Don’t Get Your Hopes Up
Nonetheless, Tuesday’s sharp gains brought out the bottom-callers once again. The standard line was that last week’s breakdown was finally the end of the bear market, and stocks could begin to rise even while the economy remains in decline. In fact, Tuesday’s action looked far more like a bear market rally than the beginning of a new bull cycle. Historically, few bear market bottoms are apparent in real-time. They are marked by such total disgust and disinterest that they are usually identifiable only in hindsight. Likewise, bull markets seldom begin with explosive rallies; they build up slowly before gaining significant momentum. Today’s muted follow-through suggests that the new, lower bottom will likely be tested once again, and probably sooner rather than later.
Economic data remains dismal. Friday’s non-farm payrolls report brought the unemployment rate up to 8.1%. Job losses in February were more than 600,000 for the third consecutive month. The reality is actually much worse: millions of under-employed and discouraged job-seekers are not included, plus many more who have taken pay cuts, furloughs, and benefit reductions. Even those who go to work every day feel much less secure than they did a year ago. This translates into lower confidence, reduced consumer spending, and increased savings. Manufacturing output has been declining faster than employment in that sector, which indicates more layoffs are probably coming. Until unemployment stabilizes and the job market begins to expand, it is hard to foresee the economy recovering. Both the World Bank and the International Monetary Fund are now projecting the global economy will contract in 2009, the first time since World War II.
The 10-Year Treasury yield traded slightly above 3% today for the fifth time since early February. That level appears to mark significant resistance, and we suspect it is a point where the Fed has chosen to make its stand. So far it is holding, but we are losing our previous optimism about Bernanke’s ability to impose his will on the bond markets. The Treasury needs to borrow more than $2 trillion in the next year, and many U.S. investors seem unwilling to accept the paltry yields that are currently offered. The fall-back purchaser is China, but with a rapidly shrinking trade surplus it is not clear the Chinese will have enough dollars on hand to buy as many Treasury bonds as the U.S. needs to sell. Meanwhile the vast expansion of the Fed’s balance sheet is already creating inflationary pressure. More will likely follow. Maybe Bernanke has a way to balance all these competing requirements, but we do not see it yet.
Our sector rankings are mostly unchanged, with the top four and bottom three slots still in the same hands as last week. Technology and Telecom remain on top of the heap, though their negative momentum means they are “best” only in a relative sense. Telecom is the only sector that has (so far) not tested its November low. The strongest moves of the last week came in the worst-performing sub-sectors, such as coal, steel, and commercial real estate.
Large Growth and Mid Growth are still the best-performing style categories. Small Value remains on the bottom. Every category except Mid Growth broke below the November lows last week. Style dispersion increased again, with 65 points separating top-ranked Large Growth from bottom-ranked Small Value.
The beaten-down Emerging Markets made a strong advance since last Tuesday. The market Vectors Russia ETF (RSX), for instance, posted a 20% gain for the week. South Korea, Taiwan, and Latin America also had strong short-term performance. It was not, however, nearly enough to reverse the negative intermediate-term momentum that prevails in every global market we track. Europe is still in miserable condition, afflicted with both economic weakness and a Euro that is sinking steadily against the dollar.
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.
“3x ETFs are like playing with Nitroglycerin.”
Johnny Rogue (October 23, 2008)
“You think you’re tough for eating beans every day? There’s half a million scarecrows in Denver who’d give anything for one mouthful of what you got. They’ve been under siege for about three months. They live on rats and sawdust bread and sometimes… on each other. At night, the pyres for the dead light up the sky. It’s medieval.”
Taken from the 1984 movie Red Dawn
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