Is That All There Is?
Dow 10,000 didn’t last very long. Equity markets around the globe are declining this week, which should surprise no one since the benchmarks were overextended by almost any measure. So far the decline is not as severe as the June/July pullback, a consolidation from which stocks rose nicely. Will the same happen this time? Thus far we have not seen the kind of trading volume or panic selling that characterizes a bottom. This suggests that some of the support levels created in the last three months could be taken out. However, bargain hunters could step forward at any time.
With a few prominent exceptions, Q3 corporate earnings have been ahead of expectations. Profits still look better than revenues at many companies, which indicates cost-cutting is responsible for much of the earnings growth. Since costs cannot be cut to zero, companies eventually have to grow their sales. This will be the focus going forward, we suspect, and it will prove to be a much bigger challenge. In any case, the good earnings now seem to have elicited a “buy the rumor, sell the news” response. Or, more pessimistically, we could characterize the reaction as “Is that all there is?”
Tomorrow brings the preliminary report for Q3 Gross Domestic Product. The consensus estimate is for 3.2% growth, though Goldman Sachs revised its forecast down to 2.7% today. Any positive number at all would break a streak of four quarters of a contracting economy. Prospects for the next quarter look less rosy: consumer confidence broke sharply lower in October, while retailer holiday sales forecasts are looking bleak. Wal-Mart (WMT) is said to be planning very aggressive price competition in certain segments, which will be good for those consumers who actually have money to spend but not so great for Wal-Mart’s suppliers.
The U.S. Dollar is in rally mode while stocks are falling, which is probably not a coincidence. However, the dollar bounce is still just short-term in nature. Long-term downtrends remain in place. Interest rate trends are pointing higher but not strongly so. The ten-year Treasury yield challenged resistance in the 3.5% area before pulling back, closing today at 3.41%. A record $41 billion auction of five-year notes today drew the strongest demand in two years, finishing at a yield of 2.39%. The government is still having no difficulty financing its debt, perhaps because so many investors feel they have nowhere else to go.
Last week we noted the rapid climb of Energy in our sector rankings. As expected, Energy took the top spot but is now correcting along with the rest of the market. Materials dropped to second place as its momentum score was cut nearly in half over the last week. Technology moved up to #3 as it weathers the storm somewhat better than other sectors. Telecom is now in the red, showing a negative intermediate-term trend.
All the Style categories were hurt by the equity correction. The tight range between categories led to a lot of shifting around in the relative rankings. Growth has slightly overtaken Value in the Large and Mid Cap groups. Mid Cap Growth is now on top. Mega Caps got up off the floor and are now sixth on the list. This category includes many huge global businesses that are regarded as “safe havens” for stock investors in difficult times. This aspect of Mega Caps seems to have overcome the negative pull of the stronger dollar. Micro Caps stayed weak and are now on the bottom of the list.
The dollar rally has been especially hard on international investments. The extra boost provided by currency appreciation the past few months turned into a double-whammy on the downside, with every benchmark we track losing momentum since this time last week. Latin America and Pacific ex-Japan are in a virtual tie for first place. These two have been trading off the lead for several months now. China climbed from #9 last week to #4 this week. Resource-heavy Canada fell hard as both commodity prices and the stronger Canadian dollar worked against it. Japan is still on the bottom and slipped into a downtrend.
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.
“If you stand up and be counted, from time to time you may get yourself knocked down. But remember this: A man flattened by an opponent can get up again. A man flattened by conformity stays down for good.“
Thomas J. Watson, IBM President
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