignited a rally I believe was highly "suspect." One of the proofs of that opinion was how quickly the rally aborted immediately as 2005 commenced.
* As the table below indicates, the strong on-balance advance of the last few weeks has brought the cumulative NYSE advance-decline result to a level above where it was at its prior peak, which was the week ended 3/4. However, as of last week, cumulative NYSE up-down volume still remained below its March highs.
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SELECTED NYSE BREADTH MEASURES --
WEEKLY & CUMULATIVE DATA (10/29/04=0)
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Adv - Dec UVol - DVol 52W H - L Closing Tick
Week ----------- ----------- ----------- ------------
Ended Week Cum. Week Cum. Week Cum. Week Cum.
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2005
06/17 4086 27130 2.38 6.90 1059 21175 732 14824
06/10 1196 23044 0.52 4.52 633 20116 371 14092
06/03* 1900 21848 0.28 4.00 627 19483 398 13721
05/27 2267 19948 1.06 3.72 333 18856 296 13323
05/20 4613 17681 2.79 2.66 201 18523 601 13027
05/13 -2141 13068 -1.69 -0.13 17 18322 629 12426
05/06 2746 15209 1.55 1.56 184 18305 791 11797
04/29 305 12463 -0.40 0.01 -324 18121 506 11006
04/22 1461 12158 0.54 0.41 -386 18445 399 10500
04/15 -4417 10697 -3.36 -0.13 -315 18831 117 10101
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03/04 1989 23753 0.61 8.36 1228 18424 745 8137
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*Four-day trading week.
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* Mentioned earlier were emerging "divergences." One that popped up last week involved up-down issue and up-down volume ratios, something I call an "inversion." It is a very short-term indicator in nature, but these periodic inversions are frequently followed shortly thereafter by a market decline.
* Something else supporting the notion of an overbought market are some of the key sentiment measures. Ones relating to the VIX and put-call activity are shown in the following table. Last week, the VIX hit a multi-, multi-year low.
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THE BEHAVIOR OF CBOE SENTIMENT-RELATED MEASURES
AND THE S&P 500 FROM 10/29/04 THROUGH 06/17/05
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CBOE Options S&P 500
Date --------------- -------------------
or Put/Call Ratios Vs. 10/29/04
Week CBOE -------------------- Prior 1130.2 =
Ended VIX* All Equ. Ind. Tot.@ Close Week 100.00
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2005
06/17 11.48 1.02 0.53 1.93 0.91 1217.0 1.6% 107.68
06/10 11.96 0.71 0.47 1.55 0.90 1198.1 0.2% 106.01
06/03 12.15 0.99 0.61 1.90 0.90 1196.0 -0.2% 105.82
05/27 12.15 0.81 0.57 1.61 0.90 1198.8 0.8% 106.07
05/20 13.14 0.93 0.46 2.23 0.89 1189.3 3.1% 105.23
05/13 16.32 1.02 0.72 1.58 0.88 1154.1 -1.5% 102.12
05/06 14.05 1.07 0.80 1.67 0.88 1171.4 1.3% 103.65
04/29 15.31 1.01 0.74 1.65 0.88 1156.9 0.4% 102.36
04/22 15.38 0.98 0.67 1.90 0.88 1152.1 0.8% 101.94
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04/20l 16.92 0.98 0.63 1.87 0.88 1137.5 -- 100.65
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04/15 17.74 1.42 1.00 2.17 0.86 1142.6 -3.3% 101.10
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03/07h 12.26 0.77 0.57 1.38 0.86 1225.3 -- 108.41
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03/04 11.94 0.81 0.61 1.31 0.86 1222.1 0.9% 108.13
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VIX Highs and Lows (Including Intraday)
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Year High Date Low Date
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2005 18.59 04/18 10.78 06/17
2004* 22.67 03/22 11.14 12/23
2003 41.16 03/12 14.83 12/15
2002 56.74 07/24 18.87 03/28
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*New series, all of 2004 forward. @All
products. l-Lowest S&P close during 2005.
h-Highest S&P lose during entire period.
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* The following table, using the DJIA, the S&P 500 and the NASDAQ Composite as proxies, shows clearly the slippage in 200-day moving-average apogee existing in early March, to the negative readings during April, back into the black in recent weeks. Nevertheless, if this rally actually is the real deal, a continuation of the new bull market many analysts now believe is in full swing, a retest back to the 200-day averages at some point would constitute a healthy development. Of course, were a decline to this key proxy to come about for negative reasons, then the event might not be "healthy." At present, a retest would require respective DJIA, S&P and NASDAQ declines of about 1.2%, 3.7% and 3.2%.
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DJIA, NASDAQ COMPOSITE AND S&P 500 CLOSING PRICES ON
SELECTED DATES VERSUS RESPECTIVE 20-DAY, 50-DAY AND
200-DAY MOVING AVERAGES (Percent or Portion Thereof)
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DJIA Vs. NAZ Comp. Vs. S&P 500 Vs.
--------------- --------------- ---------------
Date 20D 50D 200D 20D 50D 200D 20D 50D 200D
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2005
06/17 1.0 2.5 1.2 0.9 4.3 3.3 1.5 3.3 3.8
06/10 0.4 1.5 0.7 0.2 3.3 2.0 0.4 1.9 2.3
06/03 0.5 1.0 0.4 2.1 4.1 2.9 1.0 2.0 2.6
05/27 1.6 1.8 1.2 3.7 4.7 3.2 1.8 2.3 2.7
05/20 1.8 1.0 0.6 4.0 3.4 2.0 1.9 1.5 2.1
05/13 -0.7 -2.7 -2.5 1.6 -0.3 -1.1 -0.5 -1.8 -0.6
05/06 1.1 -1.3 -0.3 1.2 -1.3 -1.3 0.9 -0.8 1.2
04/29 -0.8 -3.1 -1.7 -1.7 -4.0 -3.4 -0.6 -2.2 0.2
04/22 -1.9 -4.0 -2.1 -2.0 -4.2 -3.0 -1.5 -2.9 -0.3
04/15 -3.5 -5.2 -2.8 -4.1 -6.1 -4.2 -2.8 -4.2 -1.0
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03/04 1.6 2.6 5.7 0.3 -0.4 4.1 1.5 2.3 6.6
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* Nevertheless, the big-picture reality of the situation is that the last highs in the major proxies were made more than five years ago, at significantly higher levels in most cases. For instance, as of last Friday, the DJIA, S&P 500 and NASDAQ closed 9.4%, 20.3% and 67.3%, respectively, below their 2000 all-time closing highs.
Iterest Rates
Last week's performance continued to indicate that the intra-day reversal occurring on 5/27 in longer-dated Treasury coupon issues was a major event.
* Treasury yields rose across the coupon-issue curve last week, with the increase most pronounced at the back end of the curve. A piece I wrote last week (6/6, "Bombs Away for the Economy and the Stock Market?") stated:
"In addition [to the secular bear stock market], we may now have the makings of a new cyclical bear market -- in bonds, of all things, believe it or not! [There were important] lows (in yield) on Friday morning [5/27] on the 10-year and 30-year Treasury issues: 3.80% and 4.15%, respectively, versus respective late-Friday [5/27] levels of 3.98% and 4.28%."
Last Friday (6/17), the 10- and 30-year issues finished at respective yields of 4.08% and 4.37%, up three and five basis points for the week, and 28 and 22 basis points above the 5/27 lows.
* Last week saw continued speculation about the Fed's future course with regard to additional increases in the Federal Funds Rate. It is fascinating that many of the strategists stirring this pot have an equity, rather than fixed-income, orientation. This isn't too surprising, though, since the equity bulls are trying everything possible to spin the prospective interest-rate envrionment, to support their wild enthusiasm for the stock market.
During the week, expectations were little changed, at least those being expressed in the fed funds futures market. As of Friday, the futures market continued to indicate the strong probability of another 25 basis-point hike at the FOMC's June meeting, to 3.25%, and another 50 basis points beyond that by year-end. The December future finished at 3.75% on Friday.
The Dollar
* The Dollar Index fell 1.1% last week, the worst weekly result since April. For a variety of reasons, the greenback's fate becomes an increasingly difficult call from recent highs. I will have a closer look at this in the next edition.
Commodities/Gold
* The CRB Futures Index rose a solid 2.8%, led by strong gains in the energy complex.
* Crude Oil was up in excess of 8% last week (new highs), and the active unleaded gasoline contract rose 6.5%. Perhaps the most disconcerting performance (with next winter in mind) was put in by home heating oil, however. It ended the week up almost 3%, indicating difficulty within the refining sector in building inventories.
* Although energy made a sizable contribution to the rise in the CRB Index, physical gold did its part, too. Bullion rose 2.5% last week (spot price), while silver was up a less robust 0.8%.
Last week's performance in gold and gold stocks quickly rewarded a comment I made in the last week's edition of this missive:
"Gold's recent correction was much better contained in the metal than in the stocks. However, the stocks are now leading in the other direction, which I interpret as a very constructive sign."
* The XAU closed on Friday at 92.91, up 4.9% for the week. That close put the XAU a whopping 18% above its recent low close set not long ago -- 78.73 on 5/16. The combined behavior of the physical metal and the stocks of the major companies in the sector suggest that something rather major may be developing. For reference, last year's high (intraday) in the XAU was 111.50, set on 11/17, with the index closing that day at 110.34.
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