Did BP Start The Bear Market?
Any student of statistics can tell you that correlation does not necessarily imply causation. Coincidence happens. Nevertheless, it is probably not a coincidence that world stock markets topped out shortly after the April 20 Deepwater Horizon explosion in the Gulf of Mexico. A drop in shares of BP (BP), the company formerly known as British Petroleum, was only the beginning of the market reaction. The ongoing leak and the response (or lack thereof) to it affected all kinds of financial, economic, and political trends. Market psychology is fickle, and this event obviously changed it.
BP thinks its relief wells will stop the flow of oil sometime in August. We will believe it when we see it, but some analysts think BP and the markets in general will rally higher once the well is capped. Identifying such a catalyst ahead of time is always a tricky proposition. If the catalyst can be seen, markets typically start to move in anticipation of the event. Sometimes they move too far, which is where we get the Wall Street axiom to “buy the rumor and sell the news.” BP certainly might enjoy a short-term pop when the capping is complete, as some level of uncertainty will have been removed. But the ultimate breadth of the damage, and the clean-up bill, will remain.
Meanwhile, we are now entering the third quarter of 2010 – and that means earnings season is right around the corner. Look for a flurry of corporate news over the next few weeks. Good reports will bring some comfort that the economic recovery is still alive, while negative surprises will only add to the double-dip talk. Treasury bonds are still one of the brightest corners of the financial markets, with rates on the ten-year bonds still below the 3% level. This is good news for anyone who is worried about inflation. We have to wonder just how much “value” there is in bonds at such low rates, but the bond rally could well continue as long as people value safety over returns.
Our rankings look considerably more bearish than last week, which was far worse than the week before. Half of the major sectors now sport momentum readings of -50 or lower, which implies they are trending downward at annualized rates of -50% or worse. The only good news that can be extracted from this is that the sectors may be oversold in the short-term and due for a bounce. The defensive trio of Utilities, Consumer Staples, and Health Care hold three of the top four spots. The bottom half of the chart looks like a near 5-way tie for last place. Someone has to be on the bottom, though, and this week it is Materials. Gold and other precious metals producers are a small subset of the Materials sector that can often buck the trend, but that was not the case last week. Gold bullion and mining shares both fell sharply.
All categories in our Style rankings took a large hit this week. The upper portion of the chart is another virtual tie, much like the bottom half of the Sectors. The lower-ranking categories are all Small and Micro-Cap. Clearly, smaller stocks are taking the brunt of the current sell-off. Small Cap Value has the worst momentum reading (-59) of all 32 categories we track. This is significant because it is highly unusual for one of the Style categories to exceed all of the Sector and Global categories.
Two months ago we remarked on how the U.S. was on top of the world. Those days are now long gone, and the U.S. is avoiding the bottom by only the slimmest of margins. Only Europe is ranked lower, so the U.S. is obviously not in good company, economically speaking. China and Emerging Markets remain in first and second place. Canada fell hard this week, hit by its heavy reliance on the Energy and Materials sectors. The Canadian Dollar also pulled back, adding to Canada’s loss when considered in U.S. Dollar terms.
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.
“The economy is still in the gravitational pull of the Great Recession. All the booster rockets for getting us beyond it are failing.”
Robert Reich, former U.S. Labor Secretary
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