04/20/11   Buffett Takes Our Cue

Editor’s Corner

Investor Heat Map: 8/31/11Buffett Takes Our Cue

Ron Rowland

The S&P 500 today ended its worst month since May 2010 despite an 8.4% gain in the last seven trading days.  It easily could have been much worse.  August is typically a low-volume month, but this time it turned in the second highest monthly volume so far this year.  High volume was concentrated on the downturns, suggesting buyers are still scarce.

As we expected, Ben Bernanke did not pull a rabbit from his hat at last week’s Jackson Hole conference.  He more or less repeated last year’s promises that the Federal Reserve would be vigilant, do all it can, etc etc.  Traders still found some encouragement, apparently, as markets rallied despite the hurricane bearing down on Manhattan.

The Fed chairman did have one interesting revelation, saying the Fed’s next policy meeting in September will be extended to include a second day.  This will, according to Bernanke, “allow a fuller discussion” of the issues at hand.  Has the committee prior to now been having abbreviated discussions?  We don’t see what a second day can accomplish that dozens of prior meetings did not.

Some Fed-watchers think Bernanke will use the time to arm-twist other members who are resisting his plans.  This may be so, but adding a day also serves as a policy tool in itself.  It says the Fed is serious and buys a little more time.

Signs of economic recovery remain elusive.  Housing prices stabilized a bit, and factory orders were up.  Conversely, consumer confidence dropped hard in August and no one expects much good news in this Friday’s monthly employment numbers.  Treasury bonds sneered at the S&P U.S. debt downgrade, with the ten-year yield dropping from 2.55% to today’s 2.22%.  Gold recovered more than half of the last week’s pullback despite a relatively steady U.S. Dollar.  Europe’s debt crisis is out of the headlines but by no means solved.  Caution is the prevailing attitude for investors just about everywhere.


For those who have forgotten what it looks like, that color near the top of our Sector Edge graph is called “green.”  We haven’t seen it next to any sector for many weeks.  Any positive momentum is nice, of course, but we would not celebrate just yet.  The defensive sectors are still lined up 1-2-3: Utilities, Consumer Staples, and Health Care.  It’s 1-2-3-4 if you include Telecommunications as many analysts now do.  Telecom did not look at all defensive today, however; AT&T (T) plunged on news the Justice Department would block its takeover of T-Mobile.  Consumer Discretionary moved ahead of Technology thanks to a surge in the deeply oversold home construction stocks.  Materials jumped in front of Energy, led by strength in gold and silver miners.

Industrials and Financials still bring up the rear.  In last week’s update, we mentioned that bottom-fishers had their eyes on bank stocks.  Hours later, Warren Buffett announced a $5 billion investment in Bank of America (BAC).  We were not previously aware Mr. Buffett was among our readers.  We’ll pass along more ideas as we get them


Relative positions were little changed from last week in our Style chart, but the overall  negative momentum is still obvious.  Capitalization-order remains in effect with Mega and Large Caps on top, Micro and Small Caps on the bottom, and Mid Caps tucked neatly in between.  We are starting to see a slight relaxation within the groups.  Mid Caps are still tightly compressed, but Small and Micro show some variation.  Top-ranked Mega Cap remains in both long-term and intermediate-term downtrends, i.e. below its 200-day and 50-day moving averages.


We have a new #1 Global category: Pacific ex-Japan.  This benchmark includes only the “developed” markets of the Pacific Rim, less Japan.  Weightings are currently 64% Australia, 20% Hong Kong, 14% Singapore and 1% New Zealand.  Of these, New Zealand has the best recent performance but at a 1% allocation doesn’t really contribute much.  The real source of strength is Australia’s resource-heavy economy.  Another such economy, Canada, is in second place.  The U.S. is third and turned in the top one-week performance of all our Global categories.  Gravity finally brought Japan out of the top spot and all the way down to fourth place.  The U.K. dropped back a bit, and Europe is still in the basement.


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.

“For The Industrials group could soon take last place away from Financials; banks are beginning to attract interest from bottom-fishers.”

Invest With An Edge, hours before Warren Buffett announces $5 billion stake in Bank of America (BAC)


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