07/23/14   Market Shrugs Off Global Hostilities

Editor’s Corner

Ron Rowland

Malaysia Airlines Flight 370 and its 239 occupants went missing on March 8.  No one has been able to find it after 137 days of searching.  Its whereabouts remain a mystery.  Last week, Malaysia Airlines was in the news again, as Flight 17 and the 298 people aboard went missing.  This time, the plane was quickly located, and it was apparently shot out of the sky while crossing over Russian-backed rebel territory in Eastern Ukraine.  The only mystery is who gave the order.

The FAA barred U.S. flights to Tel Aviv after a rocket fired from Gaza landed near Israel’s main international airport.  Some European airlines did the same.  The original 24-hour ban was extended for another 24 hours today.

It’s been a tough week for airlines, and Malaysia Flight 17 will be a game-changer for the industry.  For years, commercial airlines have knowingly flown over war zones.  At a typical altitude of at least 33,000 feet, they were thought to be out-of-range of all but the most sophisticated anti-aircraft weaponry systems.  Now, it seems even “rebel” forces are capable of bringing down these high-flying commercial jets.

While Ukraine may not be a destination for many flights, it finds itself in the corridor of numerous heavily traveled routes.  The same can be said of many other war zones.  Airlines will now be forced to revise their policies, adding travel time to many international flights and eliminating others.  The recent Gaza-launched rocket drives this last point home.

Although airline stocks have been lagging the past few months, and holding back the Industrials sector in the process, they have been taking the events of the last week in stride.  This morning, Delta Airlines (DAL) reported a 9% growth in quarterly earnings versus a year ago, and it traded significantly higher today.  Airlines will adjust and will survive.

Flight 17 is also a game-changer for Putin and Russia.  Up until last week, the world community was content with gently scolding Russia and invoking economic sanctions for its role in Ukraine.  Not feeling too much global economic or political pressure, Putin had the freedom to pull many of the puppet-strings from the comfort of the Kremlin, while maintaining the facade of this being a local matter and none of the world’s business.  With pieces of Flight 17 and its 298 innocent lives scattered across separatist controlled land in Ukraine, it is clearly a “local matter” no longer.

Market Vectors Russia (RSX) plunged 7.2% last Thursday and continues to decline this week.  The U.S. market shrugged off these global hostilities, and the S&P 500 closed at a new high today.

Investor Heat Map: 7/23/14


Three months ago, Technology was severely lagging the market and on the cusp of flipping over to a negative trend.  Today, it is enjoying its second week at the top of the rankings and is sitting at a 13-year high.  The Tech crash of 2000 is a distant memory to most, but a 40% gain is still needed before the damage can be fully repaired.  Real Estate edged up a notch to grab second place.  Energy managed to increase its momentum the past week but not enough to prevent a slip to third.  Health Care held its fourth place position, and insurers got a boost yesterday even though two federal appeals courts issued opposite rulings on whether or not ObamaCare subsidies apply in the 36 states with federally run exchanges.  Telecom, Materials, and Financials held their ground in the middle of the pack.  Consumer Discretionary and Consumer Staples swapped places with Discretionary coming out ahead this week.  Industrials and Utilities bring up the rear for the third week in a row while successfully keeping their momentum scores in the green.


The relative strength ordering of the style categories is unchanged this week, and it is still reflecting a textbook defensive pattern, which is a pattern consisting of two parts.  First, relative strength is aligned by market capitalization, with the largest stocks being the strongest.  Second, within each capitalization strata, Value is the strongest and Growth the weakest.  Mega Cap and Large Cap Value are at the top and both managed to increase their momentum while the 10 categories below all lost ground.  Last week, only Micro Cap was in a negative trend.  Today, Small Cap Growth and Small Cap Blend join it on the downside, and Small Cap Value is now in danger of turning red.


The top five categories remain the same as a week ago, and the top three all gained strength.  Latin America turned in another great performance.  After surging from ninth to first a week ago, it tacked on another 11 momentum points this week to separate itself from second place China.  Canada also improved, breaking out of its tie with Emerging Markets to claim third place for itself, while Emerging Markets had to settle for fourth.  Japan rounds out the top five, just as it did a week ago, but some juggling occurred in the next three spots.  Pacific ex-Japan climbed two places to grab sixth, thanks to Australia breaking through its 14-month overhead resistance and establishing a new all-time high.  The U.S. and World Equity each slipped a notch.  The bottom three categories remain the same with the U.K. and EAFE managing to hold their positive momentum.  Europe sits in last place, and it is our only global category registering a negative trend.


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.


“There is a solid case it was an SA-11 fired from Eastern Ukraine under conditions created by Russia.”

Unnamed U.S. Intelligence Official, July 22, 2014


© 2014 AllStarInvestor.com All Rights Reserved. Protected by copyright laws of the United States and international treaties. Nothing in this e-mail should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. Any investments recommended in this letter should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company. All Star Investor employees, its affiliates, and clients may hold positions in the recommended securities.

Distribution is encouraged. Please do not alter content.