01/27/10   The State of the Union is …

Editor’s Corner

Investor Heat Map: 1/27/10The State of the Union is …

Ron Rowland

Now is a good time to be a news junkie. Political pundits get the president’s annual State of the Union speech tonight, economic wonks had a Federal Reserve policy meeting, techno-geeks saw the unveiling of the Apple iPad device, and sports fans are obsessed about the impending Super Bowl. We are not quite sure where to begin.

The State of the Union is highly dependent on whom you ask. “Terrible” is a common answer among millions of unemployed, underemployed, reduced-income workers, families facing foreclosure, and those already thrown out of their homes. “Times are great,” say Wall Street bankers and others who benefited from government bailouts. “Better than a year ago but worse than two years ago,” will respond some who put a little more thought into the question. Tonight we find out what the nation’s CEO thinks. We expect to hear a lot of talk about “jobs” and “greed.”

Surprising no one, the Federal Open Market Committee decided to keep interest rate policy unchanged today. One unexpected development was dissent from Thomas Hoenig of the Kansas City Fed, who thinks the economy has improved sufficiently that an “extended period” of low interest rates is no longer warranted. Treasury bond yields jumped on the news but remain sharply lower than a month ago. The ten-year Treasury ended the day at 3.64%.

Stock markets pulled back further this week, bringing the S&P 500 back where it was in early November. Since then, the index has found support in the 1085 area – right about where it bottomed today. If the market is going to stage a rebound, this suggests the place and time to begin that action is here and now. Day to day volatility remains at elevated levels, helping to increase investor angst. The stock market decline is a near-mirror image of the rise in the dollar over the same period. The longer-term picture suggests the current strength in the greenback is probably a correction within a long-term downtrend. Such corrections can last longer than many investors think, however.


Our sector rankings have a whole new look today, and not because we made any format changes. Nearly all the sectors have been on the positive side for several months. Today the chart is more symmetrical, with three sectors showing positive momentum, three others trending downward, and the other four squeezed in between. As predicted, Health Care captured the top spot from a faltering Materials sector. Industrials and Consumer Discretionary are close behind Health Care. Materials lost more than -8% in the last week, pushing its intermediate-term momentum slightly into the red. Technology held on to its relative position as its decline was only slightly worse than the market averages. Consumer Staples improved. Telecom and Financials are on the bottom of the list, and Energy is not doing much better.


All the Style categories have had the wind knocked out of their sails. Mega Cap entered a downtrend while the others remained only slightly positive. This is indicative of a generally sideways market. This week’s chart clearly illustrates how the Style categories are much more correlated with each other than the sector categories.


Global rankings are showing a lot of damage as gains in the U.S. dollar make losses in other markets appear even bigger when converted into dollar terms. Japan kept its #1 rank by a relatively large margin but could not avoid the worldwide sell-off. The U.S. barely avoided slipping into negative territory along with the rest of the world. China and Europe are on the bottom with previously high-flying Latin America not much better. A look at more detailed charts, however, reveals that China is easily in the worse situation. Although Latin America has actually declined more over the last two weeks, it had also moved up more than China in recent months. Chinese markets clearly seem to be rolling over to the downside. Given the degree to which the rest of the world is invested in China, this is not good news for anyone.


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.

The state of the Union is not good: Millions of Americans are out of work. Recession and inflation are eroding the money of millions more…We depend on others for essential energy. Some people question their Government’s ability to make hard decisions and stick with them; they expect Washington politics as usual

Gerald R. Ford, 1975


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