02/18/15   16-Month Hiatus

Editor’s Corner

Ron Rowland

Last week, Consumer Discretionary climbed atop our sector rankings for the first time in 16 months. The sector includes industries that tend to be sensitive to economic cycles. It has both manufacturing and service segments that encompass a broad range of consumer purchases.  Among the list are automobiles, apparel, homes, media products, and restaurant dining. While some operations don’t seem to be much different than they were years ago, others are rapidly adapting.

Recent changes from federal regulators are expected to be a boost for one of the sector’s constituents, homebuilders. In moves that may bring more first-time home buyers into the market, regulators lowered the down payment requirement for some loans and reduced premium rates for mortgage insurance. Previously, loans purchased by Fannie Mae and Freddie Mac had down payments of at least 5%. That floor is being lowered to 3% in some cases, allowing for more buyers to meet the minimum. In a different move, the Federal Housing Administration lowered the mortgage insurance cost in its programs from 1.35% to 0.85%. This is estimated to save a first-time homebuyer about $900 per year. These small helping hands could bring more low-income borrowers or those without a large down payment into the housing market.

Over the years, car manufacturers and dealers have tried a myriad of ways to get customers to buy cars over the internet. You can build your perfect car, search inventory, or find pricing, and individual dealers may offer unique programs to generate sales from online leads. General Motors (GM) is driving down another side road on this tour. Over the last two years, GM developed and rolled out a system called Shop-Click-Drive that links potential buyers with local dealers and has all the tools to complete a purchase online. Customers can select a vehicle, get an estimated value for their trade-in, review incentives, set up financing, provide title information, and anything else normally done at the dealership. A car can be purchased and delivered without ever stepping into a showroom.

While not nearly as dramatic as changes in cars and housing, restaurants are also refining their habits. Many are installing technology solutions that allow diners to order and pay through kiosks at their tables. No more having a server disappear just when you want to order, waiting for your check to arrive, or sending your credit card back to a central station to have the bill processed.

Minutes from the Federal Open Market Committee meeting at the end of January were released today. The vote to keep interest rates at the current level was unanimous, but there was some discussion and diverging views over when it will be appropriate to make the first increase in rates since 2006. The next policy meeting is set for March 17-18 and will likely include some additional clues.

Investor Heat Map: 2/18/15


Consumer Discretionary managed to both keep the leadership role for the sectors and increase its lead over its next competitor.  Materials now resides in second after moving up three positions.  Technology is our most improved sector for the week.  It posted the highest gain in momentum at 16 and climbed four spots to take over third place.  Telecom and Health Care each slipped a position to make space for those moving up.  Real Estate was on top just two weeks ago, but it continued its tumble and fell from second to sixth.  It was also one of only two categories losing momentum over the past week, Utilities being the other.  Industrials inched up one position.  Consumer Staples, the opposite end of the spectrum from our Discretionary leader, fell two spots down to eighth.  Financials held steady in the ninth position.  As oil prices have rebounded, Energy finally climbed out of the basement and posted a positive momentum score.  It hasn’t been able to make either claim since the first week of September.  Interest rate sensitive Utilities got clobbered again this week and now sits at the bottom with red pixels next to it.


Once again, all the style categories posted momentum improvements this week.  The increases were not equal, ranging from 5 to 11, so there were some minor ranking shifts.  Small Cap Growth keeps the top spot for a fourth week, but its lead is slim at just 2 points.  Mid Cap Growth remained in second.  The next four categories gave us two swaps.  Large Cap Growth swapped with Mid Cap Blend to take third, and Small Cap Blend swapped with Mid Cap Value to take over fifth.  The move by Large Cap Growth put the growth categories lined up 1-2-3, revealing that the leadership sits at the right side of the traditional style box matrix.  Mega Cap moved up three places to put itself right behind Micro Cap.  It is always interested to have the two extremes sitting next to each other.  Mega Cap’s climb pushed Small and Large Cap Value each down a notch, with Large Cap Value sitting in last place for now.


China extended its reign at the top to eleven weeks, with its lead remaining the same as last week.  The U.S., Japan, and World Equity all added to their positive momentum and held their relative ranking positions.  Europe jumped from eighth to fifth as Greece and some of the other PIIGS nations put in good gains the past week.  That move pulled EAFE along with it, moving the category up one spot to sixth.  The U.K. and Pacific x-Japan made room for the European move by each dropping two places.  Emerging Markets gained enough momentum to push its way back into the green but remains in ninth.  Canada and Latin America both increased their momentum scores by double digits, but they still hold down the bottom two spots and are the only global categories in the red.


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 want June to be a viable option. That is why I would like to see the language change .”

Cleveland Fed President Loretta Mester regarding changing the Fed’s wording on when interest rates might rise, 2/16/15


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