Even the Fed is Confused
We are sad to report that one of the leading financial news services (which shall remain nameless but begins with Bloom and ends with berg) seems to be losing its editorial direction. We say this because of today’s near-simultaneous reports that stocks were weak because the Fed’s stimulus program may end and that bonds were weak because the Fed’s stimulus program may continue.
It is true that there is presently much speculation about future Federal Reserve policy. The Fed itself seems to be of two minds, in fact. Minutes of the March 15 Federal Open Market Committee meeting, released on Tuesday, said that “a few” members were leaning toward tighter policy later this year while “a few” thought policy could remain loose beyond 2011. The news coverage simply reflects the fact that even the deciders are undecided. We suspect this will still be the case when Ben Bernanke holds his first-ever press conference later this month.
Not surprisingly, then, we see continued consolidation in the stock benchmarks. The S&P 500 is still bumping up against resistance near 1340 and has been unable to break above its February peak. Bond yields have been firm, but at 3.54% the ten-year Treasury is still not reflecting major inflationary pressure. This lack of concern regarding inflation is a bit odd given that gold just posted a new high and oil moved over $108.
The answer may be that price inflation is a problem only when people are willing and able to pay higher prices. Strapped U.S. consumers, faced with flat income, tight credit and rising gas and food bills, really have only one choice: reduce expenditures elsewhere. Retailers respond by cutting prices of discretionary goods, which offsets the inflation pressure. Hence we have the current situation. Prices are on the rise in some sectors and falling in others.
Can this go on indefinitely? Probably not. Central bankers usually don’t spring last-minute surprises, so we suspect they really are undecided. They cannot remain so. QE2 ends in June, and by then we will know whether more stimulus is coming or not. Lacking that clarity, we expect to see more low-conviction, low-volume trading the next few weeks. Corporate news and geopolitical events will be the main drivers until the Fed makes up its mind. Earnings season is getting underway, so there should be no shortage of corporate news in the coming weeks.
Our Sector Edge graphic looks much different than it did just a few weeks ago. Energy had a significant lead over everything else, to the point that all other sectors looked almost flat in comparison. Energy is still in the lead, but we see a much more linear falloff between sectors. The momentum scores fall more or less equally from Energy at 53 to Technology at 6. Materials was the big winner this week as gold prices hit new highs. Industrials held on to the #3 spot. Health Care gained ground thanks to biotechnology stocks, but it still fell behind Telecom which is now in fourth place. Technology dropped to the bottom of the list.
Our Style rankings continued to show more diffusion as the spread between the top-ranked and bottom-ranked categories increased from 21 to 31. Small Cap Growth remained in the lead; this group recently eclipsed its 2007 peak and is now challenging its all-time high from March 2000. Small Cap Value, which had been lagging, moved into the upper half of the rankings. Mega Cap remained in last place. We still have inconsistent readings on Growth vs Value; Value holds a slight edge in the Large Cap segment while Growth dominates in Small and Mid Caps.
The Global rankings have a shake-up this week. Emerging Markets is the new #1 category. Analysts attribute the rally to strength in materials, a growing appetite for risk by investors, and weakness in the U.S. Dollar. Strong energy and commodity prices were positive for Canada, but it still slipped into a tie with China for second place. The dollar weakness boosted almost every foreign category and caused the U.S. to slip out of the top half of the chart. Japan is still out of sync with the rest of the world and was the only category to lose momentum last week.
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.
“Wall Street’s graveyards are filled with men who were right too soon.”
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