200-Day Moving Average Watch
Today’s downdraft largely overturned the two-day gain in some sectors, particularly energy, materials, transports, and international markets. The “reflation” theme of the last several weeks, which saw the dollar drop against other currencies while resource-related investments soared, appears to be entering a consolidation phase. The key question now is how long it will last. A short pause could actually prove helpful in prolonging the trend, but at some point consolidation turns into reversal.
Is inflation back? Looking at the massive deficit spending by the U.S., it is easy to conclude that the dollar is toast. Higher interest rates and commodity prices would be the natural result. On the other hand, currency moves are always relative. As bad as it is here, many other economies are in even worse shape and do not have the advantages of being a superpower. The unprecedented asset destruction and deleveraging experienced in 2008-2009 also argue against inflation. We will not be surprised to see a series of inflationary, then deflationary markets over the next few years as the world adjusts to a new reality.
The ten-year Treasury intraday yield climbed from 3.16% on May 21 to 3.76% on May 28 while the 30-year Treasury intraday yield jumped from 4.10 to 4.63% over the same period. Both have since pulled back slightly but remain considerably higher than they were on March 18, when the Federal Reserve announced plans to buy Treasury securities with its own balance sheet. A sharp drop in the U.S. dollar prompted a trip by Treasury Secretary Geithner to China, where he reassured his main lenders that the U.S. economy is sound and their dollar investments are safe. Whether they believed him is not clear.
Both Geithner and Fed chairman Ben Bernanke are going out of their way to deny any intent to inflate away the national debt. Bernanke said point-blank in Congressional testimony today that the Fed “will not” monetize the debt. He called on the lawmakers to close the deficit with either spending cuts or tax increases. After the laughter subsided, he went on to argue the excess liquidity he has created can be removed gently and he is not concerned about inflation. We should all hope those words don’t come back to haunt him.
Every equity category had positive performance over the five days ended Tuesday. Bullish momentum increased across the board. Materials hung on to the top sector spot and Energy vaulted into #2, up from #6 a week ago. A huge increase in oil prices and dollar weakness were contributing factors, but with Energy very weak today this sector could slide back down the ranks quickly. The bottom four sector slots remained unchanged, although action in Utilities was strong enough to flip its intermediate-term trend from negative to positive.
The strongest got stronger in our Style rankings this week. The relative positions were mostly unchanged, but the top-ranked categories like Mid Growth and Small Growth had a larger improvement in momentum than the lower-ranked ones. Mega Cap and Large Value continued to hold the two bottom slots.
Our RSM values represent an “annualized” view of the intermediate-term trend, and we always become cautious when they move into triple-digit territory. More than half of our global categories now show RSM values higher than 100. Impressive gains in local markets coupled with a falling U.S. dollar led to extraordinary gains in international markets when viewed in dollar terms. Canada and Latin America held on to the top two spots but have clearly reached the “frothy” stage. Impressive gains in the U.S. were still not enough to move it out of last place.
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.
“It will be helpful if Geithner can show us some arithmetic.”
Yu Yongding (Former Advisor to the Chinese Central Bank)
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