Weekly Commentary
by Craig on 08/02/10 at 10:46 am
Epilogue – What Happened Last Week
Thanks to a late day rally on Friday, the S&P/TSX Composite finished the week on the positive side, appreciating 1.2% for the week. This snapped a 3-week losing streak. Helping things along were a rebound in commodity stocks as the Materials sector rose 3.3% and the Information Technology sector did well, rising 7.1%. Technology was helped by a 16% rise in Open Text following a strong quarter and Research in Motion rose 7.5%. US markets lost ground, declining 0.7%, and have now been lower every week except one so far in 2010. Utilities (-2.1%), Health Care (-1.7%) and Financials (-1.7%) were the primary culprits.
European PIIGS
The financial world love acronyms. In the past few years the BRIC countries have become a commonly used acronym to represent the developing economies of Brazil, Russia, India and China. Now there are the PIIGS of Europe denoting Portugal, Ireland, Italy, Greece and Spain. These are the economies with relatively high deficits to GDP that are at the route of the recent market weakness.
The accompanying chart is the credit default swap prices for the PIIGS today compared to 6-months ago. Credit default swaps (CDS) are a form of insurance that bond investors can use to protect government debt positions from the risk of default and are priced in basis points. In other words, it would cost 4% (400 bps) to protect a position in Greek government bonds from potential default. CDSs are also used by speculators to make bets on the risk of government defaults as well.
As you can see, the cost of CDSs have climbed dramatically during the past six months, most of this in the past few weeks. This has also coincided with significant declines in the equity markets for these countries with Greece down 26% during the past month.
Market Still Love Mondays
A few weeks ago we published an interesting market trend namely the discrepancy between the performance of the S&P 500 dependent on the day of the week. And the trend has continued. While the S&P 500 is roughly flat during the past three months, Mondays have enjoyed very strong and consistently positive returns. In fact, 12 of the past 13 Mondays have finished up on the day by an average of almost 1%. This may just be a coincidence or perhaps the reaction of a lack of negative news over the weekends during the past few months. Either way, if you are going to buy into the market it may pay to do so near the close on Fridays.
Past Report You May Have Missed
Updated charts from our investment trend watcher publication. These include equity sector performance and most traded commodities. Of interest is the recent pull back in commodity prices and economic sensitive equities. Some of which have started to recovery since the beginning of February.
Market Selloff Buying Opportunity?
Yikes, bad markets today. But with this kind of ratio of down to up volume (almost 20 to 1 for the NYSE), we could expect a bounce in the coming days
Earnings Season – So Far, So Good
Once again earnings are coming in strong as is sales growth for the S&P 500. Unfortunately, the market doesn’t care. But the S&P 500 PE is now coming back from recent high levels thanks to a falling index and rising earnings.
Model ETF portfolio rose during the past week but is still down on the year. Gold and materials exposure is hurting performance but having no direct European exposure is helping.
Asset Allocation
Market Cycle Model still points to early recovery phase, Market Trender Model is still bullish on equities and Valuation Model is still bearish on equities. So no change to our asset allocation this week.
Prologue – Upcoming Market Events
Canada Housing Starts (Mon 8 Feb 8:15am) - Canadian housing starts came in at 186.3k, besting the 180k estimate and 176.1k reading for December.
US Wholesale Inventories (Tue 9 Feb 10am) – Inventories for December are forecast to rise 0.5% compared to a 1.5% rise a month earlier. This would be the 3rd month of inventory rebuilding following 13-months of declines.
US Trade Balance (Wed 10 Feb 8:30am) – The US trade deficit is expected to be $35.5Bn, a slight improvement over the $36.4Bn reading for November.
US Advance Retail Sales (Thu 11 Feb 8:30am) – Consensus is for a 0.3% rise compared to a decline of 0.3% the prior month. Excluding autos, a reading of 0.5% is expected.
US Initial Jobless Claims (Thu 11 Feb 8:30am) – This reading has been stubborn of late abut is forecast to improve from 480k to 465k.
US U. of Michigan Confidence (Fri 12 Feb 9:55am) – Confidence for February is forecast to improve from 74.4 to 75.0.
Earnings
With over 50 companies reporting in Canada and over 50 in the US, we will redirect to our complete earnings calendars.
