03/07/12   Market Pullback Feels Worse Than It Is

Editor’s Corner

Investor Heat Map: 3/7/12Market Pullback Feels Worse Than It Is

Ron Rowland

Anyone who has worked on Wall Street knows investors have short memories.  People expect today will be like yesterday, and tomorrow will be like today.  To some extent they are correct.  That’s why “momentum” is a useful indicator.  Nevertheless, even the best trends falter at times.

Such has been the case since last Friday.  Having moved upward almost without interruption since mid-December, U.S. stocks stumbled.  How badly?  Over three days, the S&P 500 dropped only 2.2%.  This hardly seems to justify some of the breathless commentary we heard.  The situation could always worsen, of course, but the bigger issue is investors forgetting what “volatility” looks like when they go ten weeks without seeing it.

Market chatter is once again focused on Federal Reserve action.  Today the Wall Street Journal reported a new Fed plan is in the works to keep long-term interest rates low without sparking inflation via “sterilized” bond-buying.  Exactly how this would work, or why it is even necessary, is unclear so far.  Perhaps we will learn more after next week’s Fed policy meeting.

For now, ten-year Treasury yields are still stuck in a tight range around 2%. Gold prices pulled back along with crude oil and other commodities.  Gold bullion is trying to find support around its 200-day moving average.

Economic news is still mixed, with data points available to support whatever view you prefer.  Friday’s jobs report is expected to show 210,000 new jobs created in February and the unemployment rate steady at 8.3%.  If the forecasts are correct, recovery is still proceeding at a frustratingly slow pace.


Technology was big news today as Apple (AAPL) unveiled the iPad 3, along with some other goodies, at an event in San Francisco.  Less noticeable was Monday’s new all-time high for IBM.  Both stocks helped the tech sector stay on top of our chart.  Consumer Discretionary is just behind, followed by Financials.  We are starting to see early signs of weakening in the banking segment.  Fourth-place Energy lost a lot of momentum since last week and is now tightly bunched with three other sectors just below.  This could lead to a big shake-up by next week.  Health Care and Consumer Staples improved a bit, helped by short-term investor nervousness.  Materials had a very bad week with its momentum score tumbling from 32 to only 9.  Telecom moved down a peg, and Utilities stayed in last place.


The Style rankings look nothing like they did last week.  This is unusual; major shifts typically show up in the Sector chart first and then have a more gradual impact on the Style categories.  The current shift is driven by significant underperformance in small cap stocks.  Over the last twelve market days, the Russell 2000 Index dropped 5.1% vs a 1.4% decline for the S&P 500.   Micro Caps took a 5.5% hit in the same period.  Hence we have Mega Cap moving up from sixth place a week ago to the top spot now.  Large Cap Growth is in second place followed by Mid Cap Growth.  Small Cap Growth – last week’s leader – fell all the way to #8 in relative strength.  We still see a preference for Growth over Value regardless of size.


U.S. stocks took the top global spot despite losing momentum, as markets everywhere else lost even more.  Emerging Markets slipped into second place as the U.S. benchmark climbed from fifth to first.  Latin America finds itself in the #3 spot.  Japan, now in fourth place, was near the bottom only a month ago.  Much of the credit goes to a declining Yen, which makes Japan’s exports cheaper for foreign buyers.  China plunged to tenth place as the government there reduced economic growth objectives.  Reduced Chinese demand for raw materials had an impact on resource-heavy Pacific ex-Japan and Canada, which are now among the bottom of the list.


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.

“Unfinished business from the financial crisis leaves the mortgage market impaired and households needing to improve their balance sheets. This balance-sheet improvement is likely to come the hard way – by increased saving – rather than through significant capital gains on equity and real estate holdings.”

Vincent Reinhart, Morgan Stanley (March 6, 2012)


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