Even the Great Depression Had Tradable Rallies
In bull markets, prudent financial advisors warn their clients that corrections can happen anytime. Likewise, rallies can and do occur during bear markets. They can be quite impressive – some of the biggest short-term moves in stock market history occurred in the midst of the Great Depression. Just as it was generally a mistake to get out of the market when the 1990s tech boom hit a few bumps, it is highly risky to take the bait when the current secular downtrend reverses for a few days. Last week was a perfect example; light holiday volume and a few positive news stories allowed the benchmarks to move up sharply, only to break down again this week.
Economic indicators are still bad and in some cases getting worse. The “official” economist-judges have now determined that we have actually been in recession since last December. Why this surprised anyone is a mystery, but some people still took it as an opportunity to sell. Today’s Beige Book report from the Fed revealed economic activity slowed markedly in all regions since mid-October. Both housing and commercial real estate weakened considerably. This Friday’s unemployment report is the next big marker, and few analysts expect it to be encouraging.
There is one bright spot: the Fed’s latest effort to encourage mortgage lending seems to be bearing fruit, with mortgage rates down and applications up in the last week. Much lost ground remains to be recouped. As if on cue, many pundits in the last few days have pointed out that stocks tend to turn up well before recessions end. This may be perfectly true – but we have yet to see any signs that the economy has reached its bottom. Stocks could still have more downside from here.
Treasury bonds staged a huge rally in the last two weeks, with the longer maturities reaching record low yields. This is partly more flight-to-quality buying as other assets are liquidated, but it also suggests that Ben Bernanke’s determination to push rates lower is starting to work. Speaking in Austin this week, he boldly stated that the Fed itself will buy Treasury securities if necessary to achieve its policy goals. In the longer term the mass liquidity now being created will likely create huge inflationary pressure, but for now we would not stand in front of this train. At best, we see rates as generally flat to lower. Corporates and munis have improved somewhat but remain risky.
Telecom broke into the top three sectors in our ranking table this week as Health Care lost relative strength. Materials and Financials remain on the bottom. It is a sad commentary on the Financial sector that it still looks so dismal after a week when the nation’s largest bank, Citigroup (C), more than doubled in price.
There was very little movement in our style rankings this week. If one must be in equities, mega-caps are the ones to own right now, if only because they are plunging into the abyss at slightly lower velocity than other categories. Dispersion between many of the style groups is still very low, with the bottom six categories all within a few RSM points of each other.
China edged into the top three Global markets this week though Japan is still firmly ensconced in the first spot. The poor performance from the Materials sector is also seen in the international rankings. Notice how natural resource-producing regions like Canada and Latin America are at the bottom of the list, while net resource consumers like Japan and the USA are near the top. The plunge in oil and other commodity prices has clearly been beneficial in those places while hurting the producing regions.
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.
“Happiness is a Warm Gun.”
The Beatles (Lennon/McCartney), 1968
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