Investors Turn More Defensive
While people along the lower Mississippi River pile sandbags, they are not the only ones at risk from the rising waters. The damage already done upstream is still being assessed. This year’s crop plantings and harvests will almost certainly come in well below original estimates, which means grain and livestock prices are probably going to remain firm. This won’t help an already-unpleasant inflation forecast. The flooding will influence everything from pork bellies to Treasury bond rates.
Energy prices are bouncing as oil wells and refineries in the region face disruptions. On the other hand, demand for some petroleum products is on the decline according to some reports. This could be a result of higher prices or a consequence of economic weakness, or a little of both.
Today, the Federal Reserve continued efforts to look “transparent” by releasing unusually detailed minutes of its April policy meeting. The summary, while still very hedged, seems to suggest the Fed is hesitant about further economic stimulus. The fact that the statement was approved unanimously makes us wonder what kind of compromise was reached between the inflation hawks and doves.
Meanwhile, historically low interest rates are still making stocks preferable to bonds for many investors. Large corporations are rushing to capture today’s low rates by issuing new bonds at a furious pace. Treasury yields nevertheless continued to drop, hitting the 3.1% level today – the lowest since early December.
The S&P 500 successfully tested its 50-day moving average this week. The 1340 support level we’ve been watching gave way, although the closely-followed index finds itself back at that level again today. Recent action in the benchmark resembles what we saw in November 2010. Substantial gains followed in the next few months. As noted below, a deeper look at the market broken down by Sector and Style is not nearly as encouraging. We expect further volatility before any new trend becomes evident soon.
With the ascent of Utilities and descent of Telecom and Consumer Discretionary, the historically “defensive” sectors now hold the top three positions in our sector rankings. Health Care and Consumer Staples remained strong and in the lead. At the other end of the scale, the bottom of the list is occupied by Energy, Financials, and Materials. This was also the case a week ago, but at that time all three had at least slightly upward momentum. Now they are in intermediate-term downtrends. Materials and Energy both show some signs of stabilizing while the Financials look vulnerable to further losses. Energy was short-term oversold going into today’s trading, and sure enough it bounced higher. Much more will be needed if Energy is to reclaim its former leadership position.
All Style categories shed some of their momentum since last week, and one actually fell into an intermediate-term downtrend. The defensive rotation we noticed in Sectors a few weeks ago is now becoming more evident in the Style rankings. The (theoretically, at least) defensive Mega Cap group finally escaped from last place, a position now held by the (again theoretically) riskier Micro Caps. The Small Cap categories also lost some relative strength. Mid Caps now own the top three spots on the list.
We have good news and bad news for U.S. stock investors. The good news is that your market is now on top of the world. The bad news is that the world doesn’t look so good. Only five of the eleven categories we track show positive momentum, and even those are in single digits. Dollar strength combined with a global setback in stock prices pushed the U.S. benchmark to the top of an unimpressive list. Global weakness is much more evident in the international categories than in our Sector and Style rankings. Former #1 Europe is now in second place, and the World Equity category is right behind. The U.K., Emerging Markets, Canada, and Japan all joined Latin America and China in negative territory. China showed slight improvement on a relative basis over the last week.
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.
“A few members viewed the increase in inflation risks as suggesting that economic conditions might well evolve in a way that would warrant the Committee taking steps toward less-accommodative policy sooner than currently anticipated.”
April 2011 FOMC Meeting Minutes
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