Greek Crisis Takes The Summer Off
Wide daily swings are taking a toll on investor nerves. The quick reversals can be blamed on several factors: fear vs. greed, risk on/off, or just trader mood swings. The net result is visible in rising volatility, both daily and weekly. The S&P 500, while looking overall bullish, needs to digest recent gains and calm down a bit.
Greece received a temporary reprieve, but the danger of default is far from over. Now the rest of the so-called PIIGS nations are coming back into the spotlight. Today Moody’s downgraded Portugal’s sovereign debt to junk-bond status. Ireland, Italy and Spain aren’t safe, either. We suspect the crisis will heat up again about the time the weather cools down in Europe this fall.
Economic indicators are still mixed. In the last week we saw construction spending drop, consumer sentiment go nowhere, and manufacturing activity increase. The next big data point will be this Friday’s June payroll report, which is expected to be sluggish. Quarterly earnings data, which starts flowing next week, may provide some additional insight.
Treasury bonds dropped hard, yielding bad news for long-term bond funds. Vanguard Extended Duration Treasury ETF (EDV), for instance, fell more than 6% between June 23 and yesterday’s close. Income investors who stretched for yield are learning the hard way that higher principal risk is part of the deal, in bonds as well as equities.
Consumer Discretionary moved up to take first place in our sector rankings. As the name implies, stocks in this group rely on “non-necessary” consumer spending. For them to do so well with the economy so weak seems odd. We won’t be surprised to see a slide down the chart soon. Telecom held on to second place. Health Care had a solid week but slipped to third place as other sectors proved even stronger. A surge in copper and other industrial commodity prices pushed Materials up to the #4 position. Defensive sectors lost relative strength, but Financials still owns the bottom of the list.
Seven days ago only one Style category had positive momentum. Now all eleven are pointed up. The gains were distributed more or less evenly, so relative positions did not change much. Small and Mid Caps still dominate the upper half while Large and Mega Caps are lagging. Once again we see a noticeable difference between Growth and Value. The market clearly favors Growth for now, with all three Growth categories well ahead of their Value counterparts. Being on the right side of Growth/Value is more important than cap size at this point.
The top three world markets are tightly bunched, but one has to lead. This week’s winner is Japan. In terms of relative strength, Japan has gone from bottom to top in less than four months while making virtually no forward progress. The U.S. slipped to #3 but is not far behind. The World Equity category is wedged in between its two largest components at second place. Emerging Markets and Latin America kept their relative positions while moving into bullish trends. Europe had a noticeable bounce but relative position improved only slightly. China was the week’s big loser. A feeble bounce paled in comparison to the rest of the world, and today’s rate hike provided more downside pressure. China now sits in last place both in the Global rankings and overall, with even worse momentum than the U.S.
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.
“Don’t try to buy at the bottom and sell at the top. It can’t be done except by liars.”
Bernard Baruch, American financier and stock-market speculator
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