10/15/14   Fear Grips Markets

Editor’s Corner

Ron Rowland

Stocks are down and bonds are up in a classic flight to safety.  Day-to-day volatility has increased significantly, and 200-point daily swings in the Dow Jones Industrial Average have become common.  However, being common does not equate to investor acceptance.  Instead, it has put investors on edge and made them even more sensitive and reactionary to news and market events.

Today, the moves became wilder.  The Dow started the day by quickly moving about 350 points to the downside.  It then reversed course and climbed 250 points almost as quickly.  With the first half hour out of the way, the Dow spent the next four hours slipping another 340 points.  At its nadir, the closely followed index was off 460 points, or about 2.8%.  Its ride wasn’t over yet, and it recovered 300 points to end the day down 173 points.

Meanwhile, money was finding its way into the safe haven of Treasury securities.  As the price of bonds goes up, their yields go down.  The 10-year Treasury yield was above 2.6% just four weeks ago and had been declining rather steadily to close at 2.19% yesterday.  This morning, demand for government bonds was so high that the yield plunged to 1.87% for a brief period.  It was the first time the 10-year Treasury yield was below 2% since June of 2013.  The CBOE Volatility Index, known as the VIX, was languishing below 15 a few weeks ago and has been in a three-year downtrend.  It closed yesterday at 22.8 as a result of recent stock market swings.  Today it briefly spiked above 31.

Plunging stocks, rising Treasury prices (with the accompanying falling yields), and a spiking VIX equals investor fear.  The fear subsided in the afternoon, and tomorrow is a new day.  Does it get worse from here or has the heart of the storm already passed by?  Only time will tell.

The impetus behind the selling came from multiple sources.  Global economic slowing seems to top the list.  Europe is once again back in the spotlight and possibly heading toward recession.  Oil prices have plunged.  We used to discuss whether oil was trading above or below $100 a barrel.  It closed today below $82.  Saudi Arabia has done the unthinkable by breaking ranks with OPEC and not cutting its production.

Today’s peak in fear seemed to coincide with the CDC’s conference call on the latest Ebola events.  Another health care worker has contracted the disease.  Disregarding guidelines against doing so, the worker flew on a commercial airline flight after having recently cared for an Ebola patient, although it was before exhibiting symptoms.  The CDC keeps telling us everything is under control, but investors become rightfully concerned when it appears otherwise.

Investor Heat Map: 15/15/14


If a chart of the Utilities sector was the only thing you could see, you wouldn’t know there was intensive selling in the broader market.  Despite the current negative sentiment on equities, Utilities managed to post a gain for the week, increase its momentum, and capture first place.  Consumer Staples, which is part of the defensive trio along with Utilities and Health Care, clung to its second place ranking.  Real Estate also bucked the negative trend by posting a gain for the week, flipping back to a positive trend, and climbing five places in the rankings.  Health Care didn’t fare as well as the other defensive sectors.  It gave up the first place ranking it held for six weeks, fell to fourth, and saw its momentum turn negative.  Financials held its fifth place position, while the selling in semiconductor stocks sent Technology down two places to sixth.  Telecom and Consumer Discretionary are both one place lower due to the rise of Real Estate, and their downtrends have accelerated.  The bottom three categories of Industrials, Materials, and Energy are the same as a week ago, although the magnitude of their negative momentum has intensified.  As a reminder, the -75 momentum score for Energy indicates its intermediate trend is declining at the rate of 75% per year.


Last week, Mega Cap was clinging to a small slice of positive momentum, but we cautioned that its status was in jeopardy.  Although it is still performing better than the other style categories, it is now firmly entrenched in the red.  The Large Caps kept their positions at the top of the rankings despite the acceleration of their downtrends.  Mid Caps still occupy the middle ground, but there was some shifting within the group.  The former lineup of Growth over Value has reversed for the Mid Caps and Small Caps, but it remains intact for the Large Caps.  In addition to the increased quantity of red ink, or red pixels if viewing online, there were shifts among the bottom four categories.  All four are performing poorly and are now registering momentum values between minus 34 and minus 40.  A week ago, Small Cap Value was the worst of the bunch, and today it has moved above the other three.


Latin America continued its rapid ascent through the global rankings and has now reached the pinnacle.  Its rise has been nothing short of remarkable.  It was in tenth place two weeks ago, jumped to sixth last week, and climbed to first today.  While most stocks around the world have been under severe pressure the past couple of weeks, Latin America has boosted its momentum and gained in value.  China keeps its second place ranking, while the U.S. lost its leadership role and fell to third.  Emerging Markets climbed two spots to fourth thanks to the strong relative showing of Latin America and China.  Japan dropped three spots to sixth even though its currency has gained strength the past two weeks.  Pacific ex-Japan climbed two spots and is close on the heels of Japan.  The U.K. climbed one spot, but it was Canada’s decline that paved the way.  Canada is typically highly correlated to Energy, and this is one of those times when its large exposure to the sector proves to be unfavorable.  Europe sits on the bottom again this week.


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.


“Only Thing We Have to Fear Is Fear Itself.”

Franklin D. Roosevelt


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