TAOST State Of The Markets for The Week Ending 16 January 2015

The major stock market indices were under pressure all week, but managed to come up for air on Friday (more below).  The Consumer Sentiment report led the stock market higher on Friday, as it came in at an 11-year high of 98.2 versus the 95.0 that economists  expected. The number was also sharply higher than December’s 93.6, and suggested that consumers are not only back, but continue to feel good about their prospects.

Economic News

Economic news for the week was generally positive, but shares were still down for the week (notwithstanding Friday’s strong push to the upside), with the Dow off by 1.3%, the Nasdaq down 1.5% and the S&P 500 about 1.2% lower. Leading the overall negative action in shares was a continued battering of oil.  Goldman Sachs cut its target prices across the oil complex to the low 40s from the high 70s.  Even still, oil prices actually rebounded 5% on Friday, helping light sweet crude recover the week’s losses and close slightly higher for the week. Oil markets remain volatile, though, and despite that 5% lift on Friday, they are still only about half of what they were just over six months ago. The fallout from the meltdown in the price of oil is still one of the key themes of 2015 and is likely to remain so for the foreseeable future.

The Franc Files For Divorce From The Euro

Switzerland’s decision to decouple the Swiss franc from the Euro was the bombshell financial news of the week.  It caught global financial markets by surprise. Big surprise.  The Swiss franc soared in value (fewer francs per most other currencies), while Swiss stocks sank, and the euro weakened dramatically.

Weekly chart of Swiss Franc
Weekly chart of Swiss Franc

The question was why the Swiss chose to end its currency’s marriage to the Euro after only a couple of years and why it chose to break the currency market’s heart this past week. Having your currency officially “pegged” to another currency is the same as hitching your country’s economic fortunes to that of another country. If the country to which your currency is pegged gets a cold, your currency may get a full blown case of influenza. Maybe the Swiss were simply inoculating themselves.  Come to think of it, the moves on the charts look a lot like needles.

With expected quantitative easing by the ECB in short order and with Greek elections set for January 25th (the consensus is that a conservative, anti-euro party will make huge strides from these elections), the last thing the EU needs is for Switzerland to “unpeg” at precisely the same time that a member country’s voter sentiment turns against the European Union. The Euro has been in free fall and the coming need to support the franc during the ECB’s quantitative easing might explain why Switzerland chose to flip flop just 2 days after reaffirming its commitment to the peg.

News of the Swiss decision to ditch the euro caused a big move in global cash toward “safe havens” like U.S. Treasuries, and we even saw the 10-year U.S. Treasury yield edge down to the 1.8% level (remember, the 10 Year Treasury is the bond that against which most consumer loans are price in the United States)

Weekly chart of 10 Year Treasury Yield Index
Weekly chart of 10 Year Treasury Yield Index

while the dollar index saw a nice 2 day bounce as global capital piled into US assets.

Weekly Chart of Dollar Index
Weekly Chart of Dollar Index

 

Stocks

Though down for the week, the S&P 500 managed to hold the 2,000 level and close a bit above it.

Hourly Chart of S&P 500 for last week
Hourly Chart of S&P 500 for last week

The 2,000 level doesn’t mean that much except as a big, round psychologically important bullseye.  It acted as strong resistance for most of the back half of 2014 and, once cleared, became support. It will bear watching closely next week and beyond to see if the market will continue to hold above the level.

Weekly chart of the S&P 500
Weekly chart of the S&P 500

Bulls of course hope that Friday’s momentum will carry over into Tuesday (Remember Monday is the MLK holiday) and provide the launching pad for fresh highs.

Next Week

Once again, earnings, oil and Europe will remain the key issues for the markets next week.  Important earnings for the week include Baker Hughes (BHI), Coach (COH), Delta (DAL), Halliburton (HAL), Johnson & Johnson (JNJ), IBM (IBM), Morgan Stanley (MS), and Netflix (NFLX) on Tuesday 1/20; American Express (AXP), eBay (EBAY), Discover Financial Services (DFS), Fifth Third Bancorp (FITB), TD Ameritrade (AMTD), U.S. Bancorp (USB), and UnitedHealth Group (UNH) on Wednesday 1/21;  E*TRADE (ETFC), Southwest Airlines (LUV), Starbucks (SBUX), Travelers (TRV), Verizon (VZ) on Thursday 1/22; and, finally, Bank of NY Mellon (BK), General Electric Co. (GE), Honeywell (HON), McDonald’s (MDC), and State Street Corp (STT) on Friday 1/23.

On the oil front, traders will be watching closely to see if price can confirm a bullish signal by eclipsing last week’s high.  Given how far and fast the black liquid gold has fallen, don’t be surprised if there’s a quick spike before the trend resumes.

Finally, be sure to watch the Euro.  It will tell you all that you need to know about what’s going on in Europe.  Given the fundamental economic events taking place all around Europe and the fact that the currency weakened to its lowest level since 2009 (relative to the dollar) we’re likely to see further weakness there.

Weekly chart of the Euro
Weekly chart of the Euro

 

Hold on to your hats folks.  2015 is off to a fast and furious start, but that means tremendous opportunity for those prepared to take prudent advantage of great risk/reward opportunities.  Stay tuned.

Have a great long weekend.