A Bear Market in Leadership
Market volume often drops in August and, so far, this year is no exception. The busiest session has been 8/6, which not coincidentally was a losing day for U.S. benchmarks. The following day the S&P 500 marked its year-to-date intraday high at 1018. From there the summer optimism began fading, though intermediate-term uptrends remain in effect for most indices and sectors. Nonetheless, the resistance levels established last fall seem to have survived their first challenge.
Many analysts say global markets are now taking their cue from China. If true, it may not be good news for the bulls. The Shanghai exchange provided leadership starting in late 2007, topping out within weeks of the U.S. market peak. Chinese stocks reached a cyclical low on 11/4/2008, the same day the S&P 500 hit a short-term peak and started another -32% decline into its 3/9/2009 low. Shanghai has been in a relatively smooth uptrend since March but peaked on 8/4/2009. Since then it is off -18% and within shouting distance of a new bear market. Investors should hope the U.S. does not follow China this time.
New data on the Consumer Price Index and Producer Price Index show little sign of inflation in the U.S., consistent with last week’s FOMC statement. What was not consistent was the Fed’s Monday announcement that it is extending the Term Auction Loan Facility past the original 12/31/2009 deadline. The program is essentially a bailout for holders of commercial mortgage-backed securities, mainly banks. The timing is interesting, given Friday’s failure of Colonial Bank in Alabama (which the Fed certainly knew was coming) and a distinct lack of good news from numerous other regional banks. This suggests the Fed and Treasury are still far more concerned about the banking system than about potential inflation.
The ongoing bond rally is another indicator inflation is no threat for now; deflation is the bigger danger. The ten-year Treasury yield ended today at 3.46%, the lowest point since mid-July. Curiously, investors also bid up the value of inflation-protected bonds, suggesting that they still fear inflation. Retailers are growing more profitable thanks to inventory reduction and employee lay-offs, but as those same activities cascade through the economy we are seeing downward price pressure at all levels. The amount of unused production capacity around the globe is staggering. For consumers, the biggest question is whether prices will fall faster than wages. If not, breaking out of the deflationary cycle may be very difficult – very bad news in an economy as leveraged as this one.
All sectors lost momentum in the last five days, but Financials stayed on top of the list. Health Care held up the best as the Obama administration sent signals it may drop opposition to the so-called “public option” reform which would have cut into profit margins at drug and managed-care companies. Weakness in luxury retailers made the Consumer Discretionary sector lose ground. Telecom slipped into the red after being the lowest-ranked sector for the last month.
The relative Style rankings were almost unchanged in the last week. Large Cap Value and Mid Cap Growth swapped places near the middle of the list. The overall range is a little tighter this week, with 26 RSM points separating Mid Cap Value at the top from Mega Cap on the bottom. Last week the spread was 34, perhaps signaling an impending emergence of new leadership.
Our global chart had significant shifts. Pacific ex-Japan is back on top of the list after being dislodged a week ago by Latin America. As noted above, Chinese stocks have been tumbling and are now sharing the relative-strength basement with Japan. China is also the largest component in our diversified Emerging Markets benchmark, causing it to slip down to the mid-point of the chart. The prime beneficiaries this week were the U.S. and United Kingdom, both of which moved up (relatively speaking) by losing less than other markets.
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.
“It’s going to be a perfect storm.”
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