A German Act of Desperation
In what one analyst called an “act of desperation,” German authorities today banned short-selling in certain government bond derivatives. We don’t know if the move represents desperation, but it is certainly ineffective. The instruments involved can be traded in numerous venues around the world, so Germany’s action accomplished practically nothing. The main result was to remind the markets how irrational regulators can be in a crisis – not exactly bullish news. Also notable is that Germany, supposedly the leader of the European community, could not persuade any of its neighbors to take similar steps.
Meanwhile, U.S. markets remained volatile in both directions, partly due to the Eurocrisis and partly because of other factors. Today the S&P 500 touched its 200-day moving average, a widely-watched long term trend indicator. A breakthrough seems likely unless momentum turns sharply bullish in the near future. With most larger-cap sectors now trending downward, we are not sure where any new leadership would originate.
Economic reports continue to suggest that inflation is the least of everyone’s worries right now. The Consumer Price Index slipped slightly in April, its first decline in over a year. On a year-over-year basis, core CPI is now at 0.9% – its lowest level since 1966. Much of the deflationary pressure comes from housing prices. Commercial real estate is still having problems too, with prices flat for retail and office space. Property values jumped in late 2009 when the economy appeared to be on the mend. That reversal is now reversing again in many parts of the country.
With all this going on, the chances the Federal Reserve will raise interest rates are dropping quickly. Yields on both short-term and long-term debt are low and, if anything, getting lower. The ten-year Treasury bond ended today at 3.36%, the lowest close so far this year. The twin safe-havens of the U.S. Dollar and gold are both taking a break from strong gains the last few weeks, but their uptrends remain intact and will resume soon, we suspect. A few more days of consolidation would even be healthy in this regard. The one safe bet is that volatility in all kinds of markets will be with us for awhile.
The relative order in sector rankings was similar to last week, but overall momentum turned more negative. Telecom jumped to second place, a nice move from #7 a week ago. Consumer Discretionary stayed on top but just barely. Industrials are still near the top of the list. The laggard sectors continued to be Materials, Energy, and Health Care, all of which are trending downward at double-digit annualized rates. Utilities kept its place in the middle of the rankings with a slightly negative score.
The Micro Cap/Mega Cap leader/laggard pattern persisted for another week. Small Growth picked up its pace and is once again nestled in the top four ahead of all the Mid Cap categories. Value is ahead of Growth at all levels of capitalization. The Large Cap categories seem to be losing momentum faster than any of the others are gaining it, which suggests capital is fleeing equities entirely and going into other asset classes. This fits nicely with bullish action we’ve seen in bonds and gold recently.
The stock exchange in Bangkok was on fire today, literally, as an angry mob torched the building along with other symbols of wealth. Thailand obviously still has some distance to go before rising out of “emerging market” status – though if we ran the NYSE we might be checking the batteries in our smoke detectors. Canada is still the strongest of the global markets on our list, but “least weak” might be a better description since it simply is trending down more slowly than anyone else. The U.S. and Japan are right behind, while Europe and the U.K. still own the bottom of the list by a comfortable margin.
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.
“Insanity in individuals is something rare – but in groups, parties, nations and epochs, it is the rule.”
Friedrich Nietzsche, German philosopher
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