A cautious outlook by Cisco Systems on Wednesday sent tech stocks reeling and pushed the NASDAQ to its lowest level since January 2, 2004 and its largest one-day percentage drop in two months. However, the NASDAQ’s decline held at its 50-day SMA, 2014. Both the Dow Jones Industrial Average and the NASDAQ managed to recoup and both were able to finish out the week on a positive note with the Dow breaking a two-week slide. For the week the Dow Jones Industrial Average tacked on 105 points (+1.0%) and ended at 10593. The NASDAQ posted a strong finish to the week but still managed to lose 2 points for the week (-.10%) to close at 2064.
The volatility of past years is beginning to reappear, as evidenced by last week’s NASDAQ roller coaster ride. While still bullish, momentum indicators are weakening slightly, while sentiment and strength indicators are now neutral. Taken together, the markets are showing signs of fatigue and a less bullish stance may be warranted. However, mutual fund inflows are still strong with $3.8 billion added in the week ending February 4th.
THE COMPASS PORTFOLIOS
For the first time this year, the volatility and weakness in several growth areas has resulted in downgrades and the triggering of protective stop-losses. Our NASDAQ 100 position has been reduced by half, as have positions in small cap growth and small cap value segments. Managed accounts using exchange traded funds have seen an increase in cash positions to approximately 30%, a perfectly prudent allocation given both the substantial gains experienced in 2003 and the recent volatility. Positions in 401(k) and other retirement accounts will likely be reduced in the coming days. Our only bond component has also been eliminated as the high yield segment has also begun to demonstrate an early trend reversal. All position reductions are made in an effort to not only protect principal but to also protect the substantial gains recorded last year. If a full downward trend should emerge, additional downgrades would be triggered. Likewise, if these growth segments should find their footing, the positions that have been reduced can easily be replaced.
“Excess volatility and disorderly movements in exchange rates are undesirable for economic growth.” These thirteen words were released in the recent Group of Seven Industrialized Nations (G-7) meeting in Boca Raton in an effort to end the dollar’s tremendous slide and to strengthen both the Euro and the Yen. A weak dollar helps U.S. exporters and hurts countries who sell their goods here. The dollar has slid over 40% from its low and a strengthening dollar would likely have a negative affect on both the U.S. economy and in turn the stock and bond markets.
Mortgage rates rose slightly last week, holding true to Freddie Mac’s statement last week that rates are set to rise after the Federal Reserve changed its stance on monetary policy, the mortgage finance firm said Thursday. The average rate on 30-year fixed-rate mortgages rose to 5.72 percent in the week ending Feb. 5, from 5.68 percent last week, with 0.6 of a point payable up front. The 30-year averaged 5.88 percent a year earlier. The 15-year mortgage increased to 5.03 percent, also with 0.6 of a point payable up front. Last week the 15-year averaged 4.97 percent and a year earlier it averaged 5.27 percent.
New jobless claims rose in the United States last week, the government said Thursday, exceeding Wall Street expectations. The Labor Department said 356,000 people filed new claims for state unemployment benefits in the week ended Jan. 31, compared with a revised 339,000 the prior week. Economists, on average, expected 340,000 new claims, according to Briefing.com. The four-week moving average of new claims, which irons out the volatility of the weekly data, held steady at 345,250, the same as the prior week’s revised number. Continued claims, the number of people out of work for a week or more, was also unchanged, at 3.12 million for the week ended Jan. 24, the latest data available. Separately, the Labor Department said non-farm productivity rose at a slower annualized rate in the fourth quarter than Wall Street expected. Since productivity is a measure of output per worker hour, slower productivity could mean more hiring.