03/23/11   Divergences Everywhere

Editor’s Corner

Investor Heat Map: 3/23/11Divergences Everywhere

Ron Rowland

World markets bounced after a terrible previous week, but not all the damage is repaired yet.  The Dow, having sliced through its 50-day moving average about two weeks ago, was bumping up against it a couple of days before closing above it today.

Meanwhile, the S&P 500 was turned away from its own 50-day MA two days ago.  We see early signs that the index may be entering a new downtrend.  The last peak was more than four weeks ago and looks more and more like it may have been a top.  Other major benchmarks have different patterns, however.  We need to see how the divergence resolves before we reach any conclusions.

Technical uncertainty is matched by a lack of clarity in the news headlines.  Japan appears to have averted a major nuclear calamity but still has to deal with tremendous damage from the earthquake and tsunami, as well as possible long-term radiation problems.  Many factories are still closed, though some are beginning to come back online.  The U.S. and European allies seem to be at odds over strategy in Libya, making the resolution of that crisis also questionable. 

The economic numbers are looking either up or down, depending how you examine them.   Today’s bad news was an unexpected decline in new-home sales which fell to the slowest pace on record, while prices dropped to the lowest level since December 2003.  Housing inventories remain very high.  At the same time the U.S. manufacturing sector is showing signs of new life. This is another divergence that needs to be resolved, one way or the other.

Commodity prices remain strong in dollar terms.  Gold bullion is attempting to break out to another new high today, and crude oil is back above $100.  Treasury yields increased as stocks rebounded, putting the 10-year yield back at 3.34% after trading as low as 3.15% last week.  Europe’s sovereign debt crisis refuses to go away, Portugal being the latest concern.  Gold and commodity-related equity sectors seem to be the refuges of choice for now.  How long they will remain so is another question.


Energy regained momentum this past week and further distanced itself from the other sectors.  It is lonely at the top – and Energy has been lonely for a couple of months now.  Materials improved enough to join Industrials in a tie for second place.  Health Care managed to stay in the #4 spot.  Consumer Discretionary slipped out of the top half and now shows zero momentum.  This sector is at the same level it was in early December and has been trading below its 50-day moving average for more than a week.  Technology completed its move from the top tier to last place.  Tech can’t go any lower relative to other sectors, but it can certainly get worse from an absolute standpoint.


Small Cap categories now hold three of the top four positions, with Mid Cap Value managing to worm its way into the second place spot.  The Style rankings remain extremely compressed, especially in the top eight positions, so changes in relative position mean little right now.  Micro Caps bounced more than most other categories the last week and is now in the middle of the pack.  The low end consists mostly of Large Cap categories with Mega Cap once again on the bottom.


The Global rankings look a little more symmetrical now.  Last week the chart was negatively skewed by Japan’s dismal performance.  Japanese stocks rebounded sharply but are still far below pre-earthquake levels.  Hence, Japan remains on the bottom with the rest of the neighborhood (Pacific ex-Japan) right above.  Canada held on to the #1 spot, though a rapidly-developing budget gridlock may introduce political uncertainties there.  Europe pushed the U.S. aside to take second place, helped by strong gains in the Euro.


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.

“Though the official unemployment rate is improving, according to our poll, we have at least 20% of able Americans looking for full-time employment.”

Raghavan Mayur, President of TechnoMetrica Market Intelligence


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