06/16/10   Green Shoots in the Sector Edge

Editor’s Corner

Investor Heat Map 6/16/10

Green Shoots in the Sector Edge

Ron Rowland

The stock market is trying to turn bullish again. We’ve noted for several weeks the breakdown of various benchmarks below their 200-day moving averages – a classic indicator of a long-term downtrend. The Russell 2000 small-cap index crossed back over the line last Thursday after only spending a few days below. The S&P 500 and the Dow Industrials did likewise yesterday for the first time in almost a month. This does not mean smooth sailing is now guaranteed, however. We remain quite concerned about volume, which has tended to be lighter on the good days and heavy on the sell-offs. A strong week on heavy volume would make the outlook a lot clearer.

Moving on to economic indicators, the housing market is turning more negative according to several recent reports. The National Association of Home Builders/Wells Fargo confidence index for June posted its biggest decline since November 2008. Housing starts, mortgage applications, and construction permit activity also fell precipitously the last few weeks. The now-expired home-buyer tax credit seems to have been effective mainly in shifting demand forward in time. In the bigger picture, demographic trends are also disturbing. The U.S. finds itself with a surplus of large-lot McMansions just as the Baby Boom generation wants to retire and/or downsize. Unless we get a sudden explosion of suburban families with young children, it is hard to imagine who will buy the type of homes that are currently available in the locations where they exist. Time and even lower prices may be the only solutions.

The U.S. Dollar is pulling back after strengthening dramatically in the last two months. Gold is doing the same though with much less drama. Both are reacting to a momentary easing of the European financial crisis. We feel sure the crisis is by no means over; it is simply taking a summer break. Look for more fireworks in the fall.

The bond market stabilized a bit, with key interest rates moving comfortably sideways the last five days. Today the ten-year Treasury yield ended at 3.282%. Next week’s Federal Reserve meeting should be uneventful, with most analysts thinking the Fed will not make any policy changes this time. If anything, the committee statement might hint that tighter policy is unlikely in the near future. The Fed has no more room to go lower but is certainly not going to clamp down on an economy as fragile as this one. They could surprise us with something creative, though. We’ll know next week.

Sectors

Telecom kept its grip on the top of the chart with Consumer Discretionary close behind. Perhaps more significant, both sectors flipped into positive momentum territory. Not by much, admittedly, but it’s nice to see a couple of green shoots. All sectors improved their scores significantly in the last week – not surprising given the stock market rally. Energy and Materials had particularly impressive improvements, though both remain in the bottom half of the rankings and are still in intermediate-term downtrends. Financials are now in last place.

Styles

We have a new permutation in the Style rankings. The extremely large and extremely small stocks – Mega Cap and Micro Cap, in other words – are together on the negative end of the scale. Meanwhile the three Mid Cap categories are clustered together at the top, with all showing exactly zero intermediate-term momentum. Growth is ahead of value at all capitalization levels.

International

The Global Edge chart looks a lot like the Sector Edge chart. The two front-runners, China and Canada, are showing a little green while there was considerable improvement across the spectrum. The U.S. slipped out of the top three and is now in fifth place. Latin America grabbed the #3 spot. Europe and Pacific Ex-Japan made dramatic strides forward, but the E.U. is still in last place. Japan moved up slightly. Overall the tone is quite a bit better than last week but not at all impressive by most standards.


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.


“…no matter how much we improve our regulation of the industry, drilling for oil these days entails greater risk. “

President Barack Obama, 6/15/10


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