01/20/10   Did China Hack Google?

Editor’s Corner

Investor Heat Map: 1/20/10Did China Hack Google?

Ron Rowland

Just when many investors thought it was safe to come out, stock market volatility increased substantially in the last week. The average daily swing in the S&P 500 is at its highest level in more than two months. Higher volatility is also apparent in the Nasdaq Composite and especially in the Technology sector. The prime driver is earnings news. Fourth quarter results vary widely. Good news from stalwarts like Intel (INTC) and IBM was countered by disappointment from other blue chips. Many companies revealed great year-over-year comparisons but still fell short of expectations.

Another source of volatility has been the special senatorial election in Massachusetts and its possible impact on health care reform. The Scott Brown victory is thought by most pundits to make passage of the current proposal less likely. Health Care stocks jumped Tuesday when the Brown win was being widely forecasted, then retreated today when the results were certain. Investors seem to have bought the rumor and sold the news. As is always the case with political decisions, we expect more twists and turns before the final outcome is known.

Last week we mentioned the dispute between Google (GOOG) and China regarding alleged security attacks on the search engine. Today the New York Times reported that the intrusions may have been intended to modify Google’s source code and give Chinese agents access to millions of users as well as Google itself. If this is true, Google’s strong reaction makes more sense. The company may have no choice but to isolate itself from a huge part of the world’s internet users. Have Chinese hackers penetrated other companies? It’s an excellent question.

Economic indicators remain mixed and subject to interpretation. Housing starts were down, a fact some analysts tried to blame on cold weather, but builders we know say there is no reason to add to an already excessive inventory of unsold homes. Today the U.S. dollar jumped higher on more indications that China wants to slow down its growth rate. Government interest rates dropped further, with the ten-year U.S. Treasury bonds down to 3.659% at today’s close. This is quite a drop from the intraday peak over 3.9% as recently as New Year’s Eve. The secular uptrend in interest rates remains intact, however. Inflation may be closer than many people think.

Sectors

Materials held on to the top sector spot but is losing momentum quickly. Health Care jumped to #2 and should push aside Materials in the next few days. Election-related volatility aside, the sector is still pushing higher. Telecom slid toward the bottom again. This sector has underperformed by a wide margin since last April, despite a rally in December that briefly pushed it to the top of our charts.

Styles

The Style rankings remain extremely congested with a near six-way tie for first place. When the rankings are this tight, even a small change in momentum can produce a large shift in relative strength. For instance, over the last week Micro Cap increased its score from 34 to 38, but this was enough to vault it from middle of the pack to first place. Otherwise, the top of the chart is dominated by Small Cap and Mid Cap categories, while Large Cap and Mega Cap are grouped at the bottom.

International

Japan has taken over the top of our global rankings. Most world markets reacted negatively to China’s tightening of liquidity, but Japanese equities as well as the Yen responded with a strong rally. Latin America fell from #1 all the way to #6. As with the Style categories, however, global rankings are currently very congested and relative strength could change quickly. China is still in last place, having lost some momentum since last week. If today’s strong dollar rally continues, these rankings (which are based on Tuesday data) could change significantly by our next report.


Note:

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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