Greek Drama Over, Says Italian
The U.S. stock market is on a positive roll. The S&P 500 and Dow Jones Industrial Average are trying to break through their January highs. The Nasdaq Composite and the Russell 2000 have already done so. Regardless of what one may think about the economy or corporate fundamentals, the bullish momentum is hard to deny. How long it will last is another question. Our guess: It will be over when it’s over.
Much of the newly bullish sentiment can be traced back to positive-sounding economic data. As we have noted before, most macro indicators can be interpreted to confirm whatever preconceived notions you have. The employment situation is a good example. Last Friday’s report kept the unemployment rate at 9.7% for February, with a decline in non-farm payrolls of only 36,000. This was better than economists had expected and prompted some to predict further recovery in the coming months. On the other hand, the February numbers may have been distorted by winter storms in much of the country along with a spurt of census-related government hiring. Not everyone is convinced the worst is behind us.
In foreign markets, activity in Greece and Europe continues to command attention. “For Greece, the problem is completely over,” said former European Commission president and current Italian Prime Minister Romano Prodi today. As if this weren’t optimistic enough, he went on to say “I don’t see any other case now in Europe. I don’t think there is any reason to think the Euro system will collapse or will suffer greatly because of Greece.” Many believe the Euro has already collapsed, while others are lining up to sell more. Now if Prodi was saying that the decline in the Euro is only partly because of Greece, he’s right. Several other nations, most notably Spain and Italy, are in similar condition and also deserve some of the blame. More likely he was simply continuing the grand negotiations that are underway to decide how Europe will share the pain.
Interest rates climbed again in the last week as the Treasury continued auctioning new bonds into a slightly-less-willing market. The ten-year Treasury ended today at a yield of 3.72%, up from 3.69% last Wednesday. This is roughly halfway between the January peak and the February low. The dollar has been steady against most other currencies; whether this is a consolidation of recent gains or the end of a dollar rally is unclear as yet. Gold is drifting down but holding its long-term uptrend.
All the sector categories showed improvement this week. Consumer Discretionary is still #1, which seems odd in the same week when Gallup reported consumer spending at a new recession low – off 13% from a year ago when everyone thought it couldn’t get much worse. This may be related to the fact that the sector has McDonalds (MCD), Home Depot (HD), and Target (TGT) among its top holdings. Perhaps its strength can be attributed to “frugal” consumer spending. Materials continued to climb and is now in second place. Financials also moved up, thanks to a sudden and sharp rally in major banks this week. Energy and Utilities are still on the bottom, but the generally rising tide brought them back into positive trends. The industry variations within Health Care that we mentioned last week are getting more pronounced. Large cap pharmaceuticals are performing poorly, but the sector is being propped up by strong results in biotechnology, medical devices, and HMOs.
Our Style rankings now have a very clear inverse cap-weight stratification: Micro Cap, Small Cap, Mid Cap, Large Cap, and Mega Cap. This divergence has reached the point where reallocation toward the smaller-cap categories makes a lot of sense. The Large Cap and Mega Cap categories, while still positive, have substantially less momentum than the smaller groups. The difference may grow even more pronounced if institutions begin shifting assets down the cap scale.
There were only minor shifts in the global rankings this week, but momentum did increase around the globe. Canada is still on top of the list, though much of its strength can be attributed to the Canadian Dollar. The movement in Canadian equities appears to be a leveraged play on the currency. If this relationship holds, we would expect to see a dramatic drop in Canadian stocks whenever the currency weakens. Pacific Ex-Japan edged ahead of the U.S. for second place. This category includes only “developed” markets, and many emerging markets in the region (Thailand, Indonesia) are doing even better. Latin America continued to gain strength, and now it’s not just Brazil. Chile, Mexico, and Colombia all made positive contributions. China is still below average. Europe is on the bottom and is now the only category with negative intermediate-term momentum.
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’ve also heard the suggestion we should sell the Acropolis. Suggestions like this are not appropriate at this time.”
Greek Deputy Foreign Minister Dimitris Droutsas when asked about the idea of Greece selling some of its islands to reduce debt.
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