Mixed Signals, Mixed Markets
Today we have mixed thoughts about U.S. stocks. Benchmarks continue to face resistance near the August/September highs. The good news is that this rally started lower and is lasting longer than the previous failed attempts. A period of sideways consolidation may help set the stage for a more sustainable breakout. Some higher volume would be nice, too.
Economic data also contains some glimmers of hope for bulls. Industrial production accelerated in September, as did retail sales. A 15% rebound in housing starts was also encouraging. We would note, however, that housing starts are not the same as housing completions. Housing sales are yet a different measure. Federal Reserve efforts to backstop mortgage securities are no doubt giving builders easier access to credit.
Easier credit, of course, goes hand-in-hand with inflation. Here, too, we see conflicting data. The Producer Price Index rose more than expected last month, but the Consumer Price Index had its smallest gain since March. Declining fuel prices and rental costs accounted for much of the improvement.
Enthusiasm for a near-term solution in the European debt crisis receded as leaders talked down an overexcited market. The next marker is this weekend’s summit meeting in Brussels. Our guess: it will end with more vague promises but no definitive agreements.
Bond markets are still reacting to every headline from Europe. Moody’s downgraded Spain’s long-term sovereign debt and threatened the same for Italy. Treasury yields in the U.S. stayed rangebound, with the ten-year rate floating between 2.10% and 2.26%. Gold prices pulled back a little but the long-term uptrend is in no danger yet. The Fed expects only moderate inflation, but markets seem considerably less confident.
Technology continued to assume sector leadership, padding the slight edge it scored last week. Disappointing quarters at Apple (AAPL) and IBM (IBM) seem not to be having much impact on other companies. Consumer Discretionary (which is arguably a better fit for Apple) moved into second place led by Amazon (AMZN) and McDonalds (MCD). Utilities and Consumer Staples also show positive momentum. Energy jumped to #5 – an impressive feat given that it was in last place only three weeks ago – and is on the verge of entering an intermediate-term uptrend. Telecom continued to slip and is now in 8th place. Materials and Financials remain the laggards, with the latter still entrenched in last place. A quarterly loss at Goldman Sachs (GS) is not a good sign for the big banks.
Relative rankings held mostly steady, but we still have a notable change. A week ago all eleven Style categories were in the red. Three have since improved enough to post positive momentum scores: Mega Caps, Large Cap Growth, and Large Cap Blend. We had a little churn in the middle of the pack as Small Cap Growth and Mid Cap Value swapped places. However, the top and bottom extremes are still anchored in place, with Mega Caps leading and Micro Caps defining the bottom. Growth is still strongly favored over Value at all capitalization levels.
The U.K. held on to first place with a small but slightly bullish RSM score. The U.S. is right behind and is also the only other global category in the green. Japan slipped back to 4th place with Yen movements offsetting changes in stock prices. Europe managed to stay in the middle of the pack despite growing “headline risk” and extreme daily volatility. Canada fell back to find itself surrounded by emerging markets categories. A plunge in the Canadian “Loonie” outweighed improvement in the country’s energy sector. China is still in last place as economic data lends support to projections of slowing growth.
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.
“Banks think the funding costs will go back to the way they were as if by magic. But they will not, not in my lifetime, because the implicit sovereign guarantee of banks’ balance sheets is gone.”
Simon Maughan, MF Global UK Ltd., October 19, 2011
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