05/11/11   S&P 500 Passes First Test Of New Support, Barely

Editor’s Corner

Investor Heat Map: 5/11/11S&P 500 Passes First Test Of New Support, Barely

Ron Rowland

The commodity correction/dollar rally continued this week, spreading to more corners of the financial markets.  Natural resource prices seemed to be bouncing but gave most of it back today.  Crude oil was particularly hard-hit.  Gasoline traded limit down, causing a temporary halt in all energy futures today while the limit on gasoline was expanded from 25 cents to 50 cents.  Many other energy contract limits were also raised.

Unraveling cause and effect is always dicey in these big moves, but the root seems to be that interest rates are headed higher everywhere but the U.S.  The European Central Bank is far more sensitive to energy prices than the Federal Reserve – in contrast with Ben Bernanke’s ho-hum attitude about inflation.  Now traders are beginning to think the ECB will hike rates whether Bernanke likes it or not.  This would normally create further weakness in the dollar, but for the time being, dollar strength created by falling commodity prices is winning out over interest rate differences.

The S&P 500 is holding – barely – above support around 1340.  We did see one close a bit below that level last week, but we don’t believe support and resistance can be determined with absolute precision.  Hence we will score it as “passing the first test” though not exactly with flying colors.  Meanwhile, the second test is now underway.

Rising fuel prices produced an unexpected jump in the March U.S. trade deficit.  Looking at goods and services separately reveals that the gap is mostly due to imported goods.  The U.S. actually has a record-high surplus in service exports.  As always, these numbers can be spun in different ways to support whatever point you want to make.

A move by Washington to further limit the size of mortgage guarantees starting later this year is the latest bad sign for housing.  The precise limits will vary by region, but the result will be higher borrowing costs for those trying to buy expensive homes.  One could argue that the taxpayers should not be subsidizing buyers of $750,000 homes – but someone builds those homes and all the stuff they contain.  The laudable long-term goal seems set to create more short-term pain.

Sectors

Health Care held its grip on the sector lead for a fourth week, and it shows no signs of weakening.  With Consumer Staples still in second place, defensive sectors have now held the first two positions for two weeks.  The other such sector, Utilities, is also creeping up with a move from #8 last week to #5 now.  Energy’s decline from a long reign at the top is proving brutal.  Last week Energy was still in the middle of the pack; now it is only one step above last place.  An actual downtrend may not be far away after today’s sharp decline in crude oil – finally giving Financials a chance to escape from the basement.

Styles

We have a new leader this week: Mid Cap Growth displaced Small Cap Growth atop our Style rankings, though not by much.  One of these two categories has held the top spot since January.  The broad market pullback created further compression in the momentum readings, which raises the likelihood of relative position changes.  Micro Caps continued to lose ground and are now tied with Mega Caps for last place.  We now have an unusual condition where both capitalization extremes are on the bottom while mid-caps are on top.

International

The Global Edge chart changed dramatically in the last week.  Credit and/or blame goes to two factors: commodity correction and U.S. Dollar strength.  To some extent these are two sides of the same coin, but the impact varies by region.  Europe is still on top, but the greenback’s rise against the Euro cut the EU’s momentum in half and almost cost it the lead.  Australia and Canada are both highly correlated to commodity prices and hence took big hits last week.  Their declines were somewhat mitigated because those two currencies bounced back faster than the Euro.  The Japanese Yen is the only major currency stronger than the dollar right now, which helped stabilize Japanese stocks – at least as viewed by dollar-based investors.  Japan moved off the bottom and is actually showing slightly positive momentum now.  China and Latin America slipped into mildly negative territory with Latin America in last place.


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.


“Larger loans for more expensive homes will once again be funded only through the private market.”

Anonymous Federal Housing Administration spokesperson, May 10, 2011


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