Another rather uneventful week in the markets passes as investment managers position themselves for quarter-end and Q2 earnings season. Monday saw a sharp selloff for the second week in a row, but most of the losses were recovered on anemic volume as the week wore on. Indeed, market internals have not recovered nearly as fast as price since Monday's beat-down. However, the responsive nature of the major averages in bouncing back from their first support level demands respect and any follow-through on a close above 930 could attract the momentum players and catch some shorts napping. This week promises to be of even weaker volume as Wednesday and Friday are market holidays in Canada and the US respectively.
The Nasdaq continues to outperform the other major indices. After the initial short-covering rallies of March and early April, the Nasdaq has taken the lead. Should the markets continue to push higher into the summer, my expectation is that this dynamic will continue.
The Dow did not fare so well last week. While the others flirted with green, the Dow finished off a full 100 points. This could prove to be a troubling negative divergence for the bulls, as Dow underperformance has foreshadowed many of the major tops of the past 18 months.
Similarly, the German Dax index has taken a bit of a beating over the past 3 weeks, falling nearly 10% from its early June highs. European underperformance has been a hypothesis of mine for a while now. I would not be surprised to see major selloffs in Europe over the summer to new lows accompanied by a refusal of American averages to oblige and subsequent rallies to new '09 highs in Q3, making a final high before rolling over in a big way for 2010. Purely speculative hunch, but that's the way I'm leaning - subject to change at the drop of a hat.
The long bond enjoyed a fairly robust week. I have very little opinion on the future direction of this instrument. But my feeling is that the increasing domestic savings rates and eventual thinning of the US trade deficit will provide a greater appetite for government debt than most anticipate (ala Japan). Additionally, I would not put it past the Treasury to increase the ratio of short term offerings (less than 2 year maturity) and simply keep rolling them over until inflation fears are killed dead.
As you can see, there are no signs of increasing inflation expectations in the short term treasury bill market. If interest rates were going to start booming higher, the savings rate would not be skyrocketing and short term rates would not be so low. Savings would be falling and rates would be rising as those trying to hedge against future inflation would be stocking up on non-durables. That ain't happening. The only place I see inflation is in the amount of hot air coming from the media and capitol hill.
The CRB index does not look all that strong. It has retraced a measly 24.1% of its prior decline. What case for green shoots remain if commodities roll over?
Have a good week!
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