04/16/14   Leaders Under Attack

Editor’s Corner

Ron Rowland

Stocks have successfully rebuffed every attempt to bring them down for the past two-and-a-half years.  Some market watchers will insist it has been more than five years since the lows of 2009 were established.  Indeed, March 2009 was a significant low, and it marked the lowest level for the S&P 500 of the past dozen years.  However, halfway through this recent five-year ascent, the S&P 500 fell more than 19% during a span of less than six months.

Some might argue its decline stopped short of the 20% normally cited as being the requirement for declaring a bear market.  Maybe so, but is a 20% drop really much different than a 19% selloff?  On an intraday basis, the S&P 500 plunged 21.6% in 2011, which easily surpasses the bear market threshold.  On a closing price basis, the Russell 2000 Small Cap Index confirmed this label by taking a tumble of more than 29% that year.

However, as bad as things were in mid-2011, many investors have already forgotten those times as they paled in comparison to the bear market that ended in 2009.  A review of newspaper headlines from two-and-a-half years ago should remind you just how grim it was and how fearful investors were.  Since then, investors have become rather complacent.  Every pullback in the S&P 500 has been short and shallow.  Each decline was over before investors had a chance to fret.

The unanswered question is whether the current market decline will be of the fearful 20% or more variety, or just another short and shallow event that may have already concluded.  No one knows for sure at this time, although that doesn’t stop many from stating their case.  For every small pullback occurrence of the past few years, there were always reasons for why it could have been much worse.

Once again, the small cap stocks of the Russell 2000 are posting larger declines, with that index dropping 8% in the past few weeks and briefly undercutting its long-term 200-day moving average.  Meanwhile, the S&P 500 has held its closing losses to just 4%.  This is significant because small cap stocks have been in a leadership role the majority of the past two years.  Some selective groups are experiencing even more pain.  Biotechnology stocks were among the market darlings earlier this year, with the SPDR S&P Biotechnology ETF (XBI) showing a 31% year-to-date profit in late February before taking a 28% plunge.

Market leaders are now under attack from investors and traders trying to reduce their exposure.  When the leaders fall, it is prudent to pay attention to the troops.  Now is such a time.

Investor Heat Map: 4/16/14


The Utilities sector continues to shine amid the market uncertainty and even gained strength this past week while the broader market was down.  Energy climbed another rung to land in second.  It has been receiving a boost from firmer oil prices, which are now carrying a political premium due to escalating tensions between Ukraine and Russia.  Real Estate had a good week although it gave up its second place ranking to Energy.  Consumer Staples, a classic defensive sector, climbed two places to fourth as investors seek low volatility stocks.  Telecom lost momentum but managed to keep its relative ranking decline to just one position.  Materials and Industrials rode out the recent downdraft and prevented their momentum readings from turning negative.  Financials and Technology were not as fortunate as they flipped over to red.  Health Care and Consumer Discretionary slipped deeper into negative trends.


Negative market action is evident in the style rankings where seven of the categories are now in the red.  Mid Cap Value and Large Cap Value continue to fill in for the former smaller company leaders and are now essentially tied for first place.  Mega Cap moved up a notch to secure third as Large Cap Blend slipped to fourth.  These are the only four categories still in the green, and Large Cap Blend is barely hanging on.  Mid Cap Blend, Small Cap Value, and Large Cap Growth are an odd trio bunched together in the middle of the rankings this week.  The bottom four categories kept their same relative order while sinking deeper into negative territory.


Latin America has been unable to break free of its long-term downtrend.  It encountered another setback this past week but was still able to post the highest momentum reading among the global regions we track.  Pacific ex-Japan had relatively stable price performance for the week, allowing it to climb into second place.  Emerging Markets posted negative one-week performance and slipped to third.  Canada and Europe swapped places with Canada landing on top thanks to help from a firmer Energy sector.  The lower six categories are unchanged with World Equity, EAFE, China, U.K., and the U.S. struggling to hang on to their last remnants of positive momentum.  Japan is the only region in the red and fell further this past 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.


“The quality of IPOs has gone down. The underwriters are trying to push these IPOs out the door before it closes.”

Francis Gaskins, Research Director at Equities.com, April 11, 2014


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