10/22/14   Market Mood Swings

Editor’s Corner

Ron Rowland

A week ago, the market was in the midst of a panic attack.  The Dow plunged 460 points intraday, the flight to safety pushed the yield on the 10-year Treasury below 2%, and the VIX (aka the “fear index”) spiked above 31.  Fear gripped the market as economic growth forecasts were lowered and the CDC’s press conference on Ebola made the agency appear unprepared.

The ensuing four days can aptly be described as euphoric.  After months of saying it would end its bond-buying in October, the Fed hinted it could potentially extend the program.  Since many analysts believe the Fed’s stimulus is responsible for most, if not all, of the stock market’s rise the past two years, the hint of more was interpreted with fervent bullishness.  On the health front, cooler heads prevailed as no new U.S. cases of Ebola were reported and the World Health Organization declared Nigeria free of the deadly disease.

Anyone that has been close to the markets for an extended period knows that markets will occasionally succumb to bouts of fear.  Markets can also become enthralled with a sense of euphoria.  However, rational thinking typically leads one to understand that these two extremes are neither healthy nor permanent.  Reality lies somewhere in between.

Housing continues to be closely watched and is again showing bullish signs.  The industry’s demise was a major ingredient of the Great Recession, making its recovery key to broader economic recovery.  Existing home sales reached a new high for the year in September, although they are still below the pace of a year ago and far below the levels of 2005 and 2006.  The median price declined for the month, but it is still showing year-over-year gains.  Mortgage application activity has picked up significantly with declines in the 10-year Treasury yield pushing mortgage rates lower.

Earnings season has been a mixed bag, especially in the semiconductor space.  A warning from Microchip (MCHP) a couple of weeks ago brought the whole group down.  Then Intel (INTC) produced solid results and helped ignite a rally.  This week, IBM Corporation (IBM) said its semiconductor operations were a drag on earnings and it was getting out of the business.  However, rather than selling its extensive chip fabrication business, it had to pay Globalfoundries $1.5 billion to take the business off its hands.  [Note to IBM: I would have taken it for $1.4 billion.]

Investor Heat Map: 10/22/14


Although stocks have rebounded strongly the past week, the defensive sectors still sit atop our intermediate-term relative strength rankings.  Utilities participated in the bounce, allowing it to stay on top for a second week.  Real Estate continued its recent climb, this week swapping places with Consumer Staples and placing itself hot on the heels of Utilities.  Health Care was the only sector to move from red back to green this week and held on to its fourth place ranking.  Financials kept its fifth-place spot while Telecom, Consumer Discretionary, and Industrials all climbed a notch.  Their climb was really the result of Technology falling three places.  The decline of Technology in the rankings may not be a sign of weakness but is more likely the result of a day or two lag in the sector’s bounce.  Materials and Energy posted some of the best one-week gains, yet they remain entrenched on the bottom.  Materials improved enough to make it appear part of the pack, while Energy still lags far behind.


Unlike the sector and global rankings that are displaying large spreads between the top and bottom ranked categories, the eleven style categories are all bunched together.  Only seven points separate the best from the worst as the previously dismal small cap stocks gain on their larger brethren.  Large Cap Growth and Mega Cap remain at the top, although they swapped positions this week.  Large Cap Blend held its third-place spot, while Large Cap Value was pushed three spots lower.  The Mid Cap trio grabbed these three positions, and although Large Cap Value was displaced in the process, the difference in their momentum values is insignificant.  The three Small Cap categories trail for now with Micro Cap on the bottom.


North America provided much of the leadership for the market’s bounce this week, and the U.S. was rewarded with a two-spot improvement to first place.  China’s performance was rather lackluster in comparison, yet it managed to keep second place.  Pacific ex-Japan got a three-day head start on its rebound, propelling it four places higher to third.  World Equity and Emerging Markets swapped places with the latter losing ground.  Japan avoided much of the drama and held steady in sixth.  Canada was a beneficiary of the Energy rebound and climbed three spots.  EAFE, the U.K., and Europe continue to lag with Europe sitting on the bottom for a third week.  Once again, the big mover for the week was Latin America.  It soared up the rankings the past weeks by bucking the overall trend and posting gains while the rest of the world struggled.  It continues to act contrary, and this past week that meant it plunged in the face of a global rebound.  It went from tenth to first in a span of two weeks and fell all the way back to tenth in just one week.  Petrobras (PBR), the Brazilian state-owned oil giant is the reason for the volatility and non-correlated moves.  Accusations of widespread corruption and a credit downgrade has pushed PBR more than 23% lower since last 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.


“This is a market that’s in suspended animation, even while risk markets are doing better today.”

George Gonclaves, head of interest-rate strategy at Nomura Holdings with regards to the Treasury market (10/21/14)


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