Dow Puts 11,000 in Rearview Mirror
The Dow Jones Industrial Average spent most of the last week trying to penetrate the 11,000 level we mentioned in our last issue. On a closing basis the breakthrough happened Monday and again Tuesday. Today added a little more margin. As we noted, these round numbers are usually over-celebrated, however this particular event does have some long-term technical significance. The bullish momentum seems likely to persist.
One reason stocks are rising is that earnings season is upon us. Corporate results so far look generally impressive – or at least not disappointing. Intel (INTC) reported brisk demand for high-end microprocessor chips, thereby inspiring buyers to bid the technology sector higher. Financials provided some additional leadership today; JPMorgan Chase (JPM) beat expectations by a wide margin. We aren’t overly impressed. Profits come easy when you can borrow at near-zero short-term interest rates and loan the same money to the government several points higher. Nonetheless, the large-cap financials are a good place to be for now.
Federal Reserve chairman Ben Bernanke – the man behind those low rates – testified before Congress today and was characteristically opaque. Media reports summarized Bernanke as expecting a “moderate economic recovery.” Here is the more complete quote of what he said: “On balance, the incoming data suggest that growth in private final demand will be sufficient to promote a moderate economic recovery in coming quarters.” Count the qualifiers in that sentence and you’ll see it is carefully-engineered doubletalk. Of course he has to say something, and the Fed chairman can’t very well admit to being as clueless as everyone else. We’d still like to see him try.
After challenging the 4% level earlier this month, the ten-year Treasury yield pulled back to 3.80% yesterday and closed at 3.85% today. The Consumer Price Index increased only 0.1% and was unchanged when food and energy prices are excluded. This indicates inflationary forces are being kept at bay, which is positive for bonds. In another deflationary hint, Wal-Mart (WMT) is rolling back prices on thousands of common consumer goods. Retail sales are looking up, but unemployment is still a structural problem that shows no sign of abating. Even as consumers who have income let loose the purse strings a bit, others are still tightening up.
Consumer Discretionary stayed in the lead with Financials close behind. Materials is in third place and losing momentum, which is somewhat surprising given the weakening dollar and strength in commodity prices. Energy remains in the bottom half of the rankings and is as volatile as ever, but through this a new uptrend appears to be taking shape. Consumer Staples, Health Care, and Utilities, the traditionally defensive trio, are the laggards for now.
The last week brought no changes to our relative Style rankings, but all the categories posted a gain in absolute strength. Small Cap Value still owns the top of the chart with Micro Cap right behind. At the bottom of the list, Mega Cap is stuck in last place and appears likely to stay there; the next-best category, Large Cap Growth, is heavy in Technology, a sector that is currently in a strong rally.
The Global rankings were unchanged on a relative basis, but the range compressed further. More than half the categories in our chart are in a narrow range with scores between 33-36. This means a large shake-up in the rankings could unfold in the next week or two. For the moment, Canada is still on top though it lost some momentum since our last report. The same is true for Emerging Markets. The European Union is in last place, but it turned in a very good week as a new Greece bailout plan seemed to meet with investor approval. Renewed weakness in the U.S. Dollar should start helping foreign markets gain an edge on the U.S., but so far the strength in U.S. equities has offset the currency impact.
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.
“At high tide fish eat ants; at low tide ants eat fish.”
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