09/11/13   Tapering the Taper

Editor’s Corner

Ron Rowland

The August employment report failed to meet expectations.  It was a disappointment on many fronts despite the headline unemployment rate dropping a tick to 7.3%.  The simple facts include fewer people are working, fewer people are working at full-time jobs, and fewer people are even considered to be part of the labor-force.  The labor-force participation rate is now at a 35-year low of 63.2%.

Do you remember the July employment report that was also disappointing?  As it turns out, it overstated the month’s job growth by a whopping 56%.  Revisions now show employers created only 104,000 new jobs in July, not 162,000 as originally reported.  The 169,000 new jobs for August are below the 12-month average, below expectations, and subject to revision.

Job growth is far from robust and is now thought to be more feeble than the consensus opinion of just a week ago.  The economy is likely to be on a similar trajectory.  These are factors the Fed will consider next week at the September 17 and 18 FOMC meeting.  Until last week’s release of the August jobs report, most analysts were convinced the Fed would begin tapering back its $85 billion monthly purchases of bonds at the meeting’s conclusion.  Now those convictions have softened, and analysts aren’t so sure.  A tapering of the taper is now in play.

Many believe this revised outlook regarding what happens at next week’s FOMC meeting is responsible for the upside action in stocks this week.  Others are convinced the reduced threat of immediate U.S. military involvement in Syria is the primary catalyst.  A few are confident it’s all due to great fundamentals, and the bears are just shaking their heads in disbelief.  Meanwhile, stocks are marching higher with the Dow above 15,000, and the 10-year Treasury continues to find support each time its yield gets near 3%.

Investor Heat Map: 9/11/13

Sectors

All Sectors strengthened over the past week.  Technology continues its leadership position on the back of strong moves from networking, internet, and semiconductor stocks.  Industrials surged from sixth to second place as shipping and small cap stocks within the group moved higher.  Health Care is in third this week with biotech companies providing much of the thrust.  A strong showing from steel, coal, and miners helped the Materials sector move up to fourth.  Consumer Discretionary posted good results for the week, although it lagged many other categories and slipped two positions to fifth today.  Energy lost two notches from a relative strength perspective even though the energy services industry was among the week’s top performers.  Financials shifted from negative to positive momentum while keeping its seventh place spot.  Real Estate narrowed the gap between itself and Utilities, but it still resides at the bottom of the stack.

Styles

All eleven Style categories are in the same exact relative order as a week ago.  There are changes in the complexion of the rankings though, as the four categories with red negative momentum scores in our previous update have changed to green.  Small Cap Growth managed to extend its lead over second place Micro Cap, and in a rare occurrence, both are posting higher momentum readings than all Sectors.  Most of the higher ranked categories are at or near all-time highs, and last place Mega Cap is within a couple percentage points of making that claim.

Global

Most investors are aware of the strength in U.S. markets this past week, but the real action was in foreign markets.  In our last update, only four Global categories were registering positive trends.  Today, it’s unanimous with all eleven on the upside.  China is on top again and is far out in front of the pack.  Much of the world remains in fear of a slowdown in China’s growth, but equity prices have shaken that off the past two months.  The Eurozone portion of Europe and the U.K. produced identical scores a week ago and are repeating that arrangement today.  Fund flows are typically a lagging indicator, and the numerous reports on outflows from Emerging Market funds this year would indicate many investors have missed the huge rally of the past two weeks.  Emerging Markets posted a 40-point momentum improvement and jumped from tenth to fourth today.  Pacific ex-Japan climbed two spots as World Equity and Canada slid.  The U.S., which was on top eleven weeks ago, dropped four more spots to tenth.  Latin America has been mired in the basement for months, but it has rallied strongly so far in September and could soon push the U.S. to the bottom.

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.

 


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Amy Smithson, chemical weapons expert at the James Martin Center for Nonproliferation Studies


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