Stocks Begin September With Low Volume Rally
Spurred by bleak prospects for his party in the November election, President Obama is reportedly planning to propose a partial extension of the Bush-era income tax rates, new tax cuts for business, and new infrastructure spending. He outlined the ideas at a speech in Cleveland, near the heart of the hard-hit industrial Midwest. Some analysts, already picking the plan apart, think the idea of allowing businesses to fully deduct new equipment spending may have an interesting side effect. Companies will have an incentive to pay for new purchases by borrowing money and getting an interest deduction as well. “The combination of free deductibility of interest to make a marginal investment, combined with accelerated depreciation, would lead to negative tax rates on that new investment,” said tax expert Ed Kleinbard in an interview with Bloomberg News.
The calendar is probably not conducive to getting major legislation through Congress before the election. Furthermore there is a great deal of concern on both sides of the aisle about how to “pay” for the revenue lost through tax cuts. The $50 billion infrastructure stimulus proposal announced over the weekend will also vie for Congressional time.
Stocks opened the month of September with a sharp rally that now seems to be losing steam as the Dow’s advance was turned back at its 200-day moving average. Anyone who thought volume would return after the semi-official end of summer vacation has been wrong so far; post-Labor Day trading activity has still been quite modest. Bond yields continue to bounce back from the historic lows in late August. Corporate bond issuance is up as companies issue new debt in order to capture the prevailing low rates. In this they are taking a hint from the U.S. Treasury, which is also issuing new debt as fast as it can. The ten-year Treasury ended today at 2.65%.
Finally, a note on gold. The precious metal is trying to move above the all-time high that was touched back in July. We do not see a clear breakout yet, which suggests the possibility of failure. On the plus side, though, the current uptrend has been slow and steady – unlike gold’s historical sharp moves. A little bit of consolidation before the next jump would not be so surprising. We suspect gold will make a big move one way or the other in the next couple of weeks.
The numbers of sectors in the green, i.e. with positive intermediate-term momentum, jumped from two to six in the last week. However, an average sector momentum of only 6 indicates non-commitment is still the dominant attitude. Buyers seem to like Materials, which vaulted into first place and is trying to break above its July high point. Utilities remain strong, but the sector slipped to third place. Telecom held on to the #2 spot. The “Big Three” sectors of Technology, Financials, and Health Care are still on the bottom of the list.
The September rally helped boost all categories within the Style rankings without changing the relative order very much. Mid Caps are still on top and are now showing positive momentum. Large Caps are all at zero, moving neither up nor down, Small Caps are still lagging and Micro Caps are still on the bottom of the pile. The Mega Cap group looks out of place in our chart, squeezed between the Small Cap categories.
Pacific ex-Japan tightened its grip on the top global spot thanks to strong bullish moves in Australia, Singapore, and Hong Kong. Strength in the Aussie Dollar was also helpful. Latin America edged into second place as Peru, Chile, and Colombia are starting to outshine Brazil as the region’s favorites. Japan lost more ground, meaning the four largest economic regions of the world – Europe, the U.S., Japan, and China – are now also the world’s weakest.
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.
“Infrastructure programs are always popular for stimulus talk but disappointing in practice.”
Douglas Holtz-Eakin, president of the Washington-based American Action Forum
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