Portugal Joins Greece in Europe’s Basement
Europe was again in the headlines, this time less because of Greece but because Portugal had its sovereign debt downgraded by Fitch Ratings. Our first question is why anyone still pays attention to Fitch or any other rating agency. Their recent track record for predicting defaults is not exactly stellar. Nonetheless, Fitch may have a point about Portugal, which is the “P” in the now-famous PIIGS acronym. The Euro currency dropped to a ten-month low against the dollar as evidence piled up that Greece is not the only member with credit problems. A summit meeting tomorrow in Brussels seems unlikely to resolve anything. Since none of the options are pleasant, political leaders will postpone serious action for as long as possible. Europe is no different from the U.S. in that regard.
None of this prevented U.S. equity benchmarks from hitting new 52-week highs in the last few days. The S&P 500 broke above its January high last week and now seems to regard the 1150 area as support instead of resistance. Today the uptrend took a rest, ostensibly because of the Portugal news, but it may have just been break time. The passage of health care reform legislation did not have the negative market impact anticipated by some critics; if anything, removal of the uncertainty may have been a positive influence.
While the housing sector is still in bad shape and unemployment is still high in most places, other economic indicators continue pointing toward recovery. Treasury bonds were crushed today after an auction of five-year notes drew unexpectedly light interest from indirect bidders – a category which includes foreign central banks. Those notes had their worst intraday move since last August. The benchmark ten-year bond yield increased to 3.83%, its highest level since the first trading day of the year. Another factor: PIMCO bond guru Bill Gross railed against federal deficit spending in his monthly investor letter. Gross was also pessimistic about most of Europe, which is in even worse fiscal shape than the U.S. and lacks some of our advantages.
A majority of sectors gained momentum in the last week, with Telecom improving the most and breaking into the top half of the list. Health Care also received a boost as the reform package seems to be, on balance, favorable for the industry. Consumer Discretionary held on to the top spot and Industrials (which includes Transports) strengthened its hold on second place. Utilities and Energy are lagging badly and continue to duel for last place; unlike most other sectors, both failed to hit new 52-week highs. This week Energy is on the bottom as crude oil prices seem to have stalled in the low $80s.
Not much has changed in the Style rankings, but we will note that momentum scores in the 50 neighborhood are historically not sustainable for long. This does not mean a market decline is imminent; a sideways consolidation would also serve to bring down the scores. Small Caps are still providing leadership while Mega Cap is lagging.
Global rankings became a little more compressed this past week as Canada took a break from its recent run. The U.S. is close behind and could easily capture the top spot if the dollar rally continues. Latin America slipped in the rankings after improving the prior week. Weakness in commodity prices and strength in the dollar are the main culprits. China moved off the bottom but is really not going anywhere. Europe is back in the basement as the Euro problems continue.
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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