The Golden Seesaw
The New Year began with a bang as all major equity indexes rose nicely. At the same time, bulls were encouraged to see volume return to pre-holiday levels. The S&P 500 is now at its highest point since October 2008. Another 400 points (~37%) or so would bring the index to a new all-time high. That’s not a prediction, just an observation. We suspect the market will have to endure a few more tests before reaching new highs.
The economic outlook remains a puzzle, in large part because no one knows how to forecast the effects of unprecedented government and central bank stimuli in so many key sectors. Pending home sales plunged 16% in December as the homebuyer tax credit expired – or so potential buyers thought. It has since been extended, but no doubt many sales that would otherwise have taken place in December were pushed forward to earlier months. The cash-for-clunkers program had a similar influence on automotive sales last summer. Exactly how much either program helped matters is unclear. What is clear is that economic data is being distorted in myriad ways, making it that much harder to make sense of the numbers.
Commodity prices strengthened over the last few weeks. Crude oil is back above $82 and gold once again over $1,130. Cold weather may be a factor in energy prices, but the value of the U.S. dollar is also driving commodity action. Gold and the greenback are in a see-saw pattern where one goes up whenever the other goes down. The direction of the dollar seems to be on everyone’s mind these days, so you will likely be hearing more currency news in the next few months.
Treasury yields seem to have stabilized somewhat after December’s big jump. Bonds remain under pressure, though, as it becomes clear (to some analysts, at least) that the Federal Reserve regards deflation as its primary foe and will gladly accept inflation as the lesser evil. Whether this is the right decision or not is another question. We’ll know the answer in twenty years or so.
We have a virtual three-way tie in the Sector rankings today. Telecom, Materials, and Technology are all moving up at about the same annualized rate. At the other end of the scale, Utilities are having a hard time after failing to sustain December’s momentum. For the moment Consumer Staples and Financials are doing even worse, but we won’t be surprised to see Utilities in last place by next week.
You have to look really closely to see any changes in the Style rankings this week. Small Cap and Mid Cap still own the top six spots. The sell-off late last week, coupled with this week’s rally, left the momentum ratings for all Style categories almost exactly where they were a week ago. Nothing much has changed, at least in the intermediate-term picture.
The U.S. lost some of its edge against foreign markets this past week, due mainly to a stall-out in the dollar rally. Latin America is once again at the forefront. Southeast Asia and Eastern Europe are also gaining strength, boosting the diversified “Emerging Markets” category to the #2 spot in our rankings. China is still the laggard but has flipped back into positive trend territory.
The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.
“I went to the bank and asked to borrow a cup of money.
They said, ‘What for?’ I said, ‘I’m going to buy some sugar.'”
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