Where the Rubber Meets the Road!

By James Dondero | August 7, 2015

  • US stocks finished in the red last week, being led lower by the small caps. While the tone of the tape was clearly “defensive,” the broad market averages held key support levels such as 2050 on the S&P 500 and 1200-20 on the Russell 2000. This week could potentially be “where the rubber meets the road,” as breaking these areas would likely lead to further selling and a potential extended decline.
  • While crude continues to dominate media headlines (see last week’s commentary regarding crude), other commodities such as copper and gold have also broken important areas of support. While many are quite oversold and may well bounce at any time, the general trend for commodities as an asset class remains down as the ECB (and others) battle deflation.
  • Bonds again moved higher last week, with yields on the 10-yr US T-Note slipping to 2.18%. Not only should bonds benefit from a deflationary environment, but they are also more appealing in a “risk off” environment. The ratio of High Yield Bonds to Treasuries continued to ease lower as well, possibly depicting the increased nervousness in the markets.
  • Finally, emerging markets continue to suffer from commodity concerns and are approaching a potential tipping point. Should support on the emerging market index fail, a new round of market liquidation could ensue. As with the US equity market, this is another area “where the rubber meets the road,” making the week ahead a very important one.