09/05/12   2012 Enters The Final Period

Editor’s Corner

Ron Rowland

There are many common ways to divide the calendar year.  Days, weeks, months, quarters, and halves are all discussed with regularity.  One fractional division of the calendar that seldom gets any attention is thirds.  In many respects, thirds make sense.  The first third takes us from January to April.  For those that subscribe to the “sell in May and go away” axiom, this demarcation is significant. 

The second third ends as the calendar rolls over to September.  This too delineates vastly different portions of the year.  Vacations are over, and it’s time to be back in school or back at your desk.  For businesses, it’s often the start of the planning cycle, as goals, objectives, and detailed plans for the new year begin to take shape.

The Fed’s annual Jackson Hole retreat also marks the close of the second third.  Last week, Fed Chairman Ben Bernanke used the Jackson Hole pulpit to defend the effectiveness of the central bank’s easy-money policies.  Unlike the past two years, where he unveiled successive rounds of quantitative easing, Bernanke refrained from rolling out QE3.  However, he also strongly hinted that new action will likely be the outcome of the next Fed policy meeting, scheduled to take place in just one week. 

We now begin the last third of the year, or as hockey fans say “we are entering the final period of play.”  Weakness in the job market, according to Mr. Bernanke, is the result of cyclical problems, not structural ones.  As such, he believes it is an area where the Fed can help.  Millions of unemployed citizens are waiting to see what that help consists of, and whether or not it translates into real jobs before the final buzzer of the year.

Economic reports continue to roll out, providing the Fed with additional data points to ponder.  Second quarter real GDP was revised upward from 1.5% to 1.7%.  Although the improvement is welcome, it is only about half the 3.2% historical average and far short of what is expected when recovering from a recession.  This Friday brings the August employment numbers.

Meanwhile, commodity prices have been on an upward trend, most recently led by gold.  Gold prices established a bottom in late May but had trouble breaking through short-term resistance until two weeks ago.  Another upward jump occurred last Friday as consensus grew that further Fed action was just around the corner.

Investor Heat Map: 9/5/12

Sectors

Technology clung on to the top spot in a week that saw compression across the ranks.  Phone and tablet makers are gearing up for another wave of new product introductions.  Winning products can create winning suppliers down the food chain of semiconductor and technology vendors.  Consumer Discretionary moved back up into the second spot as retailers have sprung back to life and homebuilders continue to defy expectations.  Telecommunications is right behind and stands ready to move up the ladder should either of the two sectors ahead of it hesitate.  Health Care climbed another notch this week, moving into fourth place.  An upside pop in the pharmaceutical group aided the sector’s advance. 

Energy was the losing sector this week.  Although crude oil prices remain in the mid $90s, energy related equity prices dropped slightly and Energy’s relative ranking plunged from 2nd to 6th.  Industrials also gave up some ground, sliding to 8th.  Materials did not improve its 9th place ranking, failing to capitalize on the recent strength in commodities.  Utilities remains in last place and is still the only sector with a negative trend reading.

Styles

Mega Cap has finally been unseated from the top position.  Small Cap Growth made an amazing ascent through the ranks, rocketing from 9th to 1st in this holiday shortened 4-day week.  Closer inspection of the Style Edge Charts indicates this feat may not be nearly as impressive as it first sounds.  The rankings are extremely compressed with only 4 points separating the best category from the worst.  Small Cap Growth did indeed improve its absolute strength for the week with its score rising 3 points from 14 to 17.  That’s not much of a gain, but when you combine it with a 5-point drop for Mega Cap, it’s just enough to put Small Cap Growth on top.

It was a good week for all three Small Cap categories as they moved from the bottom half to the top half of the rankings.  Small Caps now occupy three of the top four spots.  Micro Caps, the smallest of the Small Caps, also posted an improved momentum score, but it wasn’t enough to move the category off of the bottom.  Large Cap and Mid Cap categories were all pushed lower by the strength in Small Caps.

Global

Europe held on to the top spot for the 3rd week in row as ECB bond buying plans help reduce the region’s interest rates and provide some economic stabilization.  Canada is heavily weighted to Energy, but the country did not take a tumble as Energy did in the sector rankings.  Instead, it held tightly to its second place spot.  The “middle of the pack” was clearly defined a week ago but is now starting to look fuzzy.  The U.S. was a member of that pack last week but broke away to secure the #3 spot in the rankings.  The U.S. essentially swapped places with Pacific ex-Japan, which is this week’s fourth member of the middle along with World Equity, EAFE, and the U.K.

The bottom four categories are now all exhibiting negative trends.  Emerging Markets is currently the best of the worst, followed by Japan and Latin America.  Japan’s currency is holding steady, but equity prices keep notching lower.  China continues to disappoint a world that had grown dependent on it to be the major growth engine.  Each successive economic report out of China just seems to add to the concerns that a hard landing could be in store for the country.  China’s stock market, in U.S. dollar terms, is once again back at its lows of May, June, and July.  It found support then at these levels, but its ability to do so again in September is questionable.

 

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.

 


“Central bank securities purchases have provided meaningful support to the economic recovery. We should not rule out the further use of such policies if economic conditions warrant.”

Fed Chairman Bernanke at Jackson Hole


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