“Built” Does Not Equal “Sold”
The year is 67% finished. A few investors apparently want to start waving their banners now, which is as good an explanation as any for today’s sharp stock market rally. Media reports give credit to stronger-than-expected U.S. and Chinese manufacturing data. Yet all this proves is that companies can make more stuff even in a slowing economy. The mere fact that a product has been made does not mean anyone has bought it. Even in today’s efficient factories, manufacturers must necessarily plan ahead. Sometimes the plan turns out to be too optimistic and they are stuck with unsold merchandise. Or maybe the products get partway downstream, to the distributor level, but consumers still won’t bite.
Speaking of consumers, one manufactured good they aren’t buying more of is automobiles. Detroit just posted its worst August sales in almost 30 years. Last August, you may recall, was the end of the “cash for clunkers” program, so a drop from that point is not surprising, but the problems go deeper. Consumers who are stressed by debt and worried about their jobs are not inclined to make major purchases, especially if they can keep their old cars running for another year or two. This isn’t likely to change until we get substantial improvement in the jobs numbers.
Ben Bernanke and the Federal Reserve clearly recognize their efforts so far have not been effective. This is why Bernanke’s speech at Jackson Hole last week outlined more steps the Fed might take if necessary. This begs another question: if there are additional things the Fed could do to bring the economy back that they have not already done, what are they waiting for? The Obama Administration seems to recognize that monetary policy tools are no longer effective. Consequently they are now dropping hints of new tax cuts before the November elections. Depending on the particulars, a change in tax policy could have a swift impact on the markets and the economy.
Today’s upturn was indeed impressive, making up almost two weeks of lost ground in one swoop, but did little to change the big picture. Major benchmarks are still in downtrends and still below key indicators like the 50-day and 200-day moving averages. Likewise, the trend downward in Treasury yields is still in effect despite a slight bounce over the last week. Gold is trying hard to break out to new highs. With four months left to go, much can still happen in 2010.
The last week brought little change for the Sector rankings. Utilities and Telecom are still in first and second place, and they are still the only two sectors on the positive side of the momentum ledger. Materials edged ahead of Consumer Staples, helped by a bounce in commodity prices. Surprisingly, even after a stream of takeover news, the Technology sector turned in the weakest performance over the last five days and may soon nudge Financials out of the way to occupy the bottom relative-strength slot.
The Mid-Cap categories are in a three-way tie for first place in the Style rankings but remain decidedly negative. Large Caps are next in the lineup with Small Caps and Micro Caps on the bottom – a stratification that has been predominant for many months now. Differentiation between Growth and Value is currently minor; size is by far the bigger factor at the present time.
Pacific ex-Japan took over the top spot in the Global rankings, climbing from fourth place last week, as Australia benefited from a jump in the Materials sector and Singapore maintained its relatively strong performance. Canada jumped from ninth to fifth place, again due to Materials strength. Japan is in the middle of the pack while the U.S. and Europe are on the bottom. Generally speaking, Emerging Markets continue to outpace the Developed world. Despite its characteristic volatility, the Emerging Markets benchmark actually held up better than all other broad-based equity indexes during August.
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 hear and I forget. I see and I remember. I do and I understand.”
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