The action in the global markets last week was lost in the uproar over the high frequency trading (HFT) controversy that resulted from the new book by Michael Lewis. Though many of his past books have been good reads, I think his biggest triumph may be the marketing of his latest book.
Last week, you could have almost seen Mr. Lewis 24/7 as the bullet point was that the "stock market is rigged." This likely caused many regular investors to either call their advisors or to alter their plans to invest in the stock market.
In Monday's column, I expressed my view that this was probably bullish for the stock market, as it would keep bearish sentiment high, as many individual investors would wait to invest. However, I think the focus on rigged markets does a disservice to investors.
As the NY Times pointed out " But as an investor, high-frequency trading doesn't matter because you're focused on the boring work of buying good things and owning them for a long time." In discussions with veteran traders a year ago, few were concerned about HFT as they had seen little impact on their results.
Click to Enlarge
This long-term chart of the S&P 500 compares the price index with the total return that reflects the reinvestment of dividends. Though the bear market pullbacks in 2000 and 2008 were severe, the argument for long-term appreciation in the stock market is strong.
This chart is from last August's article from David Blitzer of S&P Dow Jones Indices, who pointed out that "One thousand dollars invested in the S&P 500 at the end of January, 1998 would have been worth $5557 at the end of July, 2013. However, if the dividends were reinvested in the index, the investment would be worth $10,635 by the end of July."
One last comment on what it really means for investors is the generally ignored quote from Mr. Lewis that "It doesn't follow from the story in the book that you should flee the market." Too bad there wasn't more focus on this comment as the dividend's reinvested chart makes a powerful argument for investing in stocks.
Click to Enlarge
As the first quarter has ended, the performance of many asset classes has seen some significant changes in just the past two weeks. In the middle of March (see chart), the Vanguard Emerging Markets Index (VWO) has gone from down 1.9% to up over 3% as the performance now matches that of the Spyder Trust (SPY).
In fact, for the year, these two markets and the previously recommended Vanguard European Stock Index (VGK) are all now about even as they are up just over 3%. The SPDR Gold Trust (GLD) has given up more of its gains as it is now up just over 5%. (Editor's Note: This chart does not include Friday's trading.)
Based on the quarterly pivot point analysis, as discussed in last week's Follow the Trend with Quarterly Pivots this may have been an important week for both GLD and the Market Vectors Gold Miners (GDX). Both started the second quarter below their new pivots, but rallied last week to close back above their pivots, suggesting that the worst of their decline may be over.
The bond market, as represented by the iShares 20+ Year Treasury Bond ETF (TLT) is still up just over 5% as the yield on the 10-Year T-Note is still locked in it's trading range. The generally bullish job report last Friday should allow the Fed to stay on its tapering course for the near future.
From a technical standpoint, I continue to expect yields to eventually breakout to the upside at some point this year. As I stated a few weeks ago, a strong weekly close in the 10-Year T-Note yield above 3.02% would be an upside breakout and signal a move to the 3.4-3.5% area.
This could be a real problem for those in a high yield mutual fund or ETF bond fund. As the chart indicates, $3.42 billion moved into these instruments in the first quarter. I am afraid that many of the buyers do not fully understand the risk of capital loss in these instruments that could result if yields move significantly higher.
Click to Enlarge
The ECB decided last week to keep their rate at the same level, despite the low inflation rate and the threat of deflation. One surprising fact was that the yield on the 5-year Spanish bonds dropped below that of the US 5-Year T-Note yield. Few would have guessed that this was possible a year ago, as it has not occurred since 2007.
Click to Enlarge
In another important moment for the bond market, Pimco's Bill Gross noted the passing of his fourteen-year old female Maine coon cat named Bob. He can be seen in the picture above watching Bill on TV. It is nice to see that someone who has over $2 trillion assets under management has a heart, as well as a sense of humor.
The economic data was generally positive last week, though the manufacturing data was mixed. The Dallas Fed Survey reflected strong growth while the Chicago PMI did not. Factory orders were better than expected.
The all-important ISM Manufacturing Index improved from February to 53.7, but was a bit below expectations. The chart shows a slight uptrend but needs to move above the downtrend, line a, to signal strong manufacturing. Of course, a drop below 50 would imply contraction and the chart has important support at line b. The PMI Services Index bounced back nicely after a weak reading in February.
Click to Enlarge
There is a very light economic calendar this week, with the FOMC minutes on Wednesday with Export Prices and jobless claims on Thursday. On Friday, we get the Producer Price Index as well as the preliminary reading from the University of Michigan on Consumer Sentiment.
The technical outlook for the stock market has improved since the last Week Ahead column, despite the wild action on Friday. The S&P futures rallied about six points in early reaction to the jobs report, but in the fist fifteen minutes of the regular session, it had given up all of those gains.
The selling has been the heaviest again in the Nasdaq and Russell 2000, as the large-cap Dow Industrials have held up better, so far. By early afternoon, the Dow was down 0.47%, while the Nasdaq Composite was down 2.25%.
As I discuss in more detail below, the outlook for the overall market, based on the NYSE Composite, is positive from both a weekly and daily perspective. This suggests that this is a pullback within an uptrend, not the start of a major correction.
No comments:
Post a Comment