04/13/11   Earnings Season Off To A Rough Start

Editor’s Corner

Investor Heat Map: 4/13/11Earnings Season Off To A Rough Start

Ron Rowland

The U.S. stock market ran into resistance in the last week, but hope remains.  The S&P 500 frustrated bulls by failing to move above its February peak.  On the positive side, intermediate-term momentum is still positive.  The 50-day moving average seems to have provided some support the past two days.

Earnings season is underway, and initial signs were less bullish than anticipated.  Alcoa (AA), traditionally the first major company to report quarterly results, disappointed and appears to have dampened the party.  The mood could improve quickly if another big player has particularly impressive numbers.  Many reports are still to come in the next few weeks.

To the joy of some and chagrin of others, the U.S. government continued operating without interruption as Congress reached a budget agreement with the White House.  More drama is likely in the next few weeks, however, as the Treasury Department projects federal debt will exceed the statutory limit on May 16.  What happens if the limit is not increased before then is not entirely clear.  This week’s auction activity shows the Treasury is still finding plenty of buyers for its paper at historically low rates.  Nevertheless, the weakness in long-term bonds that began last October still has the upper hand. 

Economic data is mixed, allowing analysts to make a plausible case either way.  March retail sales rose for the ninth straight month.  Much of it appears to be driven by higher energy and food prices, however; discretionary spending on things like automobiles remained mostly flat.  Housing and employment numbers are improving slowly at best.  The overall picture remains one of very weak recovery.


Physicists tell us that objects in motion tend to stay in motion until something stops them.  The same might be said of the Energy sector, which has been in either first or second place in our momentum rankings since mid-November 2010.  What we rank is relative strength, however.  A sector can lose momentum without losing rank.  Energy did exactly this in the last week, dropping its score from 53 to 25.  Such a steep pullback is not especially surprising after being in the lead for months.  Support at the sector’s March low is the next level to watch.  Telecom avoided most of last week’s negative market action and is now tied with Energy.  Health Care is just slightly behind, giving us essentially a three-way tie for sector leadership.  Within Health Care, the Biotechnology industry is showing short-term leadership.  Consumer Staples improved, moving into the upper half of our rankings.  Technology remains in the basement, accompanied by Utilities.


As is typical in market pullbacks, we saw compression in the Style rankings since last week and the former high-flyers underwent the steepest downfalls.  Nonetheless, the market uncertainty was not enough to move the theoretically-safer Mega Caps off the bottom nor the aggressive Small Cap Growth out of the lead.  Of course we are only five days into the market correction, if that’s what this is, so there is still time for new trends to emerge.


The visual appearance of our Edge charts often yields insight that is not quickly apparent otherwise.  This week we see a very unusual situation in the Global rankings.  Japan is so far out of sync to the downside that its weakness is greater than the strength anywhere else.  Our sector, style and global charts include a total of 32 categories, and right now Japan is the only one showing negative momentum.  Japan bulls point out, correctly, that the March 15 panic lows have not been breached, but further breakdown remains a real possibility.  At the other end of the scale, Europe is now the top ranked category thanks to a strengthening Euro / weakening U.S. Dollar.  The rally in Emerging Markets was interrupted last week as commodities and natural resources pulled back.  The U.S. is now the lowest-ranked Global category other than Japan.


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.

“The cure for high commodity prices is high commodity prices.”

Wall Street axiom



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