03/09/11   Stock Market Ignores Qaddafi/Gadafi/Khadaffy/Gadhafi

Editor’s Corner

Investor Heat Map: 3/9/11Stock Market Ignores Qaddafi/Gadafi/Khadaffy/Gadhafi

Ron Rowland

A protest movement in Libya has turned into a full-scale civil war.  This is not good news for anyone, least of all Libyans in the line of fire, but for now we in the West are noticing it mainly in the form of higher fuel prices.  This is natural when supplies are threatened or even cut off.  The good news is that Libya’s oil facilities seem to be mostly undamaged; output is down because employees have fled the chaos.  This suggests it could come back fairly quickly once some resolution is reached.

Nevertheless, crude oil prices above $100 are making some analysts rethink their economic growth forecasts.  The consensus seems to be that a short spike will not be too harmful.  That conclusion will almost certainly change if oil continues to climb for a few more weeks. 

Last week’s monthly payroll numbers showed the U.S. unemployment rate dropped to 8.9% in February.  This is somewhat encouraging, but improvement is still being driven more by a reduction of the labor force than any expansion in hiring.  If higher fuel prices persist, we expect to see an impact on consumer spending as people are forced to divert more of their disposable income to gasoline.

The stock market is largely ignoring all these concerns.  Benchmarks have been in a steady uptrend since August 2010 with two minor interruptions.  One was a six-week period from late October to early December in which it moved sideways.  The second happened over the last month in which we saw a short downturn followed by more sideways movement.

That first interruption was resolved to the upside once the 50-day moving average caught up to the market.  We are about to see another test of this indicator, with the S&P 500 now less than 2% above the 50-day moving average line.  If history repeats itself, we should see another upturn soon.


Energy is still #1 despite pulling back ever-so-slightly in the last week.  It is one of the closest things the sector has seen to a correction in the last six months.  While we do not think the energy uptrend is over by any means, a consolidation period would be no great surprise.  Energy’s lead over other sectors is substantial enough to keep it ahead of the crowd for some time.  The crowd is led by Industrials, a sector that seems to be increasingly taking its lead from Energy, for better or worse.  A new development this week is the ascent of Health Care out of the basement and into a tie for third place.  This was primarily due to strength in health care providers and medical equipment stocks; pharmaceuticals and biotechnology are still lagging.  Utilities, another member of the defensive trio, moved off the bottom but has yet to break into the upper half of the list.  Meanwhile, Technology and Materials took the biggest hits to relative strength.  We may be at the beginning of a rotation out of aggressive sectors and into more conservative ones.  Telecom is still in last place.


The Style rankings tell a different story than the Sectors.  Here we see the more-aggressive Small Caps widening their lead over the conservative Large Cap and Mega Cap groups.  Small Cap Growth kept its hold on first place and was one of the few categories to gain momentum in the last week.  The inverted cap-size pattern is still evident in our rankings, but the Growth/Value comparison is inconsistent.  Growth is now favored over Value in the stronger Small Cap and Mid Cap categories, but in the weaker Large Caps we see Value ahead of Growth.


Global rankings look much like the Sectors this week, with one stand-out category and several also-rans.  The stand-out is Canada, which continued to benefit from strength in Energy and Materials.  Japan fell from #2 to #7, which seems bad, but we would not read much into it when those six categories are all bunched so closely together.  The real news today is renewed momentum in the Emerging Markets.  For months the Developed Markets have shown superior relative strength.  All three Emerging Markets categories flipped from negative to positive this week.  China, which was the bottom dweller for quite some time, moved up three notches.


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.

“We remain optimistic and believe this ‘wall of worry’ will actually help elongate the bull run.”

Kully Samra, Charles Schwab




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