Weekly Market CallAfter the markets finished the previous week on a very strong note, I expected to see some follow through that would lift the averages to new highs. Instead, the markets spent the first two days of the week meandering and then began their slide downward. By the time trading was done on Friday, the Dow and S&P 500 had lost 2%, the Russell 2000 had lost 1.6% and the NASDAQ had lost 1.4%.
The major catalyst this week was Bear Stearns and the problems with two of their hedge funds that had placed bad bets on sub-prime mortgages. Investors in the funds were about to auction off assets when Bear came through with a $3.2B loan to keep the funds afloat. The mood that swept the market was based on the fear that other funds holding heaps of securitized sub-prime debt might have to re-price their holdings as well. And that could lead to more fund failures or near-failures. Suddenly, it doesn't look like the sub-prime mess is so well-contained after all.
Another important market driver lately has been interest rates. The same story played out here, with the bond market trading higher earlier in the week and weakening as the week progressed. With stocks looking so weak, some money flowed into bonds and managed to bring the yield on the 10-year note down to 5.13% by week's end.
We saw the successful IPO of the Blackstone hedge fund this week but it wasn't enough to light a fire under the market.
A number of well-known companies reported earnings and the market got the overall impression that the consumer is not spending as freely as in the past. Some of the companies that disappointed included Best Buy, Circuit City, Fed Ex and Starbucks. The pundits say the housing crisis is contained and inflation is benign. If that were true, why is the consumer stumbling? Is it because of falling home prices, rising interest rates and ever higher energy costs?
ETF CommentsIndexes: as discussed above all the indexes fell this week and so did the corresponding ETFS. In terms of how they look when analyzed using the TradeRadar software and daily data, it appears DIA is still above the SELL zone but SPY is right on the borderline with all the SELL indicators flashing green. IWM is almost is the same situation as SPY but has a little more safety margin. QQQQ, surprisingly, is holding up quite well. Looking at the same charts using weekly data, it looks like consolidation is taking place but nothing alarming. Are we seeing, then, a short-term pullback? The onset of the summer doldrums? Or will it develop into something more serious?
Real Estate: REITs moved downward relentlessly this week. The iShares US Real Estate ETF (IYR) was no exception and their down-trend remains intact. IYR continues to be buried in the SELL zone. Any rallies should be used to load up on the ProShares Inverse Real Estate fund (SRS) which has been making new highs since I mentioned it in a previous post back in mid-May. At that time I pointed out that IYR had fallen out of a trading range. Homebuilders were in the same boat this week. It appears the value play that was driving XHB up has lost momentum. XHB as resumed its clear downtrend as confirmed by the 20-day moving average dropping below the 50-day moving average.
Financials: the SPDR Financial Sector ETF (XLF) had a bad week and now sits below both its 20-day and 50-day moving averages. The TradeRadar SELL signal is now flashing on the daily chart and almost flashing on the weekly chart. It could be that the broker/dealers can no longer keep this ETF afloat while other financial companies in the fund are breaking down. The streetTracks KBW Bank Index (KBE) has been deep in the SELL zone since March and this week only served to worsen the situation. It is clear that the interest rate picture and housing are hurting the regional banks. Short this ETF if you can.
Energy: having brought the PowerShares DB Energy ETF (DBE) to readers attention last week I thought I'd check on how it did since then. Well, it lost a few cents over the course of the week but remains in a clear uptrend. Things were pretty much the same for the Energy Select SPDR XLE. This looks like one sector of the market that is holding up quite well. I would take advantage of this minor pullback to buy either of these ETFs.
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