Dow 10,000 Spans a Third Decade
Dow 10,000 again? We said it was important on the way up, so it must be important on the way down, too. The most recent volatility finally brought a four-digit close to the Dow Jones Industrial Average today, but the barrier had already been breached three times in May: The May 6 Flash Crash, then on May 21 and 25. The last of these had some characteristics of capitulation – a morning sell-off followed by afternoon recovery – but volume and other indicators do not suggest a widespread throw-in-the-towel mentality has taken hold in equities. We find this a bit ominous and won’t be surprised to see more downside ahead.
Also troubling is that a widely-followed trend indicator, the 200-day moving average, has been penetrated by most broad market indexes. This condition both limits the amount of buying interest and creates selling pressure as momentum-oriented systems issue “sell” signals. The market rally that began fourteen months ago in March 2009 is facing its most serious challenge yet. Equity markets around the world are rolling over. We cannot rule out a continuation of the short-term recovery of the last two days, but it is hard to imagine what could drive stocks significantly higher from here.
Europe is getting fewer headlines this week, but the situation is hardly improving. Greece, having received its bailout, is already trying to relax the terms of its debt bondage. Italy is enacting a new “austerity” program. Banks in Spain are increasingly troubled, and institutions around the continent are unsure who they can trust. The result has been a sharp rise in interbank lending rates. This presents a potential problem for many governments – including that of the U.S. – that are essentially financing their debt with low-rate bank deposits. Bankers have been glad to oblige because Treasury rates are attractive compared to private lending. Every tick up in the LIBOR cuts into this advantage. The way this quandary is resolved may be key to the next major market trend.
Reports today on durable goods orders and new home sales suggest the U.S. economy is still trying to recover, albeit in a weak and sporadic way. Unfortunately, much of the recovery is a direct result of stimulus programs, notably the home-buyer tax credit, that are unlikely to be repeated. If they are repeated, their benefits will likely be offset by additional public debt. The currency of any other nation with such numbers would be losing value quickly, but the U.S. Dollar is still a special case – and still rising nicely against the less-attractive Euro. Treasury bond yields plumbed new yearly lows in the worldwide flight-to-quality this week, with the ten-year yield dipping below 3.1% on Tuesday and ending at 3.2% today. Gold appears to have turned a corner and is picking up momentum for another run at record highs.
In the last week our Sector categories have turned completely red and undergone a major disruption. Telecom is now in first place on a relative basis. It is also the only sector category whose May 7 closing low was not breached this week. Consumer Discretionary was dislodged into second place after a long reign in the top spot. The traditionally-defensive Consumer Staples sector is now #3, but in this case “defensive” simply means “losing less than average.” Energy is on the bottom. The BP oil leak continues to spew both oil and money, and the impending onset of hurricane season can’t be good for this disaster.
Like an accordion with the air squeezed out, our Style rankings are showing the tightest compression in months. Relative positions were little changed, with small caps near the top and large caps near the bottom. We mentioned earlier that most of the major stock indexes have broken their 200-day moving averages. The Russell 2000, a primary benchmark for U.S. small cap stocks, is the primary exception, at least on a closing basis. If you must be in stocks, small caps are the place to be right now.
Japan has taken first place in the Global rankings, but as with Sectors and Styles this is not because Japan is doing anything great. In fact, its intermediate-term momentum is quite poor at -30. Canada slipped from #1 to #3 while the U.S. held on to the #2 spot. Strength in the greenback against most currencies is helping the U.S. on a relative basis. Europe is no longer “alone” at the bottom of the table since Pacific ex-Japan, U.K., EAFE, and Latin America are all doing only slightly better. Negative momentum in these international markets has reached unsustainable levels but can still persist longer than expected. Any rallies are likely to be short-lived until some as-yet-unknown catalyst turns the situation around. Europe’s trillion-dollar bailout package was apparently not the kind of catalyst traders wanted to see.
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.
“The Dow has ‘add-a-digit-phobia’. It took the Dow 36 years to clear 100 after first reaching it. Clearing 1,000 required 16 years. Don’t be surprised if adding a digit to stay above 10,000 also takes many years.”
Ron Rowland (November 1998)
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