05/12/10   Euro Sends Itself Down the Drain

Editor’s Corner

Investor Heat Map: 5/12/10Euro Sends Itself Down the Drain

Ron Rowland

Most of this week’s headlines can be traced back to events in Europe, so that is where we begin. A finance package hammered out over the weekend kept Greece out of default but at a heavy cost: as much as $1 trillion and severe debasement of the Euro currency. The idea that the Continent could have monetary union while each country retained political independence is now all but dead. All that remains is to iron out the details. The U.K., which still controls its own currency, is in somewhat better shape and has a new government as well. Nevertheless, a new age of austerity is probably dawning in Europe. More than a few people are not going to like it.

Another thing people didn’t like was the trading activity last Thursday. The “Flash Crash” has already been dissected in many ways, so we will not recount the story here. Suffice to say that such events are not usually indicative of an underlying bull market. The more interesting angle relates back to Europe. The aforementioned currency debasement has been favorable for the dollar, at least in relative terms, and global capital is now flowing into U.S. assets. This is good news for American stocks despite our own economic challenges.

Last week we mentioned the Volatility Index (VIX) had jumped higher. In hindsight, it was practically standing still. From the close on Wednesday, May 5 to the intraday peak on May 7, the VIX surged almost 70%. So far in May the index has been as low as 19.61 and as high as 42.15, more than doubling from the bottom. This amount of volatility within a volatility index borders on being ridiculous and cannot be sustained for long. Still, we will not be surprised to see stocks continue to make sharp daily moves in both directions.

Gold is another beneficiary of all the turmoil. With the supply of every major world currency growing briskly, precious metals are gaining allure as a store of value. The bullion price and the various instruments that track it gained momentum and broke out to new all-time highs during the first part of this week. Oil prices did the opposite as global demand forecasts were revised downward. U.S. Treasury rates rose slightly in the last five days but traded within a huge range. During the Flash Crash the ten-year yield dropped as low as 3.27%, but it ended today above 3.56%. The Treasury is no doubt glad to sell into the rising demand.


The sector rankings have a much different complexion this week, although the top three sectors didn’t change; Consumer Discretionary, Industrials, and Financials are still in the lead. All three are still showing positive momentum, too. Changes occurred in the rest of the chart. As of last week, only Health Care was in a downtrend, but now it is joined by six other sectors. Health Care, Materials, and Energy are in a near tie for last place, with the energy sector hurt both by falling oil prices and the Gulf of Mexico spillage. The other two historically-defensive sectors, Consumer Staples and Utilities, jumped in relative strength to grab the #4 and #5 spots.


There was no significant change in the “relative” Style rankings this week. Micro Cap and Small Cap are still on top, with Mega Cap and Large Cap still on the bottom. In absolute terms, three categories slipped into negative territory. Mega Cap, Large Growth, and Large Blend are all showing slight downtrends, but they could easily turn green again if the short-term market recovery continues. The Style categories compressed, with 24 points now separating the top and bottom categories versus 41 last week. The former high-flyers were hurt the most in the volatile activity.


Canada is now the only category with its head above water in our Global rankings, but just barely. The U.S. slipped to second place and a slightly negative reading. Japanese markets, closed part of the week for holidays, quickly caught up with the negative action elsewhere but gained relative strength to end in third place. Europe, epicenter of worldwide turmoil, continued to plunge. British markets lost momentum as well, demonstrating that the U.K. may be an island but it is still part of Europe.


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.

“I wouldn’t say it has failed yet. What I would say is what we attempted to do last night didn’t work.”

Doug Suttles, operating officer for British Petroleum on the unsuccessful attempt to stop the Gulf of Mexico oil leak with the containment dome


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