Hope Springs Eternal
In whatever world market you care to follow, the numbers don’t look good. Could they get worse? Of course, but it’s hard to forecast sustained uptrends right now.
The May employment report may prove to have been a turning point. Nonfarm payrolls came out well below consensus, the prior two months were revised downward, the average workweek fell, and wage growth is still behind inflation.
Nevertheless, the Federal Reserve’s monthly Beige Book revealed today that “overall economic activity expanded at a moderate pace.” And according to the Fed, “Hiring was steady or increased slightly.” Why the discrepancy? The Beige Book is essentially anecdotal. People pay attention because they think it influences the Fed’s thought process. How much it really does so is known only to the Fed.
Given today’s rally, investors seem to think the odds of further monetary stimulus are rising. The Fed’s “Operation Twist” program is set to end this month but may be extended. The European Central Bank, despite today’s decision to hold its benchmark rate steady, may have other tricks up its sleeve as well.
Tricks are exactly what it will take to keep the Eurozone intact. Last week we pondered whether Greece or Spain would hit the exit first. Now we wonder if Germany will beat both of them. It is, after all, German unwillingness to allow direct bailouts that has everyone else on the continent so flustered. A new Northern European alliance would not restore prosperity, but it could be the least-bad option.
Federal Reserve action and some kind of resolution in Europe seem to be what U.S. stocks want. The Dow and the S&P 500 both found support just below their 200-day moving averages in the last few days and posted strong upside follow-throughs today. This means, technically speaking, a long-term bull market is still in effect. High volume in the recent sell-off also raises hopes a bottom may be in place. Friday was indeed a hard day for bulls, though we would not call it a selling climax.
The most significant number of the week may still be 1.44%, which is how low the ten-year U.S. Treasury yield fell following the jobs report. The thirty-year bond yield went as low as 2.51%. If low interest rates were the answer, we would right now be in the greatest bull market of all time. Clearly we are not, but old habits die hard.
Utilities is a green island in an otherwise completely red sea – not only for sectors but in the Style and Global charts as well. A momentum score of 9 would not be too impressive in any other context, but today it’s the best we see. Utilities is also the only equity category to show improvement since last week, and it has a sizable lead over second-place Consumer Staples. Health Care slipped to fourth place behind Telecom. Consumer Discretionary, which contains the increasingly volatile Home Construction segment, rounds out the top five sectors. Below is a cluster of four downward-bound categories: Technology, Industrials, Materials, and Financials. Energy is still in last place overall and even managed to fall further behind the others. The free-fall in crude oil will stop eventually, allowing energy stocks to recover, but they could go much lower first.
The broad-based market sell-off pushed the Style categories even further into the red since last week. Mega Caps – theoretically the most “defensive” – is the best of the bunch but hardly impressive by any other standard. The most positive thing we can say is that Mega Cap is the only Style category to have stayed above its 200-day moving average so far in 2012. Large Cap Growth is in second place, with Large Cap Blend and Large Cap Value right behind. The ascent of Large Cap Value from 7th to 4th corrects the size-alignment anomaly we noted last week. Now Micro Cap is the odd one, ranking ahead of all the Mid Cap and Small Cap categories. Small Cap Growth remains on the bottom. Although it is the worst of the Styles, Small Cap Growth would be near the middle of the pack if placed with the Sectors and would be #2 in the Global rankings.
Today’s Global chart contains almost as much red ink as the other two combined. The U.S. is still on top despite last week’s dismal performance. Japan moved up to a tie with World Equity for second place. Don’t thank Japanese stocks, though – the TOPIX index actually hit its lowest point since 1983 last week. A strengthening Yen is making Tokyo look much stronger in dollar terms. Canada stayed in fourth place despite energy weakness. A weak pound hindered the United Kingdom, which slipped to #5, effectively tied with Pacific ex-Japan. The rest of the list looks miserable, though some regions are attempting to form a double-bottom at last October’s lows. Slowing growth forecasts are hurting China and Latin America. Europe, however, is this week’s bottom-dweller. Stock markets in Spain are off more than 30% the last four months. Greece has been cut in half. The rest of the Eurozone may not be far behind.
“There’s always hope that some magic tool would be found.”
David Ron Florance, Wells Fargo Private Bank, June 6, 2012
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