05/20/09   Green Shoots or Artificial Turf?

Editor’s Corner

Green Shoots or Artificial Turf?

Ron Rowland

The stock market is currently retracing a downside correction of a major rally within a primary bear market. Follow that? Let’s try again. Last week was the first real pullback the market has had since the March 9 low. Yes, there have been numerous one and two-day downturns, some of which bordered on “violent,” but this was the first to last an entire week and resulted in 5% declines in many major benchmarks.

Then, in the blink of an eye, the rally resumed this week. For the S&P 500, about 90% of last week’s loss had been recovered by early this morning. The week opened with some good news: favorable election results in India and a better-than-expected earnings report from home improvement chain Lowe’s (LOW). Of course, neither Lowe’s nor anyone else is really reporting good news. They are reporting that business is not quite as bad as they expected – yet – and that the rate of decline is slowing – for now.

How long can this positive spin keep the rally going? We are concerned it won’t last long because, among other reasons, the leading sectors right now (mainly Financials, Real Estate, and Consumer Discretionary) are the same sectors that saw the worst devastation in the bear market’s initial wave. This is not the foundation upon which new bull markets are typically built; the old leaders rarely get to keep the crown after such devastating losses. What we are seeing now is more consistent with massive short-covering, annual rebalancing by pension funds, taxpayer-funded bailouts and blind hope in slightly-improved economic indicators. None of these are likely to persist.

The S&P 500 has yet to move above its 200-day moving average, so stocks are still in a long-term downtrend according to this widely respected indicator. On the other hand, the average is falling by about 1% per week, so if the index can just stay flat it will eventually make a crossover. We will soon find out if buyers have any ammunition left.

The U.S. dollar dropped sharply this past week and may be returning to the long-term downtrend it broke out of last fall. This is giving a boost to commodities, particularly crude oil. For crude oil to rise in such a weak economy is unusual, but for now the short-term trend is positive. Gold is also in a quiet rally that is starting to look sustainable.

As we expected, the 10-Year Treasury yield held above the 3% level after a retest late last week. Today brought a sudden downtick, though, when the Federal Reserve released minutes of its April meeting. It appears some policy officials are pushing for the Fed to buy even more Treasury and mortgage-backed securities. Such are the temptations of having the power to create money from thin air. Perhaps more important, Fed economists now project that the unemployment rate will stay above 9% all the way through the end of 2010. The season for “green shoots” is fading away fast.


Materials regained the top of our sector rankings, closing the narrow lead Financials held as of last week. Otherwise the relative rankings showed only minor changes. Most sectors lost momentum in the last five days, and Utilities are again in an intermediate-term downtrend.


We see yet more compression in the Style rankings as the top-ranked categories lose momentum faster than those on the bottom. The RSM spread between the top and bottom categories narrowed to 15 today, down from 22 last week and 43 the week before. Mid Caps still own the top three slots while Micro Caps continue to climb the chart, moving from # 6 up to # 4 in the last week. With such low dispersion the relative positions are far less meaningful, however.


India was a big story in global markets this week as their month-long election process came to a close. We claim no expertise in Indian politics, but judging from market reaction the election was a victory for business-friendly parties. Local markets shot up 17% while some U.S.-based ETFs focused on India popped more than 23% Monday morning. Otherwise, most global markets tracked the U.S., rising sharply after last week’s losses. The falling dollar was helpful to international stocks as well. Emerging Markets, Latin America, and China now hold the top three positions in our table, with Canada falling down the ranks. Despite the short-term strength, most international markets still lost intermediate-term momentum since 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.

“I am so smart, S-M-R-T, I mean S-M-A-R-T.”

Homer Simpson (Nuclear Plant Operator)


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