Flat-Lined U.S. Economy
As February opened, stocks bounced back from a rough stretch that brought the S&P 500 below technical support levels and into an intermediate-term downtrend. The rally appeared to run out of steam today. Volume trends are also troubling, with recent sell-off days generally more active than bullish days. At the same time, any unexpected good news could spark more buying interest.
Earnings season is winding down with mixed reviews. More than 75% of the S&P 500 companies that have reported fourth quarter results managed to beat profit expectations, but few are showing higher revenues. Profits seem to be driven mostly by inventory restocking and cost-cutting. This is not indicative of sustainable economic growth, despite hints to the contrary in the initial estimate for Gross Domestic Product. GDP is showing its statistical weaknesses, among which is the fact that government spending counts as “production.” This may help explain why stock prices are soft. One bit of good news is that unemployment seems to be stabilizing, albeit at the highest level in decades.
Equity gains seem to be directly related to dollar weakness lately. This may help explain why small-cap stocks underperformed blue chips in the last week. A weak dollar is helpful to U.S.-based companies doing business overseas, which is more likely to be the case in large-caps than small-caps. The short-term dollar weakness also helped commodity prices, especially crude oil. Look for stocks and natural resources to give up their gains if the dollar rally resumes.
Bond yields are on the rise after trending down for most of January. The ten-year Treasury rate has now retraced almost half of its 2010 losses and is picking up momentum. Treasury securities are also closely aligned with the dollar, to the point that it is not entirely clear which is the leader and which is following. Weaker currencies naturally have higher interest rates. The quandary in this case is that U.S. rates are being held artificially low by various Federal Reserve and Treasury interventions. Eventually something will have to give.
Health Care is still the top sector, followed by the relatively small Consumer Discretionary, Consumer Staples and Industrials sectors. Technology, Materials, and Financials all slid downward in the last week. Telecom held on to last place. Overall, the sector rankings show a generally flat market, with the positive and negative trends roughly offsetting each other.
The Style rankings look very much like the definition of a “trendless market.” The week brought little change in the relative positions and some deterioration in absolute terms. The uptrends and downtrends are well-balanced as is the case in Sectors, but the Style variation is significantly less. Mid Caps are still on top, with Large Cap and Mega Cap still on the bottom.
Japan is now the strongest market in our global rankings and is the only market showing a positive score. The U.S. is flat-lined at zero, down slightly from last week’s score of 2. China and Europe are still on the bottom of the chart. The European Union, faced with fiscal disaster in places like Greece and Spain, is looking less and less unified. At this point it is still an open question if the wealthier states are willing to bail out the small ones. Whether the alternatives are even worse remains to be seen.
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.
“A disordered currency is one of the greatest political evils.”
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