09/26/12   Blame It On …

Editor’s Corner

Ron Rowland

The S&P 500 has pulled back about 2% in recent days and is off less than 3% from its 2012 intra-day high.  However, investor skittishness and media headlines would have you believe it’s been a catastrophe.  As always, the fear mongers want you to think this is the start of the end of the world.  Yes, it’s been a couple of months since the last 2% pullback, but let’s be realistic.  Investors should expect such an event nearly every month.  It’s the months without one that are truly rare.  Every bear market begins as a pullback, but not every pullback begets a bear market.

Every little market blip seems to require an explanation, although there often isn’t a logical one.  Laying the blame on Europe is in vogue these days, and with rioting in the streets of Spain and Greece, it’s an easy story to sell.  Austerity is a hard pill to swallow, and if U.S. citizens are faced with the cutbacks many European nations are considering, then rioting in our cities could soon be front page news.

Investor uncertainty is also bandied about as a reason for market pullbacks and volatility.  Uncertainty is slow to change, making it unlikely to provide much in the way of a real-time signal, yet much emphasis is placed on this amorphous condition.  We’ve been facing a large amount of uncertainty all through the recent market rally.  Concerns about the election, the fiscal cliff, Europe, and the economy have been there all along, not just in the past week and a half.  This makes it tough to lay the blame at uncertainty’s door. 

Something that has actually changed recently is companies issuing warnings about upcoming earnings reports.  Despite the two-week slide in oil prices from above $100 to below $90, transportation companies like FedEx (FDX) and Norfolk Southern (NSC) lowered guidance.  Caterpillar (CAT) cut its long-term profit forecast.  A new earnings season is just around the corner, so more warnings are possible.  Meanwhile, Apple (AAPL) set new sales records for its iPhone 5, selling out over the weekend.  Simultaneously, many analysts expressed disappointment with those results, expecting more from Apple.

Investor Heat Map: 9/26/12


Sector performance was wildly divergent the past week, leading to a new relative strength alignment.  Only three sectors managed to post gains, and two of them were rewarded with top echelon rankings.  Telecommunications takes over the #1 spot, leaping from the #6 position.  Higher speed networks are boosting mobile data usage, which in turn is boosting carrier revenues.  Telecom was easily the top performer of the week, handily beating second place Health Care and trampling all the others.  Health Care was the other category rewarded for turning in good one-week results, jumping from seventh to second in the process.  Consumer Discretionary also improved its standing, although not in as impressive a manner as the top two.  Instead, it moved up a notch to third by merely keeping its losses smaller than most other sectors.

With the top three positions now occupied by fresh names, the former residents were forced to evacuate.  Energy, which sat in first place a week ago, is now down to fourth.  The drop in crude oil prices is starting to take its toll on energy equities, but they are still showing gains for the month.  Materials dropped two spots to fifth, while Financials tumbled from second to sixth.  Technology also slipped and has moved back down into the lower half of the sector rankings.  The bottom three spots remain occupied by Consumer Staples, Industrials, and Utilities, with Utilities still the only category registering a negative trend.


The Micro-Cap group continues to display the lowest correlation among the Style categories with its movements somewhat out of sync with the others. This week, it completes its ascent through the rankings, where it went from last to first in only three weeks.  That is an impressive accomplishment, but it can’t be seen just by looking at its individual chart.  Its relative strength is not apparent until you overlay its chart on top of the other Style charts.  The three Small Cap categories are still near the top of the rankings, with last week’s leader, Small Cap Value, now sitting in second place.  Mega Cap is trying to break up the Small Cap party by wedging itself into the #4 spot and ahead of Small Cap Growth.  The lower portion of the Style rankings are still a jumble of the Large and Mid Cap categories, although the Large Caps are on the verge of pushing all three Mid Caps to the bottom.


We’ve often said the “shape” of the green and red strength bars on our Edge charts tell a story.  Today, a quick glance of the Global Edge chart reveals a single leader, three laggards, and the vast majority hanging out in the middle.  There is still a range of results across those middle seven, but those differences pale when the other four are brought into view.  Europe has been the global leader for many weeks and still retains that role, but it is now facing a test as a new wave of civil unrest is gathering steam.  Canada still occupies the second slot, although it is quickly losing any advantage it held over the rest of the pack.  Short-term weakness in oil prices and the Canadian dollar could push Canada far down the list by our next update.

Global categories are weaker across the board as the recent rally shows signs of tiring.  Whether this is a quick pullback of the longer-term uptrend or something more serious, prudence dictates a watchful eye.  For now, benchmarks remain above their 50-day averages, which is often the first-line of defense.  The U.S. finds itself smack-dab in the middle this week, with developed markets generally ranked higher than the non-developed ones.  The laggards are once again Japan, Latin America, and China.  All three are clinging on to positive trend readings but could easily slip to the negative side.



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.


“Always borrow money from a pessimist; he doesn’t expect to be paid back.”



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