02/12/14   There’s A New Fed Chief In Town

Editor’s Corner

Ron Rowland

Much has happened this past week.  Stocks jumped, unemployment fell, Yellen took center stage, and the debt ceiling became a non-issue for at least 13 months.

From an intraday low of 1738 last Wednesday to this morning’s high of 1826, the S&P 500 put together an impressive 5% rally.  Additionally, there were no losing days during that stretch with advances occurring each day.  Volume, or lack thereof, is our only concern with this rally.  Every one of the winning days was marked by lower volume than what was produced during the prior selling action.  Lower volume doesn’t change the fact that stocks moved upward, but it does call into question the sustainability of this move.

Last Friday, the Bureau of Labor Statistics published its January Employment Situation report.  According to the BLS, employers added an anemic 113,000 jobs in January, far below expectations for 180,000 new jobs.  This was on top of the paltry 75,000 jobs added in December, making it two months in a row of severe shortfalls.  Many analysts spun the “bad news” regarding the economy into “good news” for stocks.  The rationale behind this forecast is that economic weakness could prompt the Fed to delay further tapering, and the resulting extension of stimulus is good for stock prices.  The market seemed to agree and continued to climb.

The past year, we’ve been reporting how people leaving the labor force has dropped the participation rate to a historic low, which in turn has allowed the official unemployment rate to steadily decline.  Things seemed to go the other way in January with the labor force participation rate climbing back up to 63.0%.  However, due to yet another quirk in the way the unemployment rate is calculated, this combination of low job growth and improved participation actually lowered the official unemployment rate from 6.7% to 6.6%.  The BLS attributes this inconsistency to annual adjustments made to the historical data.

Janet Yellen, in her first public appearance as the new Federal Reserve Chair, delivered about six hours of testimony to the House Financial Services Committee yesterday.  There were no unpleasant surprises, and the market liked what it heard with the Dow Jones Industrials average climbing 193 points.  Ms. Yellen emphasized the Fed’s plans to be transparent, to continue tapering monthly bond purchases at the rate of $10 billion per month, and to keep interest rates low for an extended period.  She acknowledged that labor market weakness remains a concern and that the Fed will be looking at other measures of distress in the job market.  This is because the Fed previously established 6.5% as a threshold for when it would consider raising interest rates, and the unemployment rate is getting close to that level while employment problems persist.

Problems surrounding the approaching debt ceiling were looming in the not-too-distant future.  However, in a surprise move, House Speaker John Boehner decided to eliminate the possibility of the issue becoming another political football.  The House passed a no-strings-attached measure to allow the national debt to increase as necessary until March 16, 2015.  That gives us 12-13 months before we hear about this again.

Investor Heat Map: 2/12/14


Health Care held the top position throughout the recent market gyrations, and this week it widened its lead over the other sectors.  Biotech rebounded strongly this past week and continues to be a significant contributor to Health Care’s performance.  Real Estate moved another notch up the ranking list, but overhead resistance could thwart further progress.  Technology posted some of the best performance numbers this week, helping it climb up to third.  Utilities recently sprang from near the bottom to second place, as market volatility gave a boost to this defensive sector.  Now, with the market once again moving ahead, Utilities is starting to lose some of its steam.  Materials, Industrials, Financials, and Consumer Discretionary all moved back into the green this week.  Their current momentum readings are rather fragile, and we would describe their new trends as “tentative” at this time.  Telecom, Consumer Staples, and Energy remain in negative trends, and Energy has now replaced Consumer Staples on the bottom.


Ten of the eleven style categories were in the red a week ago.  Today, only one is in the red, reversing the ratio.  Mid Cap Growth is the new leader, taking the spot away from Micro Cap, which held the top position the past two months.  Mid Cap Blend moved up to second and Mid Cap Value is in fourth, placing the Mid Cap trio solidly near the top.  They are joined by Large Cap Growth, which moved up three places.  Micro Cap, the former leader, fell to fifth, although we wouldn’t rule out a resurgence at this juncture.  Large Cap Blend, Large Cap Value, and Mega Cap hold three of the next four places.  Small Caps continue to be pushed further down the rankings as two of the Small Cap categories bring up the rear.  Small Cap Value is on the bottom for the second week in a row, and it is the only style category with a negative momentum reading today.


The European Continent posted impressive gains, allowing Europe to reclaim its top global ranking after a one-week absence.  In our previous update, all eleven categories were in negative trends, but this past week Europe led six categories back into the green.  The U.S. slipped to second as the U.K. held steady in third.  Today, the Bank of England painted a positive picture of economic activity, saying it now expects 3.4% GDP growth in 2014, up from its previous forecast of just 2.8%.  World Equity, EAFE, and Canada are the other three categories reversing their negative trends this past week.  Canada’s performance was aided by the Canadian dollar, which has gained strength the past two weeks after a steep drop in January.  Pacific ex-Japan leads the list of laggards.  Australia, Pacific ex-Japan’s largest constituent, today announced plans to sell nearly $120 billion of government assets with the hopes of raising cash and setting an example for other cash-starved countries.  Japan and the three developing market categories all bounced nicely this past week but remain mired in down trends.


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.


“I expect a great deal of continuity in the FOMC’s approach to monetary policy…I strongly support that strategy.”

Federal Reserve Chairwoman Janet Yellen (2/11/14)


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