06/12/13   TOTO Is The New RORO

Editor’s Corner

Ron Rowland

Financial commentary was thick with discussions of the “Risk-On, Risk-Off” trade two years ago.  When stocks and commodities were moving upward, it was a “Risk-On” environment.  Alternatively, “Risk-Off” became the terminology used to describe a more cautious environment where stocks and commodities moved lower.  It became so ubiquitous that UBS released a pair of exchange traded notes (“ETNs”) named Risk-On and Risk-Off.

Trading in these two ETNs has now slowed to a standstill.  The market evolves, and different influences tend to have larger market impacts as time moves forward.  The RORO trade is still discussed in some circles, but most market watchers believe the Fed’s Quantitative Easing “(QE”) efforts, and their eventual termination, are the key to market action in the current environment.  More precisely, it is the Fed’s plan of when it will begin to “taper” its bond purchases that has traders on edge.

Taper, or tapering, is the term used to describe a gradual reduction of the Fed’s monthly bond purchases.  For many months, investors believed tapering was in the distant future, or essentially off.  With Taper-Off (no reduction of QE), stocks were happy and moved upward.  That changed on May 22 when Fed Chairman Ben Bernanke admitted to the Congressional Joint Economic Committee that tapering could begin as early as the next two FOMC meetings.  With the possibility of Taper-On (a reduction of QE), stocks began retreating instantly.  Thus was borne the Taper-On, Taper-Off trade, or TOTO.

Taper-On has been the dominate force in the market since May 22.  It will likely maintain that role until next Wednesday (June 19), when the FOMC concludes its next policy meeting.  At that time, the Fed’s statement will be parsed word-by-word in an attempt to determine the status and schedule of tapering and, ultimately, the direction of the stock market’s next leg.

Investor Heat Map: 6/12/13


Consumer Discretionary and Financials have been swapping places at the top of the rankings for many weeks.  Since Financials held the honor last week, today it goes to Consumer Discretionary.  Health Care continues its ascent, climbing from fifth to third.  Its rise forces both Industrials and Technology down a notch from their previous levels.  There was some minor shuffling among the next four sectors with Consumer Staples now at the top of that group.  Two categories are registering negative trends again this week with Real Estate moving down and replacing Utilities on the bottom.


Micro-Cap sits in the top spot for the second week in a row.  This is somewhat unusual, given the market jitters of the past few weeks.  Micro-Cap stocks are typically the riskiest ones and tend to decline more than the major averages during market pullbacks.  The group’s strong relative strength suggests that investors believe the current market conditions represent a buying opportunity as opposed to the start of a significant decline.  Small Cap Growth and Small Cap Blend keep their second and third place positions today, while Small Cap Value slipped a notch and allowed Large Cap Value to move ahead.  The lower half of the Style rankings remains a mixture of the Large Cap and Mid Cap categories.  Growth versus Value continues to be a mixed debate, with Growth having the advantage in the Small and Mid Caps while Value reigns in the Large Caps.


The number of global categories with negative trends increases to seven this week, and World Equity and the U.K. are on the verge of making it nine.  The U.S. and Europe hold on to their number one and two spots, while putting some distance between themselves and the rest of the pack.  EAFE managed to keep its fifth place ranking, but it flipped over to a negative trend in the process.  Japan showed signs of stabilization this week after its recent plunge, allowing it to move ahead of Canada.  It’s easy to see on the Global rankings chart that the developing markets are currently the most troublesome.  Despite all the negative economic news, China is the best of the lot, and it is managing to hold above its April lows.  The Emerging Markets price level is now sitting at a nine-month low and registering a double-digit loss for 2013.  Pacific ex-Japan consists only of developed markets (Australia, Singapore, Hong Kong, and New Zealand), yet the category has been moving in lockstep with the emerging market categories since early May.  Latin America has now erased all of its gains for the past year and is not showing any signs of stabilization.


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.


“This used to be called risk-on, risk-off. Now it is known as taper-on, taper-off. The name is different, but the pendulum swings the same way.”

Ashraf Laidi,chief global strategist at City Index on 6/11/13


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