03/13/13   Cyber Threats Are Real

Editor’s Corner

Ron Rowland

Our country’s top intelligence officials are more concerned than ever about cyber attacks and their potential for wreaking havoc on the nation.  In a U.S. Senate hearing yesterday, Director of National Intelligence James Clapper, FBI Director Robert Mueller, and U.S. Cyber Command’s Army General Keith Alexander joined together to warn that cyber attacks and espionage on critical infrastructure is surpassing terrorism as the top global threat.

Those responsible for the threats include criminal hacker groups, cyber terrorists, and even government sponsored entities.  Although no new or imminent threats were mentioned, the speakers made it clear the nation is vulnerable to attacks in many forms including cyber espionage, cyber crime, destruction of computer networks, and commandeering of critical infrastructure.  It is that last category that appears to be the most worrisome.  Commandeering of the financial system, nuclear-power plants, electric power grid, or transportation networks would put the nation and its citizens at immense risk.  It goes without saying, a significant breach of our military command and control infrastructure could be devastating.

The weapons of war are forever evolving, usually at a faster pace than civilization itself.  Unmanned drones are a deployed reality, although it seems the U.S. is still struggling to establish the appropriate rules of engagement.  Out and out cyber warfare will eventually become commonplace.  However, both China and the U.S. appear to want to avoid this path.  Yang Jiechi, China’s foreign minister, called for cooperation on cybersecurity.  “Cyberspace needs not war, but rules and cooperation,” he said, adding that it should not become a “new battlefield.”

One of the industries most likely to benefit from this is software.  However, given the secretive and sensitive nature of the activities involved, the primary players will probably be the military and intelligence agencies for many years.  It may eventually evolve into a group of publicly traded companies, but for now, there is not a Cyber Defense ETF available to investors.

Investor Heat Map: 3/13/13


Last week’s ‘Machete with a Handle’ pattern has given way to a more linear drop off in strength across the sectors.  Financials recaptured the top position after a three-week absence.  Industrials provided the interim leadership and today slips to second place.  Health Care now occupies the third spot, primarily as a result of strength in biotechnology.  Consumer Discretionary moved up two places to fourth, with retailers and homebuilders both helping the effort.  Consumer Staples and Utilities – two defensive sectors – are in a virtual tie in the middle of the pack.  However, there does not appear to be much rhyme, reason, or theme regarding which sectors are stronger and which are weaker.  Energy and Materials are next in today’s lineup.  This represents a three-step climb out of the basement for Materials.  Real Estate slides another two notches this week, landing in ninth.  Telecom and Technology continue to trail, with Technology grabbing last place honors.


Mid Cap Value rules the roost of Style rankings again this week, as every challenge to the top position has met with failure.  Small Cap Growth has stepped up to be the next challenger, even though Growth is lagging Value in the other capitalization segments.  Micro Cap jumped from seventh to fourth, providing additional evidence that a shift in strength to the Small Cap groups may be underway.  Small Cap Blend and Mid Cap Blend round out the top five.  Small Cap Value, formerly in the #2 spot a few weeks ago, has now slipped to sixth.  Large Cap Value was pushed down another level, further squeezing the Large and Mega Cap groups into the bottom slots.  Mid Cap Growth is an anomaly among these lagging categories, especially since Mid Cap Value is on top.  Large Cap Growth and Mega Cap hold the bottom positions again.


The top six Global categories are unchanged from a week ago, although each is posting stronger momentum today.  Japan and Pacific ex-Japan continue to head up the list of eleven, which only has one region in a negative trend today.  The U.S. dollar continues to strengthen, creating a headwind for foreign equities.  Still, it hasn’t been enough to derail the rallies in Japan and Europe.  After Europe, which is in sixth place today, strength starts to drop significantly.  Latin America jumped three places to seventh this week, although it appears to be meandering upward rather than showing any real strength.  The U.K. weakened slightly and is struggling to keep from breaking down into a negative trend.  Canada flipped from negative to positive this week, but it has really just been moving sideways the past six months.  China is the only category registering a downtrend this week, and its recent action has officially put an end to its late 2012 rally attempt.



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.


“The issue we’re weighing is: When does a nuisance become a real problem and when are you prepared to step in for that?”

Army General Keith Alexander, head of U.S. Cyber Command (3/12/13)


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