11/30/11   Central Banks Around the World Step In

Editor’s Corner

Investor Heat Map: 11/23/11Central Banks Around the World Step In

Ron Rowland

If you have an incurable disease, your only option may be to treat the symptoms and hope for the best.  This seems to be the strategy underlying today’s coordinated central bank action.  The U.S. Federal Reserve and five other central banks reduced their already-low overnight dollar swap rates to a near-microscopic level.

The main beneficiaries are foreign banks, which have a new and cheaper source of short-term liquidity.  A side effect is that the Fed is now lending dollars to non-U.S. banks at a lower rate than it makes cash available to domestic banks.  This oddity will likely be resolved with a lower Discount Rate, probably within days. 

Such decisions are not made in a vacuum; recall what happened in the last week.  The Fed announced a new bank stress test program, a German government bond auction failed, S&P downgraded the entire banking sector, Moody’s cut its outlook for the U.S. and downgraded France, the congressional Supercommittee failed to reach a deficit-reduction agreement, Chinese authorities reversed policy by cutting bank reserve requirements, and President Obama travelled to Asia before meeting European leaders in the White House.  Coincidence?  Probably not.  A plan of some kind is unfolding.  More surprises may be in store.

For the moment, stock traders seem pleased with events.  All sectors posted big gains on increasing volume.  We would note, however, that practically all of today’s gains came in the first half-hour and benchmarks were relatively flat for the rest of the day.  The S&P 500 is roughly back where it traded two weeks ago.  Long-term trend indicators still point down.  We don’t want to jump on this train, but we also would not recommend getting in its way.


Defensive sectors still rule our rankings.  In fact, Health Care moved up to third place, so now the group occupies the top three spots.  Consumer Staples is on top with an RSM of 2, slightly ahead of zero-momentum Utilities.  Everything else remains in a downtrend.  The middle of the pack continues to consist of Industrials, Consumer Discretionary, Technology and Energy, though relative positions shifted around a bit.  Materials and Telecom are still lagging, although Financials still owns the bottom.  Major players like Bank of America (BAC), Morgan Stanley (MS), and Goldman Sachs (GS) have had trouble building on Monday’s opening pops as analysts remained bearish on banks worldwide.


Not much changed in the Style rankings since last week.  The chart is still ordered roughly by capitalization, from large to small.  The glaring exception is Large Cap Value, which improved but is still in the bottom half, perhaps because it includes most of the larger Financial sector stocks.  Large Cap Growth is in first place followed by Mega Cap.  The Small Cap categories and Micro Cap occupy the Style basement.


Our Global rankings have a snaggletooth look this week with the top and bottom extremes both significantly separated from the others.  The nine in-between categories have a generally linear falloff.  The U.S. is in the lead.  A negative 12 momentum reading is hardly reason to brag, but U.S. equities remain preferable to other world stock markets.  Latin America, which was #2 last week, tumbled all the way to seventh place as Brazil and Mexico were walloped.  Canada kept sliding and is now only one notch off the bottom.  To no great surprise, Europe still sits on the bottom.


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.

“At present, there is no need to offer liquidity in non-domestic currencies other than the U.S. dollar, but the central banks judge it prudent to make the necessary arrangements so that liquidity support operations could be put into place quickly should the need arise.”

Fed Statement, November 30, 2011


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