04/20/11   S&P Hedges Its Treasury Ratings

Editor’s Corner

Investor Heat Map: 4/13/11S&P Hedges Its Treasury Ratings

Ron Rowland

What goes up must come down, and what goes down must come up. Both were true this week in regard to the U.S. Dollar and U.S. stock indexes.  Reversals abound as we look at various benchmarks.

The fun began Monday morning when Standard & Poors cut its outlook on U.S. government debt to negative from stable.  Given the firm’s dismal failure to properly rate anything in 2007-2008, we are not sure why anyone pays attention to them now.  S&P did nothing more than hedge its bets.  If the debt problems worsen, they can say “We told you so with our negative outlook.”  If we see improvement, they will respond “See, that’s why we didn’t change the actual AAA rating.” 

Market reaction was nonetheless swift.  Counter to what you might expect, both Treasury securities and the U.S. Dollar initially rallied on the news.  Stocks fell hard at the same time.  Today both patterns reversed sharply.  The U.S. Dollar Index ended today below Monday’s close while the Dow Jones Industrial Average is once again challenging the February resistance level. 

The stock market turnaround was sparked by good news on the earnings front.  Intel (INTC) blew away its consensus outlook and traders decided there may be reason for optimism.  Apple (AAPL) reported better-than-expected earnings after the close today.  Its outlook for next quarter, to be discussed in a later scheduled conference call, will likely be a key factor in tomorrow’s trading.

One market that didn’t reverse this week was gold, which hit new all-time highs every day since last Friday and pierced the $1,500 per ounce threshold.  Silver topped the $45 level for the first time since 1980.  The combination of debt, political turmoil, currency debasement, and price inflation gives gold sellers plenty of reasons to demand a higher price.  Gold can and will drop hard when investors cease worrying, but they seem unlikely to do so soon.

Sectors

For the first time in months, we have a major shake-up in our Sector rankings.  Health Care started the year near the bottom of the list, along with the other traditionally “defensive” sectors, and broke into the upper half a few weeks ago.  Now Health Care is #1, displacing Energy.  Medical delivery stocks provided the early push, and now biotechnology is the main driver.  Consumer Staples is in second place, while fellow defensive sector Utilities lags behind.  This anomaly may be explained by continuing concern about nuclear power plant safety.  Energy is down but not out, now occupying the middle of the pack along with Materials and Industrials.  Technology escaped from the basement by moving a notch ahead of Financials.

Styles

As yet, the Style rankings do not show the shift toward defensive categories that we see in Sectors.  Large Cap and Mega Cap are still in the lower half with Mega Cap owning the lowest momentum score of all.  Meanwhile Small Cap Growth, which is typically considered relatively aggressive, continues to hold the lead.  All Small Caps are obviously not equal, however; Small Cap Value is in 10th place, just one click above the bottom.  Such wide divergence is unusual and will likely be resolved within a few weeks.

International

Pacific ex-Japan has not been especially “strong” lately, but it has been “less weak” than other regions.  Presently, this is enough to put it in first place.  Emerging Markets (a category whose major component is China) follows right behind.  China itself is in third place after holding up better than average in recent weeks.  Europe lost its lead and is now in the #4 spot.  A brief surge in the greenback and accompanying Euro weakness pushed European stocks lower in U.S. Dollar terms.  Today that currency relationship reversed strongly, so Europe is still in the race.  Latin America drifted downward and now sits just one step above the bottom, which is still held by Japan.  Japan is an island nation, both literally and in our rankings.  A sustainable rally seems unlikely until the various tsunami-induced uncertainties are resolved.


Note:

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 dollar, the S&P statement was like getting kicked when you’re already down. The dollar is losing its status as the king of the hill, and gold is looking to take its place.”

Matt Zeman, a senior market strategist at Kingsview Financial


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