12/07/11   Europe’s Answer: More Meetings

Editor’s Corner

Investor Heat Map: 11/9/11Europe’s Answer: More Meetings

Ron Rowland

If more meetings with more people are the way to restore lagging economies, then Europe is on the right path.  An astounding number of committees, parliaments, panels, agencies, entities, and organizations are hard at work, talking longer and more intensely by the day.  Meanwhile, S&P issued a negative outlook on 15 euro zone nations based on the rising risk of recession amidst continuing market stress.

The U.S., for its part, took the ozone-unfriendly step of flying Treasury Secretary Geithner across the Atlantic to tell the Euro folks they should erect a “stronger firewall.”  Why he could not say this via e-mail is unclear.  Geithner also endorsed the Merkel-Sarkozy plan (now known as the “Merkozy” plan) to renegotiate the European Union treaty.  To us it all looks like yet another delaying tactic.  But of course, we weren’t invited to the meetings.

In any case, market action the rest of this week will depend on the outcome of various meetings.  Thursday brings a European Central Bank policy meeting and subsequent press release.  This will be its second announcement since new president Mario Draghi took the ECB gavel.  Analysts expect another rate cut to build on November’s surprise action.

EU heads of state will then gather in Brussels.  We are a bit concerned about expectations for this summit meeting.  More than a few analysts think the politicians finally “get it” and will announce real, meaningful plans to end the Euro debt crisis.  If the summit ends with more vague promises, market reaction could be severe.


Our sector rankings look radically different this week.  The sharp rally that began seven market days ago has pushed all ten major sectors to positive intermediate-term momentum status.  Even the beleaguered Financials sector is sporting green this week, although it does remain on the bottom of the list.  Sector leadership has also shifted with Industrials and Energy essentially tied for the top spot.  The defensive trio of Consumer Staples, Utilities, and Health Care held the top three positions last week but have now slid to third, sixth, and seventh respectively.  Extreme volatility levels suggest additional shifts by next week.  The bottom of the list has so far remained unchanged with Materials, Telecommunications, and Financials occupying that ground.


Our Style rankings did a wholesale flip, going from all negative to all positive.  The relative rankings were rearranged as part of that process, and the tight range of momentum scores suggests further changes in the weeks ahead.  Last week’s chart ordering along capitalization size was thrown out the window this week.  The Large and Mega Cap segments, which held the top three spots last week, have now been pushed down to the middle of the pack.  The Mid Cap trio also relinquished relative strength and is now clustered near the bottom in the spots occupied by Small Caps last week.  Small Caps moved all the way up the ladder and now hold three of the top four spots.  One thing that did not change was the Micro Cap category’s relative ranking, which remains below all the others.


Unlike the Sector and Style rankings, where all categories have moved to the positive side of the momentum ledger, the Global categories are still a mixed bag.  A little more than half moved into the green, led by the U.S., which seems to be trying to distance itself from the others.  The three-way tie for second place is an odd mixture of the U.K., China, and the World Equity compilation.  Latin America and Pacific x-Japan also managed to edge themselves into positive momentum territory.  Despite the world wide focus on trying to save it, Europe remains stuck near the bottom.  Japan is now in last place, slightly below Europe, but it was not the result of weakness in Japan this past week.  Instead, it’s a reflection of the fact that Japan’s move off of the late November lows was very muted compared to all other 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.

“There cannot be a single currency without economic convergence or the euro zone will explode.”

Italian French President Nicolas Sarkozy, December 2011


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