U.S. stocks have been on a steady advance since mid-November. Instead of comforting investors, this phenomenon seems to be making them more nervous. Each multi-day pullback, and many single-day declines, prompts a chorus of pundits declaring the start of the next bear market. It seems everyone wants to claim credit for calling the next market top, while hoping you will forget their numerous failed predictions. As sure as night follows day, the market will indeed experience another bear market. When that day comes, the newest dire predictions will come true, and all prior bad calls will be reclassified as early warnings.
Part of investor anxiety is propagated by new highs and new milestones the market is reaching. The S&P 500 is above 1600, and the Dow Jones Industrial Average closed above 15,000 for the first time ever yesterday. One hundred years ago, the Dow was trading below 80 points. Stop and think about how many new highs the Dow established in its move from 80 to 15,000. New highs are normal, expected, and beget more new highs. New highs are the reason we invest, they are not a reason to predict the end is near.
If you want something to worry about, there is no shortage of items to fill that need. One area that receives a large allocation of analysts’ time is the monthly employment report. Last Friday’s edition for the month of April showed the unemployment rate dropping from 7.6% to 7.5%. Nonfarm payrolls increased by 165,000 in April, and the initial reports for February and March were adjusted upward by 114,000 jobs. These numbers appear to be good, and the stock market seemed to be pleased. However, the Bureau of Labor Statistics provides reams of supporting data, and various slices of that data reveal a not so rosy picture.
With 11.7 million people seeking jobs, the job market has far to go before it is fully recovered. Beyond the 11.7 million unemployed are another 7.9 million people classified as “involuntary part-time workers.” There are also 2.3 million people that would like to be employed, but they are not counted as unemployed since they haven’t looked for work in the past four weeks. The government includes these additional categories when calculating the “underemployment” rate, which increased from 13.8% to 13.9% for April. Employment will remain a source of worry and a hot topic for months to come.
The complexion of the Sector rankings is changing. The traditional defensive sectors of Utilities, Health Care, and Consumer Staples have provided much of the leadership the past few months, but they are now absent from the top of the rankings. On an absolute-strength basis, all three defensive categories remain quite strong and are close behind the new leaders. On a relative-strength basis, they have slid down to the middle of the pack. Real Estate now occupies the top spot, moving up from third. It is sharing the spotlight with Consumer Discretionary, which jumped from sixth to second. Consumer Discretionary is getting strength from autos, housing, and retailers. Rounding out the upper tier are Telecom and Financials. The lagging sectors are the same four that have occupied those slots for numerous weeks. Industrials, Technology, Energy, and Materials are participating in the market rally and showing improved strength, but they have been unable to improve their relative rankings.
The eleven Style categories keep getting stronger and stronger. Simultaneously, they are getting more compressed. Their average momentum reading is 30 today, indicating an annualized positive trend of +30%. Meanwhile, only 6 points separate the top from the bottom. Our interpretation: the decision to own stocks has been much more important than deciding which Style to own. The three Mid Cap categories remain at the top and are posting identical scores this week. The three Large Cap categories held their fourth through sixth place positions, although Large Cap Value went from top to bottom of the trio. Mega Cap fell from seventh to last. This category has been behaving somewhat strangely all year. Representing Blue Chip stocks, Mega Cap fits the defensive category description. However, it failed to rise in the rankings when the defensive sectors were leading, but it quickly fell to the bottom when defensive sectors lost some steam.
Japan is still far out in front, although its lead is starting to diminish. We mentioned the Style rankings had only 6 points separating top from bottom. Meanwhile, our Global rankings have 21 points separating first place Japan from second place EAFE. The U.S. moved up a notch to third, and Europe jumped four places to fourth. World Equity and the U.K. held their middle ground positions. Pacific ex-Japan lost the most relative-strength, slipping from third to seventh. Australia lowered interest rates, putting downward pressure on its currency and stocks. The bottom four categories had no position changes from a week ago, with Emerging Markets now trying to break free from the others. China, Latin America, and Canada all managed to flip from negative to positive momentum scores today.
“Investors have played the worry game, and those that have sat on the sidelines in cash are staring to question that.”
Sean Lynch, Wells Fargo investment strategist, May 7. 2013
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