Is Dow 11,000 Truly Significant?
Greece is back in the headlines, with markets now pegging the odds of default higher than ever. Last month’s backstop agreement by other European nations was in fact so riddled with loopholes as to be worthless. Meanwhile the day of reckoning draws closer; Greece cannot delay debt payments for much longer. Refinancing attempts are drawing buyers only at prohibitively high yields. The spread between German and Greek ten-year debt widened to more than 400 basis points, the most since before the Euro currency was introduced in 1999.
Speaking of the Euro, it is dropping like a rock against the dollar and more losses seem likely in the coming months. This is beneficial for other currencies – most notably the greenback, which is still considered a “safe haven” by people whose countries are in even worse shape. Not coincidentally, U.S. stocks pushed higher though the last two days may have marked a short-term peak. A rally in energy prices was also helpful. This may seem odd coming at the same time as a rising dollar; the answer seems to be that global economic recovery is pushing oil demand higher. An announcement by the Obama administration that it might permit drilling in some previously forbidden offshore areas helped the energy service sector, too.
The financial media is drawing a great deal of attention to the proximity of the 11,000 mark in the Dow Jones Industrial Average. Is there any real significance to this level? Technically, Dow 11,000 was of no importance between 1999-2001, a period when it was crossed many times and offered neither support nor resistance. The area did serve as resistance in 2004 and especially 2005, and then it switched roles to provide short-term support for part of 2008. On a six-year chart, Dow 11,000 does appear to be a significant price level – but we will not celebrate a crossover too much unless it persists and eventually becomes support.
The ten-year U.S. Treasury yield briefly touched 4% earlier this week before pulling back to end today at 3.86%. Nonetheless, interest rate trends are pointing higher. Conventional wisdom points toward inflation fear, excessive federal debt, or both. These are no doubt important to some people, but we think the bigger reason for higher bond yields is simply supply and demand. The Treasury is issuing new debt at a rapid pace, just as the economic recovery makes investors more interested in buying stocks than sticking with the “safety” of government bonds. Lower bond prices and higher rates are the natural result.
There is a virtual three-way tie for leadership between Consumer Discretionary, Financials and Materials. The Industrials sector slipped back to fourth place but still has very strong momentum. Telecom and Technology occupy the middle ground while Utilities, Health Care, and Consumer Staples are at the bottom along with Energy. Only a week ago Energy was in last place and showing negative momentum. It is still a laggard, but if the short-term trends continue this sector could climb the ranks quickly.
The range expanded a bit more this week; the top-ranked Small Cap Value group increased its momentum reading by nine points, while on the bottom Mega Caps could manage only a two-point increase. Just as the sector rankings show an increasing risk appetite with defensive sectors on the bottom, the Style rankings have “riskier” small caps on top and “defensive” large and mega caps on the bottom.
Canada held on to its top Global ranking, but Emerging Markets jumped from 7th place all the way up to a tie with Canada. Latin America, China, Emerging Europe and Emerging Asia all helped push the broader Emerging Markets category higher. The European Union is still on the bottom with the U.K. not doing much better. Japan lost ground, relatively speaking, even as its momentum rating increased. Relative weakness in the developed markets of Europe and Japan have pushed the non-U.S. developed market benchmark, the EAFE, to near the bottom of the chart. Only the E.U. is doing worse.
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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