08/24/11   What Do They Want Him To Say?

Editor’s Corner

Investor Heat Map: 8/24/11What Do They Want Him To Say?

Ron Rowland

About this time last year, Ben Bernanke took the stage at the Fed’s annual Jackson Hole, Wyoming conference.  He said the Federal Reserve would make every effort to sustain an economic recovery.  This turned out to include a second round of quantitative easing worth $600 billion.  A glance through recent data reveals QE2 was hardly a resounding success.

Nevertheless, the hoopla did manage to push stocks up nicely the next few months, so we can hardly blame investors who want more of the same this year.  Given that the Fed only two weeks ago all but promised to keep short-term rates near zero until mid-2013, we are not sure what else he might do.  Years of microscopic interest rates have helped neither the economy nor savers, especially the elderly.  Some refer to current Fed policy as “financial repression.” 

Stock volatility remains elevated; the Dow Jones Industrial Average has had seven 300-point days so far in August.  Intraday movements were even more spectacular as Europe’s debt crisis threatened to destabilize large banks.  Gold blasted through $1800 and then $1900, but it fell hard today.  Treasury rates stayed historically low, with the ten year yield briefly dipping below 2%.   

A rare East Coast earthquake rattled a few nerves this week, but the emergency-preparedness test may prove useful if Hurricane Irene stays on its present course.  The good news is we are now halfway through the tropical storm season with no damage to U.S. offshore oil production.  Anyone who buys gasoline should hope the Gulf of Mexico stays clear.


Once again we see that being in a sector with “above average” momentum is not necessarily good news.  Why?  Because the “average” sector benchmark is moving down at a -53% annualized rate by our intermediate-term measurement.  Utilities and Consumer Staples are still “leaders” only because they are falling less rapidly than other sectors.  Technology was the week’s biggest loser, shedding more than 25 momentum points thanks largely to the big plunge in Hewlett Packard (HPQ).  Weakness in crude oil prices damaged the Energy sector as well as Industrials and Materials.  The Industrials group could soon take last place away from Financials; banks are beginning to attract interest from bottom-fishers.


Relative strength (or, more accurately, relative weakness) in the Style categories is still aligned with size.  Mega Cap is outperforming everything else despite dropping 15% in less than a month.  Then we have the Large Cap and Mid Cap groups, and a virtual four-way tie at the bottom between Small Cap Value, Small Cap Blend, Small Cap Growth, and Micro Cap.  Strictly speaking, Micro Cap is the lowest of the bunch, but all four are sharing the basement.


While an overnight sovereign-debt downgrade from Moody’s kept Japan from participating in Tuesday’s otherwise-global surge, Japanese stocks are still outperforming other regions.  As noted above, “outperforming” does not necessarily equate to “good” performance in any other sense.  A break below the March tsunami-panic lows could bring Japan back to 2009 support.  Pacific ex-Japan, led by resource-rich Australia, is in second place while Canada holds third.  Both categories gained an advantage because commodity prices recovered faster than stock prices in recent weeks.  Europe is once again in a class by itself at the bottom of the chart as a gridlocked EU struggles to resolve its debt crisis.


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.

“I think the potential for government intervention outweighs all other market forces in the current environment – and it is hard to make logical investment decisions based on a guess about what the government may or may not do.”

Michael Price, editor of OnTrack Report


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