04/01/09   One Quarter Down, Three To Go

Editor’s Corner

One Quarter Down, Three To Go

Ron Rowland

One quarter down, three to go for 2009.  The S&P 500 fell for the sixth consecutive quarter, its longest losing streak since 1970.  The Dow posted its worst first quarter since 1939.  Both comparisons would be much worse if not for a sharp gain in March.  Indeed, March was a stellar month if we ignore the preceding carnage.  Therein lies the problem: we can’t ignore the preceding carnage.  Whatever happened, happened.  At the same time, we cannot drive forward while looking only in the rear-view mirror.  What’s next?
The equity rally is currently taking a break.  The S&P 500 index has been hovering around the critical 800 level for two weeks now.  We suspect the outcome of this battle will reveal the next major trend.  While the benchmarks are finding some support at their 50-day moving averages, it will not take much selling pressure to create another breakdown.  The March rally topped out very close to the January low, which suggests upside resistance will not give way easily.  Equity risk remains very high.
The government’s decision to force out General Motors (GM) CEO Rick Wagoner, and accompanying suggestions that bankruptcy may not be such a bad thing after all, indicate the Obama administration is losing patience with the results of its economic policies.  We find it odd, frankly, that Wagoner was shown the door but the heads of banks which have consumed far more taxpayer cash than GM still have their jobs.  Do the bankers really have that much influence in Washington – or should they view Wagoner’s fate as a warning shot?  We will find out soon enough.
Meanwhile, the somber economic drumbeat is getting no better.  This week the S&P/Case-Shiller home price index revealed no sign of recovery in the housing market.  Friday’s Non-farm Payroll report will likely show another 650,000 jobs disappeared in March.  While it is possible to find glimmers of hope here and there, the reality is the economy cannot recover as long as so many jobs are being eliminated.  There will be no substantial recovery in the U.S. or anywhere else until employment trends begin to turn upward.
Treasury yields still remain well below the 3% level, thanks to the March 18th Fed announcement that it will begin taking government debt onto its own balance sheet.  Mortgage rates are also falling, but the bargain rates do not appear to be stimulating much sales activity.  Mostly people are seizing the opportunity to refinance.  Junk bonds are building support around current levels, but have been beaten down so far it is hard to identify a trend just yet.
Technology and Telecom still top the sector rankings while Financials and Industrials are still on the bottom.  In between, Consumer Discretionary edged into positive trend territory despite forecasts for lower consumer spending.  The astonishing volatility in the Financial sector shows no signs of going away – daily swings of 5% or more are becoming common.  
Relative strength among the equity Style categories is mostly unchanged this week.  Growth stocks are still the place to be, at least for those who must stay exposed to equities.  All three Growth categories are at least within shouting distance of seeing some upward momentum.  Value stocks are still heading firmly downward.
The week brought only minor shifts in our global rankings.  China moved back into first place, edging out the Emerging Markets category.  Canada and Latin America pulled back as recent strength in commodities appeared to fade.  The Canadian Dollar also fell against the greenback, hurting the relative value of Canadian stocks.


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.

“Now it’s been ten thousand years, man has cried a billion tears.  For what he never knew, now man’s reign is through.  But through eternal night, the twinkling of starlight, so very far away, maybe it’s only yesterday.”  

Rick Evans (lyrics from In The Year 2525, 1967)


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