10/07/09   So Much For Seasonality

Editor’s Corner

So Much For Seasonality

Ron Rowland

One of the many patterns that so-called “seasonality” traders try to exploit is the end-of-month rally. The last few days of each month and the first few of the following are generally positive for stocks. There is some evidence to favor this strategy, but “generally” is not the same as “always.” This time the last two days of September and the first two days of October were all down, and they added up to the worst four-day performance for the S&P 500 since July 8. The good news for bulls is that a subsequent reversal repaired much of the damage. The intermediate-term uptrend remains intact – for now.

One factor contributing to the downturn was the September payrolls report that was released on Friday. The national unemployment rate rose to a worse-than-expected 9.8%, and would already be over 10% if fewer people had not left the workforce. The economic recovery, such as it is, remains invisible to millions of consumers. This is a problem not only for them but for the businesses that would like to have them as customers, and for the banks to whom they owe money. We will see a little more clearly where we stand as earnings season unfolds in the next few weeks. Alcoa (AA), typically the first blue chip to release earnings each quarter, exceeded expectations by reporting a small profit after the close.

There was much activity in the currency markets the last few days. Reports that oil-exporting nations want to be paid in units reflecting a basket of currencies rather than the U.S. dollar were quickly denied by all concerned, but the dollar nonetheless fell hard on the news. Meanwhile in Australia, one of the few developed nations to avoid recession, the central bank actually raised interest rates. This move was also not helpful to the greenback. On the other hand, the dollar appeared to find some short-term support, so maybe the selling was overdone.

While all this was happening, gold popped higher to a new record of almost $1,045 per ounce today. Whether the breakout is sustainable remains to be seen. Gold bugs point out, correctly, that on an inflation-adjusted basis gold is still far below its historic peak. The bearish response is that there are few signs of inflation anywhere in the economy right now. Also curious was a bond-market rally that pushed the ten-year Treasury yield as low as 3.106% last Friday morning, with a close today of 3.175%. Near-simultaneous rallies in both gold and bonds are unusual, but that is exactly what has happened since early August. One trend or the other is likely to give way soon. If we had to guess, we think the uptrend is more likely to continue in gold than bonds. This doesn’t mean a bond crash is imminent, but further gains from this point are hard to imagine.


All sectors lost absolute strength this past week. Materials held on to the top spot again, but Technology moved ahead of Consumer Discretionary to take second place. Consumer Staples climbed two rungs of the ladder. With the devastating plunge of September 2008 now having dropped off, the one-year return has turned positive for most sectors. The biggest exception is Financials, which remain negative despite a ridiculous triple-digit gain in the last seven months. This is a good illustration of some math that investors too often forget: the percentage gain needed to recover a loss is far greater than that of the original decline.


Mid Cap Value moved back ahead of the more volatile Micro Caps by losing less in the last week. All the Mid Cap categories are now above Small Caps, but the rankings are very compressed with only 16 points separating top from bottom. Mega Caps are in last place with Large Caps just slightly better.


Latin America was the only one of our 32 categories to actually gain momentum this past week. Brazil rose nicely as Rio de Janeiro got the nod to host the 2016 Summer Olympics, the first time for the games to be held in South America. Pacific Ex-Japan held up relatively well and received a boost when, as mentioned above, interest rates went higher in Australia. Recent weakness in Japan pushed their equity market into an intermediate-term downtrend. A strong Yen is working against the export-dependent Japanese economy. The U.S. remains in the bottom half of the international markets .


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.

“The possession of gold has ruined fewer men than the lack of it.”

Thomas Bailey Aldridge


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