Fed Extends The Extended Period
The stock market rally continues. The S&P 500 is now comfortably over the January high we’ve been watching. The Dow Jones Industrial Average, held back by its mega-cap members, is still trying to make the same breakthrough. Otherwise, most equity benchmarks are at new 52-week highs. Intermediate-term momentum is bullish across the board, so we suspect more gains are ahead.
As expected, the Federal Reserve kept interest rates unchanged at its policy meeting this week. Traders were anxious to see if the “extended period” language remained in the statement. It did. The committee did not sound terribly optimistic about the economy, leading most analysts to expect “exceptionally low” rates won’t go away until late 2010 at the earliest. This language has now been the same for eight consecutive meetings, so the “exception” is quickly becoming the rule.
The Fed’s $1.4 trillion program to support mortgage-backed securities – which injected substantial new money into the market – will apparently be allowed to expire at the end of March. This amounts to a withdrawal of liquidity and could mean higher mortgage rates. Removal of the buying activity would not seem to be helpful for the housing sector. The Fed is well aware of this, so maybe they have other tricks up their sleeves. Today’s Producer Price Index report of a -0.6% decline was more evidence that inflation-fighting need not be a priority right now, and tomorrow’s Consumer Price Index report will probably suggest the same.
The Fed’s action, or rather lack thereof, caused the greenback to sell off and pushed commodity prices higher. Gold is on the upswing again after being weak for most of March. The U.S. Dollar Index is close to a six-week low, though still far above where it was at the end of 2009. The fact that Treasury rates pulled back to end at 3.642% today indicates the market does not expect the dollar will remain soft for long.
Consumer Discretionary still holds the top spot in our sector momentum rankings. Starbucks (SBUX), perhaps the exemplar of discretionary spending, is powering higher as at least some well-heeled consumers begin to open their wallets more freely. We have a three-way tie for second place between Industrials, Materials and Financials. Industrials is a bit of a catch-all sector that includes conglomerates like General Electric (GE) and United Technologies (UTX). The next four sectors are also tightly bunched: Technology, Telecom, Consumer Staples, and Health Care. The last of these has been increasingly volatile in reaction to the health care reform end-game in Washington. On an intermediate-term basis, Health Care has been losing relative strength while Telecom is gaining. Energy and Utilities are still on the bottom of the list.
Diffusion within the Style categories is less pronounced this week but still significant. The strongest and weakest groups are separated by 31 points on our scale. Stratification by cap weighting is still present: the Small cap categories are on top, Mid Cap in the middle, and Large/Mega Cap on the bottom.
Canada strengthened its hold on the top global spot with gains in both its currency and its equity markets. The U.S. edged into second place with Latin America close behind. Pacific Ex-Japan slipped in the rankings but continues to perform well as do all its major constituents: Australia, Hong Kong, and Singapore. Europe rose out of the cellar and surpassed China thanks to gains in the Euro and an apparent willingness by Greece to embrace an austerity program. China continues to lag. For all the talk about China’s bull market, the fact is that it has been losing relative strength to the rest of the world since last summer.
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.
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