Shrugging Off Bad News
Last week we mentioned the 1100 level as key for the S&P 500. Since then the index has managed to stay mostly above this area, rising today to the highest point since the late January breakdown. The tone is definitely improving. Bad news and bleak outlooks are being shrugged off – always a good sign. While the January peaks are still some distance off, a big day or two could change the picture dramatically.
U.S. markets have picked up momentum faster than most foreign benchmarks, which have been hindered since early December by a strong dollar. Major U.S. indexes started moving above their 50-day moving averages a week or two ago. Overseas market averages are just doing so today. In the big picture, a correction from last year’s strong gains should not be especially surprising anywhere. The U.S. is holding up better than other places not because our economy is any better but because our currency is stronger.
Today’s big data point was the ISM Non-manufacturing index, which measures the condition of the service-based economy. The reading exceeded estimates and was the best since October 2007. This suggests recovery is still trickling down, but discerning whether it is more a result of government stimulus or fundamental improvement is difficult. Also today, ADP Employer Services reported businesses cut only 20,000 jobs in February – the smallest drop in two years. Unfortunately, ADP also revised its January job loss estimate from 22,000 up to 60,000. If February shows a similar revision, celebration may turn out to be premature.
Treasury rates dipped a little further over the last week, with the ten-year bond yield dropping to 3.63% from 3.69% a week ago. While most headlines focus on the federal government’s fiscal issues, state and local leaders may have an even bigger problem on their hands. Sales tax and other revenues are dropping even as the demand for health care and social services goes up. Public pension obligations are also a sore spot. If California, once thought to be the nation’s social trend-setter, is a sign of the financial future then we have to wonder why municipal bonds are not crashing. Our best guess is that investors presume localities will be bailed out by Washington. We are not sure we would take that bet.
Consumer Discretionary widened its margin as the leading sector, with both the retailing and leisure components performing well. Industrials held on to second place but are now being challenged by Materials. Industrial metals have been especially strong recently. The Chile earthquake is boosting spot copper prices as the full extent of damage to the country’s mining infrastructure is still unclear. Health Care slid down to the middle of the pack even as absolute performance improved. There is significant variation within the Health Care sector; Biotechnology is providing leadership for now. Energy and Utilities are still laggards, but they could be lifted into positive trend territory soon if the broad market rally continues.
The divergence we mentioned last week between Large/Mega Caps and everything else widened further in the last few days. The Micro Cap, Small Cap, and Mid Cap categories are all bunched closely together at the top. Large Caps are performing well in absolute terms but falling back in relative terms, while Mega Caps are even worse. The combined picture suggests that investors are increasingly willing to take on more risk.
Canada increased its lead over other global benchmarks, due in part to the strength in Materials mentioned above. Energy certainly didn’t help, though the relatively strong Canadian Dollar is no doubt playing a part. The U.S. is still in second place, and most world markets had a good week. China moved up nicely and is trying to move back into an uptrend. Europe is still having problems as the Greek drama drags on. The Euro bounced back today as Greece unveiled an austerity program. Many observers think it is no more than that – a bounce – and the problems are far from over.
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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