12/23/08   It Can’t Get Any Worse? Don’t Be So Sure.

Editor’s Corner

It Can’t Get Any Worse?  Don’t Be So Sure.

Ron Rowland

Since this Wednesday is an abbreviated market day, we are reporting to you a day early this week and next. Trading volume is down considerably this week and will likely remain so for the rest of December. This means it is probably a good idea to not jump to conclusions about whatever happens during this time. At this point, the large institutions are mostly finished with their year-end rebalancing and/or window-dressing. More meaningful activity will resume on January 2 and the following week.

This is also the time of year when the financial media barrages us with annual retrospectives and outlooks. Remembering 2008 is not exactly a pleasant activity for many people – but there is certainly much to review. Barring a huge Santa Claus rally, it appears the stock market is drawing to the end of its worst year since the Great Depression. In fact, any market statistic or economic indicator you care to name probably did something extreme this year. That is one reason so many people are hurting so badly. “It can’t get any worse” was a dangerous thought to have in 2008. It may be just as dangerous in 2009.

As noted above, market action right now may not be very meaningful. However, for what it’s worth, we will note that the S&P 500 rally ran into resistance at the 918 area and is once again in a short-term and intermediate-term downtrend. The benchmarks had risen nicely when President Bush announced an interim bailout plan for GM and Chrysler last week. That strength faded quickly. Analysts are beginning to conclude that bankruptcy is inevitable for these companies no matter what Washington does; even the Japanese automakers are starting to be hit by economic weakness. Consumers are pulling back fast and furious. It will be interesting to see how many retailers, having bet the farm on a good December, can survive to see February. We suspect some household names will soon close their doors.

The bond market continues to see huge volatility. To no great surprise, Treasury yields are bouncing a bit after dropping sharply in mid-December. We suspect rates will stabilize around current levels for a while, at least until the Fed begins to perceive inflationary pressure from all the stimulus activity. Ben Bernanke is happy for rates to stay where they are for the time being while he addresses the credit crunch through other means. Investment-grade corporate bonds are starting to get more attractive to investors who need to show more yield. We continue to view municipal bonds with suspicion: state and local governments are finding it difficult to cut expenses fast enough to make up for falling tax revenue.


Health Care is back on top of the chart, reclaiming its place from the resurgent Consumer Staples. Health Care, Consumer Staples and Utilities are still the best performing groups, though even they are in solid intermediate-term downtrends. Energy slipped back toward the bottom after making a brief trip higher. It appears that sub-$40 oil prices may be with us for a while despite the best efforts of OPEC to talk the market higher. Materials is still on the bottom of the list.


The “January Effect” seems to be getting underway with the Small Cap categories outperforming Large Cap on an intermediate-term basis. Small Value and Small Blend are now ahead of all three Large Cap categories. The absolute differences are not great, however, so it will not take much for the relative positions to again reverse in the next few weeks.


We hope you enjoyed the positive momentum score that China had last week, because it is gone now. China still remains first on the list but Japan has improved considerably, mainly due to strength in the Yen. In fact, action in all the international markets is being heavily influenced by currency movement right now. The dollar made up some lost ground the last few days but with short-term Treasury rates hovering near zero the broader trends are likely to favor foreign currency investments for the time being.


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.

“We have two types of forecasters. Those who don’t know – and those who don’t know they don’t know.”

John K. Galbraith


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