12/16/15   The Experiment Is Over

Editor’s Corner

Ron Rowland

It all began seven years ago as an experiment in monetary policy. The experiment contained new, mostly untested, variables like zero percent interest rates and quantitative easing. Unlike scientific experimentation, which isolates individual variables and is performed in conjunction with control groups, the Federal Reserve’s monetary experiments were neither isolated nor controlled. Instead, it was a free-range experiment with multiple inputs (stimulus) being applied simultaneously and without a means to measure the effect of each.

Today, the experiment ended, or the most visible aspect of it anyway. Today, the Federal Reserve ended the zero-interest-rate policy portion of its grand experiment and moved the Fed Funds interest rate higher for the first time in more than nine years. The official target range on Fed Funds is now 0.25% to 0.50%.

The results of this seven-year experiment are unknown, although many Fed watchers may prefer to claim that the results are mixed. The new policies were among the most aggressive efforts the Fed ever undertook to spur a sagging economy, yet the post–Great Recession expansion has been the most timid ever according to many traditional measurements. Meanwhile, critics of the Fed’s plans and policies, who were predicting the experiment would end in financial disaster, didn’t get the results they were expecting either.

Another portion of the experiment is still underway. Quantitative easing, or the Fed’s injection of money into the economy through bond purchases, has not been unwound. The various versions of this policy ran the Fed’s balance sheet from below $1 trillion to more than $5 trillion in six years. Although the widely publicized “last purchase” by the Fed occurred in October of last year, nothing has been done to unwind those prior purchases. The Fed still has more than $5 trillion in assets, and the quantitative easing portion of the experiment will not be concluded until it disposes of those assets.

The Fed did a good job of telegraphing its intentions regarding this meeting. Therefore, initial market reaction was muted, and the initial upward move is being interpreted as a sigh of relief. Worriers will now fixate on what happens next. For its part, the Fed says it will take things slow and gradual.

Investor Heat Map:12/16/15


The quantity of sectors in an uptrend slipped from eight to three this week due to the recent market decline. The rally of the past couple of days has the potential to turn this back around, but for now, it is what it is. Consumer Staples ascended to the top and knocked Technology down to second after its seven-week reign. Real Estate jumped three places higher as it continues to cling to its last sliver of positive momentum. Health Care is ranked four spots higher than a week ago, but its green-to-red transition makes for a hollow victory. Consumer Discretionary, Financials, Telecom, and Industrials all find themselves lower in the rankings and now in negative trends. Utilities and Materials swapped places, although both continue to greatly lag the field. The sheer magnitude of Energy’s negative momentum reading sets it apart from the other ten sectors. Crude oil prices briefly fell below $36 a barrel this past week, a level considered unthinkable in 2008 when they were above $140.


Mega-Cap has now been at the top for a dozen consecutive weeks. It was deeply in the red when it arrived at the top at the end of September, as fear gripped the market and investors sought out the perceived relative safety of these huge companies. However, it did not relinquish its position when the market rallied in October, signaling that, although markets were moving higher, investors were still nervous and preferred the defensive characteristics of the Mega-Cap category. Large-Cap Growth is second, although its momentum is barely on the plus side of zero. Large-Cap Blend and Mid-Cap Growth flipped from green to red, and the seven categories previously in negative trends fell deeper into the red. Mid-Cap Value jumped from the bottom to seventh, placing all three Mid-Cap categories higher than the Small-Cap segments in today’s rankings. Micro-Cap, the smallest of the small, fell two spots to last place and punctuates the capitalization stratification apparent in the relative strength ranking.


A week ago, the U.S. was a small island of green floating atop a sea of red. It is still at the top this week, but it has now succumbed to negative momentum. The recent market weakness has truly been global in nature, as all 11 global categories are in steeper downtrends than they were a week ago. The selling has been relatively uniform, producing only minor changes in the ranking positions. Japan is in the #2 spot again and hasn’t been ranked lower than that for six weeks. World Equity and China swapped places, with World Equity gaining a slight advantage. The next five categories are in the same positions as last week. At the bottom, Latin America managed to move ahead of Canada. Weakness in the Energy sector continues to weigh heavily on Canada, forcing it back into the basement slot it held three weeks ago.

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.


“I guess the word is ‘finally’.”

-The first statement by an unidentified reporter at today’s post-FOMC meeting press conference.


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