Stocks Still Look Defensive Despite Rally
The first reports for earnings season are in, and they didn’t disappoint. Alcoa (AA) easily beat forecasts for both sales and profits. The company is widely watched as an economic barometer because aluminum demand reflects trends in consumer goods, automobiles, and many other sectors. By this measure the global economy seems to be growing nicely. On the other hand, aluminum demand is still far below the 2008 peak year, so one can plausibly call the latest news nothing more than a small break in the storm.
Another bellwether stock, Intel (INTC), reported sharply higher profits amid an apparent “upgrade cycle” among corporate technology buyers. While sales grew, an expansion in Intel’s profit margin and cash hoard was even more impressive. Analysts lauded Intel’s manufacturing efficiency. The downside of this is that “efficiency” in the technology sector usually equals “less work for humans.”
The unemployment picture is not improving, which may be why retail sales tumbled in June. Vehicle sales fell especially hard and a decrease in total gasoline sales also had an impact. The bottom line is that consumer spending went through a clear slowdown in the second quarter. Not coincidentally, today’s economic forecast from the Federal Reserve turned pessimistic for the first time in a year as the Fed noted the soft jobs market may cut into economic growth.
Stocks rallied strongly in the last week, but most of the rally came on below-average trading volume. This is consistent with a normal counter-trend rally, as is the fact that the weakest groups were among the strongest performers. A longer-term perspective adds some color to the picture. On a one-year chart, the most recent rally looks similar to the one in early June – which led to new lows for the year being set before month-end. Stepping back even further to the five-year chart reveals that the three-year bear market is still in control. The short-term rally could continue for some time, but as yet we do not see the beginning of anything more sustainable.
Treasury prices declined as stock prices rose in the last few days. The yield on ten-year notes rose to the 3.1% area from a low near 2.9% at the beginning of June. Gold held steady as most commodity indexes rose. A downtrend in the dollar against other major currencies suggests that traders do not expect higher interest rates in the U.S. for some time. This begs the question of what, if anything, can the Fed do to stimulate at this point? We do not know, but Ben Bernanke has shown surprising creativity before. He may well do it again.
Utilities turned in a “below average” performance for the week, but it was enough to push the sector’s trend into positive territory. Moreover, Utilities is now the highest-momentum category among the 32 shown in our rankings. Consumer Staples hung on to second place, indicating that even after a strong one-week rally the stock market still has a “defensive” posture. Financials was the best performing category last week, and Materials also moved up in the ranks. Energy is back on the bottom but, like most everything else, still showed improvement from the dismal picture of a week ago.
So far the market rally has not proven sufficient to push any of the Style categories into a positive intermediate-term trend. Mid Caps still are the best of a bad lot, but the rankings are tightly packed and relative positions could change substantially in a short time. Value has a slight edge over Growth in the Mid and Large Cap groups, while Growth is doing significantly better than Value in the Small Caps.
Global markets behaved much like domestic ones recently: those with the weakest trends bounced the most. The E.U., U.K. and U.S. turned in the three best weekly performances in our Global Edge chart. It was enough to propel Europe and the U.K. out of last place and up to the middle of the ranks. The U.S. was left behind and now occupies the bottom slot. This is partially related to relative weakness in the U.S. dollar during this time, but the U.S. is still by many measures one of the weaker world equity markets. China and Emerging Markets held on to the top two spots, and both improved enough to ease into slightly positive momentum territory.
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.
“Our bonds have always been repaid.”
Illinois Governor Pat Quinn,
as the state tries to raise $500 million by selling bonds
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