We Just Like Saying “Eyjafjallajokull”
After breaking above 11,000 early last week, the Dow Jones Industrial Average came back and tested that level on Friday and Monday. Having passed the test, the Dow and other benchmarks are still showing bullish momentum. Muted gains Tuesday and today look like short-term consolidation. Yes, a number of potentially troublesome developments could easily kill the rally at any time, but this market has shrugged off all manner of negative news. We suspect it will continue to do so. Corporate earnings have been positive with a few blow-outs like Apple (AAPL).
The big story is the fraud suit brought against Goldman Sachs (GS) by the Securities & Exchange Commission. The particular case at hand is relatively minor; Goldman can easily write a check for the damages it allegedly caused (and denies). The bigger question is whether similar incidents will now be uncovered, either at Goldman or other firms. The populist anger against bailed-out banks is giving political impetus to deeper investigation that could go in unpredictable directions. The timing is also curious, given that once-floundering financial reform legislation is suddenly moving forward in Congress. This will probably remain in the headlines for weeks.
Europe is slowly recovering from the sooty emissions of Icelandic volcano Eyjafjallajokull. Air traffic is moving again, at least, allowing the continent’s financial wizards to converge on Athens and discuss how Greece will raise the 10 billion Euros it needs by the end of May. Bond traders are not waiting for an answer, having already jacked up Greek interest rates to record highs. From their perspective this is probably wise; there are no good solutions to the crisis. Spending cuts or tax increases will outrage an already angry population, and the rest of Europe cannot afford to bail out Greece as well as several other countries that are in similar predicaments.
Treasury yields are still heading down. The ten-year rate dropped to 3.74% today. This rate hit 4% back in June 2009 and again earlier this month. The trading range has tightened a bit over the last few months and now lies between 3.5% and 4%. A break above or below that zone will signal the next major trend, but we cannot be sure when it will happen. Range-bound markets like this one tend to persist longer than most people think possible. The U.S. Dollar moved higher against most world currencies. The Euro crisis may be the best news the greenback has seen in years.
Consumer Discretionary pulled away from the pack this week, putting some distance between itself and Financials. The Leisure and Media groups have been providing leadership within Consumer Discretionary while Retail has taken a break. The Goldman Sachs news put a strain on the Financials, but the setback has been very specific. Other sub-sector benchmarks that do not include GS are recovering well after the initial hit. Materials continued to lose momentum, sliding down to a tie for fifth place with Telecom. The defensive trio – Utilities, Health Care and Consumer Staples – still own the bottom of the chart.
We see something very rare this week: one of the Style categories has the strongest overall momentum score, better than any of the Sector or Global leaders. This is unusual because the Style categories are diversified across sectors and tend to be less volatile. The Micro Cap and Small Cap Value groups are reaching unusually bullish levels – a possible cautionary sign. The Style rankings show a fairly uniform decline in strength from top to bottom, with Mega Cap and the three Large Cap categories still the weakest.
The U.S.A. is back on top of the world. Even though U.S. stocks lost a little momentum, other world markets lost even more. Dollar strength also helped boost the U.S. relative to foreign markets. Emerging Markets slid all the way from #2 to #6, largely due to China’s drop from #5 to #10. China reported very impressive economic growth, but the roaring economy has failed to translate into a roaring stock market. Europe remains on the bottom as the Greek drama drags on and volcanic ash adds to the problems.
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 SEC’s suit doesn’t bode well for the entire U.S. financial services industry. You don’t want to be the company or industry that the U.S. government loves to hate.”
Ed Rogers, Chief Executive Officer of Rogers Investment Advisors
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