Is The Commodity Correction Over?
The S&P 500 could not hold above the 1340 support level we have been watching, but so far the failure hasn’t been disastrous. The index has crossed above and below its 50-day moving average multiple times the past ten weeks. This indicates slowing momentum but not necessarily an impending bear market.
This week’s main story is commodity prices. A rout in early May pushed most energy, grain, and metals contracts down sharply, but now we see crude oil back over $100 and gold once again north of $1,500. Corn prices rallied more than 7% in the last two weeks. Even cotton and sugar began showing signs of strength.
All of the above could just be short-covering or a “dead cat” bounce, of course, but reports suggest global demand for key resources is still growing. Energy and raw materials prices are closely related to global economic growth trends, which still appear strong in emerging market nations. The U.S. will report preliminary first quarter growth tomorrow; the consensus estimate is GDP grew by an anemic but still positive annualized 2.2%.
Bond yields are still drifting lower. This raises questions for the theory that higher commodity prices mean higher inflation. Interest rates should be rising if inflation is really a threat. Instead they are historically low. Why? Obviously we have inflation in certain categories like food and fuel, but other prices are flat or falling. Labor is a good example. Wage inflation is the least of our problems in the U.S. right now. This makes us wonder if commodity prices can sustain another rally. As always, we will let the market be our guide.
Health Care stayed in the lead for another week but now has to share it with Consumer Staples. Does this mean Health Care is headed down the ranks? Not necessarily. These two defensive sectors could easily split leadership duties, just as Energy and Materials did for much of the last year. Those former leaders now sit in a tie near the bottom of the list, just above last-place Financials. Five out of ten sectors currently show negative momentum, but Financials is definitely the downside leader for now – the only sector trading below its 200-day moving average. Energy seems to be building the groundwork for a new uptrend while Industrials, Technology, and Consumer Discretionary are weakening.
A week ago Micro Caps were the only Style group with a negative momentum reading. Now Small Cap Value, Small Cap Blend, and Mega Caps are also in downtrend territory. Small Cap Growth is almost there with a score of zero. The three Mid Cap categories still hold the lead, relatively speaking, but they still lost strength since our last report. Overall, the ranking chart has a near-symmetrical appearance with the leader at +10, the loser at -10, and the others spread neatly in between. Nonetheless, the differences are small enough that we could still see dramatic relative shifts in a short period.
The International rankings are not encouraging for anyone, to put it mildly. The U.S. kept the lead with a reading of +3, measly but enough to make it the only global category with positive momentum. The next seven are tightly packed within a five-point range. The bottom three then fall off sharply, with Emerging Markets at -13, Latin America -17, and Japan -26. Greenback strength has been a major influence on the perceived performance of international markets lately. A U.S. Dollar Index gain of 4% so far in May gave U.S. investors an additional loss on foreign stock positions. In Japan, hopes for a quick recovery faded as the second post-tsunami rally fizzled. Canadian stock benchmarks showed some improvement; an extra large weighting in Energy and Materials is now working in Canada’s favor.
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.
“Selling a soybean contract short is worth two years at the Harvard Business School.”
Robert Stovall, Managing Director at Wood Asset Management
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