We Got the Santa Claus Rally – Now What?
We were going to say that the stock market is off to a good start in 2009, but today’s decline reversed most of the new year’s gain. On the other hand, even a flat year would be a great improvement after the carnage of 2008. A lot can happen in the next 245 trading days – for better or worse.
Almost all market sectors showed improvement over the last five days, which includes December 31. Going back a little further to Christmas Eve, it appears there was in fact something of a “Santa Claus Rally.” The S&P 500 was up 7.7% from December 24 through January 6. Small-cap stocks did even better during the Twelve Days of Christmas, with the Russell 2000 rising 9.3%. All the benchmarks have rallied strongly since their November lows. The question is whether this should be regarded as a bear-market rally or the first sign that the worst may be behind us. There are bullish signs. Most sectors are now above their 50-day moving averages, meaning that by one definition an intermediate-term uptrend is in place. Unfortunately, this is more a result of the averages being pulled down than of rising prices. The November lows are holding – but the November highs have not been tested and may present substantial resistance.
Economic indicators provide little reason for near-term optimism. Minutes from the December FOMC meeting, released this week, show that even the Fed is becoming discouraged, with the central bank now expecting the unemployment rate to keep rising into 2010. Whatever data you care to examine – consumer confidence, pending home sales, manufacturing, employment, and so on – the numbers are not improving. The ADP jobs report today suggests unemployment is rising faster and farther than even many pessimists had expected. Additionally, the upcoming earnings season is likely to be dismal. Why, then, are the markets not plunging? Investors seem to be pinning a lot of hope on the Obama economic stimulus plan, which now appears to include tax cuts as well as infrastructure spending. We have no doubt that a bill will be passed soon after the inauguration parties wind down. Regardless of its details, any such plan will likely create little more than good feelings, which will probably disappear quickly. Then what? We will find out in the next month or so.
Treasury yields moved up in the last week by an amount that would have been quite astonishing a year or two ago. In the context of the late 2008 bond rally, however, it was actually a fairly mild correction. Yields are now back roughly where they were in mid-December. The sharp year-end plunge in Treasury yields seems to have been a function of liquidity factors and window-dressing. Most of the reversal took place on December 31 and January 2. So far this week bonds have been relatively stable. Investment-grade corporate bonds are still getting a bid from yield-starved investors, though we suspect that may change if the equity market turns south.
The Consumer Discretionary sector made a dramatic leap to the top of the list, a development we view with some skepticism but will continue to monitor. We suspect it represents a bounce from deeply oversold conditions among retail stocks. Other sectors maintained their relative positions, and all sectors improved their momentum scores significantly in the last week.
The Style ranking chart shows extremely narrow dispersion, with only nine RSM points separating the top and bottom categories. This renders the relative positions meaningless, so we would not get too excited about Small Value taking the top spot away from Mega Cap, or about Micro Cap moving up from the bottom. The rankings can – and likely will – change dramatically by next week.
China recaptured the top spot from Japan and is now sporting positive momentum, but with global markets still very volatile this could change quickly. The Emerging Markets index jumped in the rankings as well. Today’s news from India about financial irregularities at Satyam (SAY) is a very bad omen for at least one emerging market. Given that regulatory standards in other emerging economies are no better than India, it is not hard to imagine investors losing confidence in equities from non-developed markets.
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.
“If anything is certain, it is that change is certain. The world we are planning for today will not exist in this form tomorrow.”
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