06/15/11   Unrest in Greece Squashes Rally Attempt

Editor’s Corner

Investor Heat Map: 6/15/11Unrest in Greece Squashes Rally Attempt

Ron Rowland

Unlike his June 7 speech that derailed a market rally, Ben Bernanke’s statements to Republican members of Congress about raising the debt ceiling had little effect on yesterday’s rally attempt.  However, yesterday doesn’t matter anymore.  Today, protests in Greece turned violent and caused markets around the world to sell off.  Greek Prime Minister Papandreou is attempting to work with opposition parties to form a national unity government, but that is not alleviating concerns.  Events in Greece are still happening in real time as we go to press with riots in the streets and the Prime Minister offering to resign.

The week is not over yet, but with two days remaining, hope is fading for an end to the six-week losing streak for the major market averages.  Optimism was sparked on Tuesday after retail sales in May were not as bad as expected, the PPI came in at a tame level of 0.2%, and China reported strong expansion in industrial production and modest inflation.

Although the negative events out of Greece dominated the headlines today, there was other economic news at work also.  Today’s CPI report for May posted an increase of 0.165% for its eleventh monthly gain and puts the yearly increase at 3.6%.  Core CPI jumped 0.287%, the largest monthly increase since July 2008, although its increase from a year ago is just 1.5%.

The dollar was losing ground earlier in the week but surged 1.6% today as it is still viewed as a safe haven.  Its biggest gains came against the Euro, but it also made good strides against the Japanese Yen and Swiss Franc.  Gold seemed to be the only “currency” able to show a gain against the greenback today.  Gold finished the day above $1,530 an ounce.

Other commodities were not able to separate themselves from the negative action of stocks.  Crude oil was off about $4 and broad commodity indexes had declines in excess of 2%, unraveling three weeks of a slow and steady advance.

U.S. issued Treasury securities, inflation-protected bonds, and investment grade corporate debt were all higher today, presumably thanks to exposure to the U.S. dollar.  Junk bonds and international debt suffered.

Sectors

Health Care and Consumer Staples remain first and second in our sector rankings.  They should be able to keep their positions at or near the top as long as investors remain nervous and jittery about the market.  Utilities and Telecommunications hold the third and fourth spots, although they swapped positions since last week. The four leading sectors have somehow managed to keep their intermediate-term trends in positive territory throughout this recent mess.

Moving down the list, there is a large drop off in performance after Telecommunications as we find Energy, Consumer Discretionary, and Materials in a near three-way tie for the leadership of the underperformers – otherwise known as fifth place.  Industrials and Technology switched places while losing momentum over the past week.  Financials still have the lock on last place and have the dubious distinction of being the worst overall major category of the 32 we track.

Styles

We often talk about compression in the Style rankings, and today we have a great example of it with a near seven-way tie among the top seven categories.  Due to a slight advantage out in the undisplayed third digit, Mid Cap Growth maintains its relative position at the top of the heap.  Given the close proximity of the six categories nipping at its heels, it wouldn’t take much to make Mid Cap Growth plunge to seventh place by our next update.

With everything so tightly packed, relative positioning doesn’t mean much, but we must make note that all three Large Cap categories have now climbed into the upper half of the ranking table.  The four categories that are distinguishing themselves to the downside happen to be the ones representing the smallest stocks – the three Small Caps and the Micro Caps.  The Micro Caps have found some support at their 200-day moving average the past few days, which has saved their negative intermediate term trend from becoming long-term negative.

International

Last week we had the European Union and the U.K. regions sporting small positive numbers.  This week, they have swapped places and are still on top while their momentum readings have turned negative.  Although Greece is a relatively small portion of Europe, the civil unrest there today is causing large declines across most of Europe.  The Euro is also taking a beating, so we are anticipating a significant drop in the relative strength of Europe by our next update.

Japan was one country that actually gained ground the past week and pulled itself out of last place in the process.  This is by no means an indication of “clear sailing” for Japan, just a sign that things are beginning to stabilize somewhat.  Canada is still in great shape from a long-term trend perspective, but that isn’t obvious from its intermediate-term momentum readings which are weak enough to drop it into last place.  The Canadian dollar has been trading in a fairly narrow band the past four weeks, so that hasn’t been a contributing factor.


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 fully understand the desire to use the debt limit deadline to force some necessary and difficult fiscal policy adjustments, but the debt limit is the wrong tool for that important job.”

Ben Bernanke (6/14/11)


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