10/12/11   Markets Steamroll Slovakia’s No Vote

Editor’s Corner

Investor Heat Map: 10/12/11Markets Steamroll Slovakia’s No Vote

Ron Rowland

Earnings season is officially underway.  Alcoa (AA) traditionally kicks off each quarter and did so again after Tuesday’s close.  The aluminum giant’s quarter came in well below expectations, but traders took the market higher today anyway, apparently hoping for better news from other companies. 

Market benchmarks are near the top of a 10-week trading range.  So far, we see nothing to suggest this rally is any different than four previous failed attempts.  Those, too, came on low volume and hopes for a European solution.  Monday’s sharp gains came on the lowest volume since July.  Tuesday’s volume was even lower. 

As for Europe, Slovakia is the last hurdle to passage of a new liquidity facility.  Approval seems likely after a change in government following the initial failed vote.  The more important news is that the previous agreement for banks to take a 21% haircut on their Greek bonds is shifting.  That number was always too low, as is the 30-50% range now being discussed, but market reaction suggests that traders expected far worse. 

Treasury rates and gold both bounced back.  The ten-year yield is above 2.2%, the highest since August, and gold is back above $1650.  Crude oil likewise moved back above $85.  Minutes of the September Federal Reserve meeting, released today, revealed a central bank open to further large-scale asset purchases.  A coincident jump in hard asset prices and interest rates indicates that further stimulus goes hand-in-hand with higher inflation risks.  Walking the tightrope between inflation and recession is taking much longer than Ben Bernanke and his crew imagined. 


In last week’s update we insulted the Technology sector’s ability to offer market leadership.  We are thus chastened and report Tech’s leap into first place among all 32 equity categories.  The reading is only barely positive but was enough to push Utilities down to second place for the first time since mid-August.  Consumer Staples is third and the only other category to show positive momentum.  The middle of the pack drops off quickly from almost even (Consumer Discretionary) to much worse for Industrials and Telecom.  Industrials was nonetheless much improved from last week, allowing Financials to retake its rightful place on the bottom of the pile. 


A broad-based rally allowed all sectors to strengthen a bit, or at least become somewhat less weak.  The relative rankings showed very little change.  Barring a market reversal, Mega Caps are on course to a positive momentum reading soon.  Growth edged back above Value in all three capitalization segments, though cap size is still by far the dominant factor.  Consistent with that theme, Micro Caps are still in last place.


In a scene from the nineteenth century, Britannia once again rules the waves.  Reduced pressure from the Euro set up a rally in the pound, which in turn let U.K. stocks rise nicely in dollar terms.  Our U.K. benchmark is still in a long-term downtrend, though, so this may be more of an oversold bounce.  Japan slipped to second place after showing muted participation in the rally of the past week.  The U.S. is close behind, but today’s action will probably push it ahead.  China kept up its reputation for volatility, jumping about 20% from the October 4 intraday low to today’s intraday high.  Even so, China funds are well below the August low points, and the category is still in last place globally.


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.

“It’s the entire Euro Zone system which is under threat at the moment, not just a few small countries anymore.”

Richard Iveta Radicova, [outgoing] Prime Minister of Slovakia October 11, 2011


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