1/6/16   North Korea Nuke Test

Editor’s Corner

Ron Rowland

It began this morning with a report of a magnitude 5.1 earthquake centered near the Korean peninsula. Soon after, seismologists claimed the disturbance appeared to be man-made and not the result of normal seismic activity. Indeed, the readings were very similar to prior nuclear bomb tests conducted by North Korea.

At noon local time, North Korea proclaimed it had successfully tested a hydrogen bomb. This marks the fourth time the country has conducted nuclear bomb testing. However, unlike the previous three occasions, this time they claimed it was the fusion reaction of a thermonuclear hydrogen bomb (“H-bomb”) instead of the fission reaction of an atomic bomb (“A-bomb”).

The difference is significant. Hydrogen bombs, also called “super bombs,” can be up to 1,000 times more powerful than the fission class A-bombs used to bring World War II to an abrupt end. Additionally, they are much smaller in size and are able to fit on the nose of an intercontinental missile. The world was alarmed to think such mass destructive power was now in the hands of Kim Jong-un, the young dictator of North Korea that seems intent on leaving his mark on history and not making any friends in the process.

Worldwide experts started voicing their skepticism about North Korea’s claim almost immediately. While they all seem to agree that a nuclear test was conducted, most do not believe it was an H-bomb because the resulting force was similar to the country’s previous A-bomb testing. It would be nice to know for certain whether or not North Korea now has an H-bomb, but the fact that it conducted a nuclear bomb test is reason enough for concern.

Market reaction was predictable. Stocks around the world traded lower again today, and the Dow Jones Industrial Average was down more than 300 points this afternoon after posting a 400-point intraday drop on Monday. Gold and U.S. Treasury bonds are in demand and moving higher today as investors seek a safe haven. So far, it has been a dismal beginning to 2016.

Investor Heat Map:1/6/16


Investor uneasiness, which has coincided with the annual calendar rollover this year, is evident in today’s rankings. All sectors posted noticeable momentum declines, and four of them slipped back into negative trends. There is little change in the relative strength ordering, as only Utilities and Consumer Staples swapped places. The rankings have a clear defensive bias. Utilities, Consumer Staples, and Health Care have long been the traditional defensive trio in the sector universe. Over the past decade or two, I have often remarked about the defensive characteristics and tendencies of Real Estate and Telecom. Today, these five constitute the top-five sectors, and they are the only five able to post a positive momentum score today. How’s that for a defensive bias? Technology, Financials, Industrials, and Consumer Discretionary were the four categories that moved back into the red this week. Materials and Energy continue to lag.


Four style categories also made the move from green to red, and that means all 11 styles now have negative momentum scores. The style rankings reflect a defensive bias, too, and they have for many months now. The blue-chip stocks of the Mega-Cap category have been at the top for 15 straight weeks. The three Large-Cap categories have occupied the second-through-fourth-place spots most of this time, indicating investor preference for the perceived quality and safety of larger companies. Mid-Cap Value and Mid-Cap Growth swapped position, leaving the three Mid-Caps in a virtual tie. In the lower rungs, Small-Cap Value and Micro-Cap moved higher, while Small-Cap Blend and Small-Cap Growth slid lower.


The three global categories that briefly popped onto the green side of the ledger a week ago have now slipped back to red. Pacific ex-Japan heads up the list by posting the least amount of negative momentum. This category has the majority (about 60%) of its assets in Australia, a country with a large base of natural resources. As such, it usually exhibits high correlation to the Materials sector. However, now is not one of those times; Pacific ex-Japan is on top of the global list, while Materials is second-to-last in the sector rankings. Last week, we noted that strength in the Australian dollar was a beneficial factor for the Pacific ex-Japan category. However, that benefit has now disappeared, and currency impacts are nearly neutral. Japan moved ahead of the U.S., but both are in the red this week. China was in the headlines as trading for 2016 got underway. China’s new market circuit-breakers were tripped on Monday when stocks there plummeted 7%. Trading was halted for the remainder of the day. Not surprisingly, China suffered the largest momentum drop of any category over the past week, although it managed to keep its slide in the rankings to just one position. The Eurozone also encountered weakness, and it is now tied with China. The lower categories all fell deeper into the red, and the bottom slot has now been occupied by either Canada or Latin America for 17 consecutive weeks.

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.


“You can’t be a real country unless you have a beer and an airline.
It helps if you have some kind of a football team, or some nuclear weapons,
but at the very least you need a beer.”

-Frank Zappa, musician (1940 – 1993)


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