06/02/10   First Gulf Hurricane of Season Expected to be Category 10W-40

Editor’s Corner

Investor Heat Map: 6/2/10First Gulf Hurricane of Season Expected to be Category 10W-40

Ron Rowland

Last week’s bounce in world stock markets was both strong and short-lived, despite today’s strong closing rally. We mentioned in our last update that most benchmarks had entered long-term downtrend territory, trading below their 200-day moving averages. That is still the case today, and indeed the 200-day MA appears to be acting as upside resistance. The S&P 500 turned back down after approaching that level last Thursday and Friday and made another attempt today. The Dow Jones Industrial Average did likewise. Both surges came on below average volume, which typically doesn’t bode well for a sustained market advance. Volatility remains high with the Dow’s intraday swings now averaging more than 200 points. The blue chip average is holding above 10,000, but how long it will stay there is unclear.

The BP oil spill is still flowing and is now a market-moving event. Shares of BP and other companies involved in the incident have plunged, weighing down the energy sector and the broad market. BP in particular has now declined so much that its survival as an independent company is a real question. Even the largest liability estimates make BP an attractive takeover target for a competitor with deep pockets. On the other hand, BP may get even cheaper if the leak continues through the summer. An active hurricane season could severely complicate the repair operations.

In economic news, the picture is as mixed as ever. Pending home sales jumped in April as Americans took advantage of the home-buyer tax break before it expired. At the same time, a plunge in mortgage applications suggests that the withdrawal of government support is likely to reduce sales in coming months. The European debt crisis is fading from view but is no less serious. Interbank lending rates like LIBOR are still elevated, hinting that banks still do not know who they can trust. We expect more fireworks, but all parties concerned may also decide to take a summer break.

The U.S. Dollar was relatively stable last week, at least as compared to recent action. Treasury yields gained back some ground and the ten-year rate now stands at 3.33%. Gold has climbed as well and could make a run to new highs soon. Precious metals bears argue that the metal has come too far in a short time and is due for a correction. True enough, but compared to other recent bubble markets like energy, housing and technology stocks, gold could have more room to run.

Sectors

No sector has been able to buck the market weakness, but Consumer Discretionary is trying the hardest. Telecom’s visit to the top spot on our chart ended quickly, lasting just one week. Most sectors improved their momentum scores, the main exception being Energy. Not surprisingly, the energy services sub-sector is suffering the worst damage. iShares DJ Oil Equipment & Services (IEZ) plunged -30% between April 23 and June 1. A deeper look reveals that stocks focused on offshore drilling are being pummeled as their business prospects diminish more by the day. Materials had a great week but remains in a steep downtrend.

Styles

The Small Cap and Mid Cap categories bounced the most this past week, further securing their positions in the upper strata of our Style rankings. Mega Cap, normally considered a safe haven in turbulent times, is getting no respect and remains on the bottom. This is partly due to the category’s reliance on energy and bank stocks, neither of which looks especially attractive right now.

International

Canada moved into the #1 global position as its central bank raised interest rates, the first such move from a G-7 country in the current cycle. Our neighbor to the north got a boost from Materials but is also being held back by its Energy exposure. China continues to climb the ranks and is now just behind Canada. After being one of the first world markets to lose momentum late last year, China is now trying to provide upside leadership. The U.S. slid down to third place and Japan is #4. The resignation of Japan’s Prime Minister seems to have had little impact on the country’s stock market, but the Yen took a hit today. Europe, still the epicenter of global weakness, is firmly entrenched at the bottom of the ranks.


Note:

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’d like my life back.”

Tony Hayward, BP CEO


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