08/28/13   August Moves From Boring To Potential Cruise Missile Deployment

Editor’s Corner

Ron Rowland

Most of August has been boring and uneventful, at least the first 21 days were.  That all changed after our update last week, as numerous events having the potential for being market moving news emerged.

First was last Thursday’s three-hour mid-day halt of the Nasdaq stock exchange, which has been dubbed the Flash Freeze.  During the halt, investors were kept in the dark as to the nature or extent of the problem, but the Nasdaq came back online before the trading day ended.  After the markets closed on Thursday, Nasdaq officials proclaimed all technical problems were resolved within the first half hour.  The remaining two-and-a-half hours were “necessary” to ensure a smooth and orderly reopen of trading operations.

Between Thursday’s setback and the botched Facebook (FB) IPO, the Nasdaq is having customer confidence problems.  As it turns out, the third and fourth largest U.S. stock exchanges, BATS and Direct Edge, had been in serious merger discussions the past nine weeks.  Two days ago, possibly sensing some vulnerability on the part of the Nasdaq, BATS and Direct Edge announced their merger.  The combined firm will continue to be called BATS Global Markets.  Even though many investors are not familiar with the name, it will have a 20.6% market share, vaulting it into the #2 spot ahead of the struggling Nasdaq’s 18.1% share while slightly trailing the NYSE’s 23.0% share.  You probably recall Nasdaq’s huge marketing effort to bestow the title of “the stock market for the next 100 years” on itself more than a decade ago.  BATS now has its eye on that title.

On the global stage, events in Syria have reached crisis stage.  Our U.S. Secretary of State, John Kerry, bluntly stated there was “no doubt” that chemical weapons were used last week to kill more than 1,000 people in Syria and “little doubt” that Syrian President Assad was behind the attacks.  Pentagon officials indicated they have identified and locked-in on targets for long-range cruise missile strikes.  All that is missing is the final go ahead from President Obama.  The revelation of potentially being just a day or two away from war was enough to spook investors and send stocks to the downside yesterday.

As you might expect, oil has shot up to $109 a barrel, gold climbed above $1,400 an ounce, and Treasury bond prices moved higher.  In his Morning Briefing today, Ed Yardeni said that thoughts of an Arab Spring are now naive expectations, and it increasingly “looks more like the Arab Winter.”

Investor Heat Map: 8/28/13

Sectors

The number of positively trending Sectors is the same today as a week ago, although one of the names changed.  Technology sits at the top again after taking control of that position last week.  Materials jumped three spots to second place as commodity prices mount their best rally in more than a year.  Industrials and Health Care are bunched together just behind Materials.  Consumer Discretionary slipped two places to fifth as homebuilders and retailers came under pressure.  Energy was the big mover the past week, posting the largest percentage gains of any Sector and flipping from negative to positive momentum readings.  Financials went the other way, joining the ranks of categories currently in negative trends.  Telecom, Consumer Staples, and Utilities all lost ground for the week.  Real Estate produced the largest momentum improvement of any category, but it remains entrenched at the bottom of the Sector rankings.

Styles

Today’s top five Style categories are identical to last week’s lineup.  Small Cap Growth sits at the top and is followed by Micro Cap, Small Cap Blend, Mid Cap Growth, and Mid Cap Blend.  If you can visualize the style-box matrix, the strength resides in the lower right quadrant.  Strength falls off as we move out of that quadrant either upward toward the Large Caps or left toward Value.  The further away the move, the weaker the various categories become.  The two categories near the opposite end of the style-box, Large Cap Value and Mega Cap, are now registering negative momentum.

Global

No change at the top as Europe extends its reign as world leader, at least in terms of momentum.  The region is not immune to activities in Syria though, and its markets are just as vulnerable as those in the rest of the world.  China lost strength this week, although it was able to keep its second place relative strength ranking.  The U.K. moved up a spot, swapping places with EAFE.  Here at home, the U.S. climbed back into the upper half from its seventh place standing last week.  The U.S., World Equity, and Canada are on the verge of slipping into negative trends.  Four regions are in negative territory again this week and all require more red ink than a week ago to display the magnitude of their downside weakness.  We would expect Pacific ex-Japan to be a beneficiary of an improving Materials Sector, but weakness in the Australian dollar is proving to be a headwind.

Note:

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.

 


“We’ve always said we want the UN Security Council to live up to its responsibilities on Syria. Today they have an opportunity to do that.”

U.K. Prime Minister David Cameron, August 28, 2013


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