12/19/12   Countdowns All Around

Editor’s Corner

Ron Rowland

Americans, and even citizens in other parts of the world, seem to be fixated on various countdowns. Retailers are counting down the shopping days until Christmas.  Children are counting the same days, although they don’t refer to them as “shopping days”.  The annual countdown to New Year’s day has additional significance this year, as it coincides with the arrival of the Fiscal Cliff.  Arrival of the Mayan “End of Days” is also getting attention, although most of it of the tongue-in-cheek variety.  However, the purported demise does coincide with the countdown to the Winter Solstice and the official end of autumn.

Of these, the Fiscal Cliff is the one receiving the most attention from investors, and rightly so.  It is the one countdown that is most likely to influence investment returns.  Hope that negotiations are making progress has been the catalyst for market gains this week.  It’s not clear how much real progress is being made because both sides still seem to be doing more posturing than anything else.  For now, the market is getting enough satisfaction from “hope” to keep the gains going, but it will need something more substantive for upside action to persist.

According to some analysts, the various Quantitative Easing (“QE”) initiatives by the Federal Reserve will eventually lead to a dramatic collapse in bond markets and runaway inflation.  Whether or not that forecast eventually comes to fruition, it clearly hasn’t happened yet.  Gazing at a short-term chart of the 10-year Treasury yield might make one believe that bond market carnage is now underway.  Afterall, the yield zoomed from below 1.57% to nearly 1.85% in the span of only nine days.  However, looking at a longer period it can be seen that the yield has been at higher levels in all but three months this year.  Therefore, it would be premature to read too much into recent action.

Gold is another asset class that seems to be moving in a counter-intuitive direction.  Amid all the QE actions and the potential for inflation, the price of gold would be expected to rise, or at least remain firm.  However, it is doing neither, dropping each of the past four weeks and still off about 12% from its 2011 peak.

We wish each and every one of you a joyous holiday season.

Investor Heat Map: 12/19/12

Sectors

Most sectors participated in the market rally on Monday and Tuesday this week, which boosted their momentum scores and improved their overall health.  Industrials held the top position after taking it away from Consumer Discretionary just a week ago.  The Financials sector continued its recent climb, this week moving from fourth to second.  Materials also moved up two spots landing in fourth.  Signs of renewed growth in China is helping this group.  Health Care turned in a lackluster performance and fell three spots to fifth.  Another defensive sector also gave up ground this week as Consumer Staples dropped to seventh.  Shifting of relative positions in the lower tier helped Telecommunications move up to sixth and allowed Utilities to climb out of last place.  Relative winners always produce relative losers, and this week Energy and Technology drew the short straws.  Technology gained enough to erase the minus sign from its momentum score, but it is now the lowest ranked sector and the weakest of all 32 equity categories.

Styles

Value moved closer to gaining full control of the Style Edge rankings.  The Value categories now occupy three of the top four spots, as Large Cap Value moved up from sixth to fourth.  Mid Cap Value still rules the roost, although Small Cap Value moved up a notch and appears ready to mount a serious challenge.  As usual, the strength in Value translates to relative weakness for Blend and Growth.  All three Blend categories are one notch lower than a week ago, and the three Growth categories have been relegated to the lower sections of the rankings.  Mega Cap continues to be the overall laggard, although it did post good results in this week’s upward move.

Global

A week ago, we had a fairly linear decline in strength from top ranked China to last place Latin America.  This week, China and Europe are attempting to separate themselves from the rest of the pack.  China continues to be bolstered by the prospect that economic growth rates are stabilizing or improving.  Things are looking up for Europe, too.  S&P gave Greece an early Christmas present by raising its rating from “selective default” to B-minus, a six level boost.  The remainder of the Global categories have separated themselves into three bunches.  The first group consists of Pacific ex-Japan, EAFE, and Emerging Markets with only minor rearrangement in their relative positions.  Elections earlier today in South Korea produced that country’s first female president – conservative lawmaker Park Geun-hye.

The second group of bunched up categories consists of the U.K., World Equity, and Japan.  Japan also held elections recently, with voters putting Shinzo Abe in line to be the new Prime Minister.  Japanese stocks have been reacting very positively to the news, and the yen has been falling.  The bottom cluster once again consists of the three categories representing the Western Hemisphere.  Latin America jumped ahead of its neighbors to the north, removing itself from last place.  The U.S. and Canada are in a virtual tie for last place, but the hidden decimal places gives the U.S. a slight advantage and puts Canada at the bottom.

 

Note:

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.

 


“They seem to be so close that I’d be surprised if it fell apart. I think the likelihood is we will get an agreement.”

Senator Charles Schumer on Fiscal Cliff negotiations


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