06/10/09  Summer in Full Swing

Editor’s Corner

Summer in Full Swing

Ron Rowland

With Memorial Day events and graduation parties now mostly behind us, summer is in full swing for investors.  Some no doubt followed tradition by selling in May and going away.  Those who remain appear to be considerably less active than was the case just a few weeks ago.  NYSE volume on Monday and Tuesday of this week was the lowest since last September, excluding holidays.  Exactly what this means is unclear; we suspect it may be a distortion caused by the wild volatility in financial stocks.  Citigroup (C), for instance, went from $1 in early March to close at $3.48 today.  This means far fewer shares are necessary to maintain the same dollar trading value.  With General Motors now bankrupt and delisted, another actively-traded stock just disappeared from the NYSE.  Combine these factors with the normal summer slowdown and the low volume may not be as significant as some analysts think.

In any case, the S&P 500 has stayed solidly above its 200-day simple moving average all month.  This is as much due to a decline in the average as to gains in the index, which has actually moved mostly sideways in June.  Nonetheless, the breakout level around 930 appears to be providing short-term support and this area may prove to be the base for further gains.  Additionally, intermediate-term support at 880 appears quite strong, solidified by the May lows and an upward trending 50-day moving average.  A break below 880 would likely have bearish implications.Earlier this week the Treasury allowed ten of the large banks that were force-fed TARP money last year to repay their capital injections, thereby (and not coincidentally) escaping executive compensation restrictions.  The list was interesting mainly for who was not on it: Citigroup (C), Bank of America (BAC), and Wells Fargo (WFC) all remain wards of the state.  Does this mean that the escapees such as JP Morgan Chase (JPM) and Goldman Sachs (GS) are shining examples of financial stability?  We think not.  They are still enjoying the benefit of various other bailout programs and a continuing implicit guarantee from failure.  The main thing to be learned from this news is who has the best lobbyists in Washington.

Some of the much-noticed economic green shoots are turning yellow, which farmers tell us is not a good sign.  Much ado was made last Friday over the May non-farm payrolls report that showed smaller job losses than expected.  The unemployment rate jumped to 9.4%, but the really bad news was in the average hours of work, which dropped to its lowest level since 1964.  Employers, mindful of the high cost of hiring and training new workers, are still trying to avoid layoffs by reducing overtime hours and imposing unpaid furloughs.  This suggests the demand for labor is still slowing and unemployment will continue to rise.  The Federal Reserve’s Beige Book, released today, said the rate of economic decline is moderating in most regions but offered few signs of recovery.

Today’s $19 billion auction of ten-year Treasury bonds went through at a higher-than-expected yield of 3.99%, and the rate briefly crossed above 4% before retreating.  Tomorrow the Treasury will try to sell $11 billion in 30-year bonds, and we won’t be surprised to see that rate approach 5% soon.  The Fed shows no sign of relenting from its near-zero policy for overnight money, so the yield curve is steepening quickly.  Meanwhile many corporate benchmark yields are actually declining, which is not what we would expect if the Treasury issuance were creating a “crowd-out” effect in the credit markets.  As with NYSE volume, the old rules-of-thumb aren’t necessarily helpful in today’s strange environment. 


Materials is still the sector with the highest relative strength, by a significant margin.  As we thought might happen, Energy slid down the rankings as a result of its steep price drop a week ago.  Crude oil prices are now moving back up, above $71 today, so Energy could regain its previous position quickly.  Technology is now in the # 2 spot and was one of the few categories to register a momentum increase in the last week.


Mid Cap Growth has finally been dethroned, falling to # 3 after holding the top spot in our Style rankings for months.  Small Cap Growth is now first on the list with Micro Caps right behind.  Consistent with the increase in risk appetite which is evident in the benchmarks, investors are favoring small over large and growth over value.


In our last commentary, we noted that more than half our global categories had triple-digit momentum scores, indicating that caution was warranted and that some were clearly frothy.  Sure enough, all categories lost momentum in the past week and now only two have triple-digit readings: China and Canada.  The U.S. has finally moved out of the cellar, being replaced by Japan at the bottom.  The dollar, which has been extremely weak for the past three months, staged a counter-trend rally in the past week.  This put a crimp on international performance when translated back into U.S. currency.



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.

“Only government can take perfectly good paper, cover it with perfectly good ink
and make the combination worthless.”

Milton Friedman


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