What About Two Years Ago?
The S&P 500 made a valiant attempt to show a gain every day of the year in 2010. The streak ended yesterday, but six positive sessions in a row was still impressive. Earnings season is now underway. The lead-off batter, Alcoa (AA), had a disappointing report. Given the dismal 4th quarter of 2008, year-over-year comparisons ought to look great for most companies. Comparisons to two years ago would probably be more instructive.
The monthly payrolls report showed the unemployment rate held steady at 10%. A deeper look, however, reveals that many previously-unemployed people gave up their job searches and left the workforce. The Federal Reserve’s beige book, released today, reported modest economic recovery in most regions continued into December. Meanwhile the U.S. trade deficit jumped higher than expected, making us question whether consumers are cutting back their purchases as much as we thought. They may simply have shifted to buying other things.
We have talked before about the dangers of a trade war as politicians in various countries, including the U.S., seek to protect their domestic industries. Now Google (GOOG) is making noise about pulling out of China because of the country’s censorship practices and disregard for intellectual property. We wonder if there is more to the story; surely Google was not surprised to learn that the Chinese government watches people and even reads their e-mail. In any case, trade disputes are taking on a different form in the digital age. For their part, the Chinese authorities are trying to cool off economic growth anyway, so the loss of Google’s services may not bother them too much. This will be an interesting story to watch.
The dollar continued to retreat from December’s rally, and of course gold did the opposite. Treasury yields are steady or declining so far in January. The ten-year bonds closed out 2009 at 3.84% and were down to 3.78% as of today. The government is continuing to flood the market with new supply, $84 billion this week alone. Outstanding public debt reached $7.27 trillion in December. Theoretically this should be having an upward influence on interest rates, but yields are about where they were two years ago.
The big sector news this week is a plunge by Telecom, which fell more than halfway down our rankings from #1 last week to #6 now. AT&T (T), the largest stock in the sector, dropped more than 5% in the last five days amid increased competition in the wireless smart-phone space. Materials took over the top spot but is looking less bullish as China seems intent on slowing growth, and thereby demand for raw materials. Technology lost some momentum but managed to stay in third place. We mentioned last week that Utilities were having a rough ride. The sector seems to have stabilized somewhat and remains just above Consumer Staples at the bottom of the chart.
The top six positions in our Style table are all tightly bunched, giving the appearance of a near six-way tie for first place. These six happen to be all the Mid Cap and Small Cap categories, suggesting that the seasonal strength in small caps just might prove to be reliable this year. Small cap indexes are just barely above their September peaks while the Large Caps have a greater margin. However, Small Caps had relatively poor performance in October, so their recent strength may simply be a case of playing catch-up.
There was some minor shifting in the Style rankings, but nothing that warrants any change in strategy. The Mid Cap and Small Cap categories still dominate the top of the chart while Large Cap and Mega Cap own the bottom. All categories are in substantial intermediate uptrends, however. Even the worst group, Mega Cap, is rising at a 22% annualized rate.
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.
“It sounds to me a little bit like selling a car with faulty brakes
and then buying an insurance policy on the buyer of those cars.”
Financial Crisis Inquiry Commission chair Philip Angelides,
referring to Goldman Sachs’ sale of mortgage-backed securities
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