US Equity Markets Push Ahead
The lights were green on Wall Street today if one could see them above the snowbanks. U.S. equity markets hit new highs in the rally that began last summer, with the S&P 500 marking its highest close since August 2008. International markets are attempting a similar feat but are having a more difficult time.
Stock market gains appear to be driven by a combination of factors. Economic recovery is not one of them, unfortunately. Last week’s unemployment numbers were not encouraging at all, even though the headline rate dropped to 9.4%. However, the Fed’s beige book claims businesses are growing more optimistic. This may be because of the Fed’s apparent intent to keep the liquidity faucet open. Meanwhile, European officials look ready to expand their own stimulation efforts. Japan signaled a willingness to help finance further bailouts, of which Portugal is set to be the next beneficiary.
The strong U.S. Dollar rally that marked the new year ran into resistance this week. The dollar was down again today. Not surprisingly, gold has been doing the opposite of the dollar and is now stabilizing after last week’s big drop. Ten-year Treasury yields are range-bound between 3.25% and 3.50%. A breakout from this zone should provide a clue for the next major trend in interest rates.
Minor leaks caused a shutdown of the Trans-Alaska oil pipeline and made inventories drop by 2.2 million barrels in today’s EIA report. This has energy traders a little bit on edge. On the other side of the world, floods in Australia are threatening coal and cotton production, driving prices for these commodities sharply higher.
Materials is still first in the Sector rankings but seems likely to fall behind Energy soon. While Materials has recovered well in the last few days, Energy is plowing ahead. A shutdown of the Trans-Alaska Pipeline pushed crude prices over $92. Technology climbed back into 4th place, driven mainly by semiconductor stocks. Consumer Staples and Utilities are sharing space on the bottom of the pile; Health Care is right above them in order but is picking up enough momentum to separate itself from the other defensive sectors.
Very little changed in the Style rankings since last week on a relative basis, but today ten of the eleven categories broke out to new 52-week highs. The one straggler is Mid Cap Value, and it’s not far from joining the club. Although Small Caps have been doing better than Large Caps lately, they have also been much more volatile. Small Cap Blend had nearly twice the daily volatility of Large Cap Blend over the last month.
In last week’s update we suggested Japan might be able to hold the lead for a change, and sure enough it did. Japan’s equity markets remained strong enough to fend off the negative impact of currency fluctuations. The U.S. is still nipping at Japan’s heels. Canada firmed its grip on third place, helped by strength in Materials and Energy along with a strong showing for the Canadian Dollar. Emerging Markets held their relative position but are losing ground nevertheless, with local currency weakness adding to volatility concerns. Europe is back on the bottom again and is the only negative-momentum category of the 32 we track. Debt crisis-driven weakness in the Euro added to the woes of a lagging stock market.
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.
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