10/17/12   It’s Still Early

Editor’s Corner

Ron Rowland

It doesn’t matter whether you are a bull, a bear, or even a chicken.  Whatever your current view of the market is, you can find data to support it.  The largest tug-of-war at this time is the bullishness of the Fed supplied liquidity versus the bearishness of third quarter earnings reports.  We’re still in the very early stages of earnings season, with less than 15% of the S&P 500 companies reporting so far.  Expectations are low.  Perhaps pessimistic is a better term.  Unfortunately, most companies are succumbing to those lowered expectations.  Upside surprises have been few.

Construction is perhaps a bright spot, as builders continue to post better-than-expected results.  Today’s housing report for September showed housing starts and building permits at four-year highs.  Additionally, permits posted the largest year-over-year increase in 29 years.  Unfortunately, when viewing these data points on long-term charts, this “huge” upturn loses its ability to impress.  Sadly, while 872,000 annualized housing starts may be a four-year high, it corresponds with the lows established during downturns of the past five decades and is 60% below levels of seven years ago  There is still a long way to go.

Technology represents the other extreme with seemingly every company reporting so far disappointing analysts.  Declining revenues for Intel (INTC) and International Business Machines (IBM) appear to be indicative of the entire group.  Upside surprises, if they do come, could ignite a fire under some market segments.  If you thought all the bad news was already baked into current stock prices, then today’s 5% plunge in IBM might alter that perception.

The Consumer Price Index jumped 0.6% in September, although most of that increase was expected.  On a year-over-year basis, the CPI is up just 2.0%, which happens to coincide with the Fed’s long-term target.  However, bond investors are starting to get nervous.  The 10-year Treasury yield rose from below 1.63% to over 1.81% the last three days.

Investor Heat Map: 10/17/12


Health Care widened its lead over the other sectors and is sitting at an all-time high.  Financials continued to climb in the rankings, moving up a notch to second place, as the executive shake-up at Citigroup (C) doesn’t seem to be having any negative effect on the sector.  Telecom was in first place two weeks ago but has now slipped to third.  Japan’s Softbank sees value in the sector and has struck a deal to become the new majority owner of Sprint Nextel (S).  Consumer Discretionary held on to its fourth place position and is getting a boost today from the latest housing report.  Materials and Energy swapped places with Materials now showing a slight advantage.  Consumer Staples and Industrials continue to lag.

The bottom of the list has changed.  After months of being on the bottom, the Utilities sector has moved up a rung on the ladder.  The basement now belongs to Technology.  The semiconductor group has been dragging the sector lower for months, and today IBM is the downside culprit based on its latest earnings report and guidance.


The Large Cap categories are spread across the rankings today.  Large Cap Value controls the top spot for the second week in a row, while Large Cap Blend is three notches lower in fourth, and large Cap Growth is yet another three notches down in seventh.  The strength of Value over Growth is now more evident with Mid Cap Value moving up three places to second.  Small Cap Value slipped to eighth, however, so the alignment is not perfect.  The former Mega Cap and Micro Cap leadership fell a little further down the list with Mega Cap landing in third and Micro Cap in fifth.  The bottom portion of the rankings has a decidedly Small Cap tilt, with various Small Cap categories occupying three of the bottom four slots.  Small Cap Growth being in last place brings a sense of symmetry to the rankings because first place is held by Large Cap Value, from the opposite corner of the style box.


China has quickly and quietly climbed the full length of the rankings, rising from last place to first in just three weeks.  Although it has been showing good strength, its quick ascent was aided by recent weakness in other parts of the world.  Europe, the former leader, didn’t fall far, landing in second place today.  Spain, Greece, and Italy are all posting outsized one-week returns, helping Europe maintain its above average ranking.  For many weeks, we’ve seen a clustering of five or six global categories constituting the “middle of the pack.”  The pack is now gone, and there is a gradual decline in strength across the next seven positions.  Pacific ex-Japan is at the forefront of this group, followed by an improved EAFE.  Canada fell from second to fifth, and Emerging Markets slipped to sixth. 

The next few categories were vying for the top position just a few weeks ago and now find themselves lagging all but a couple categories.  The U.K. is in seventh, followed by World Equity.  The U.S. lost the most relative strength this week, falling from fifth to ninth.  The bottom two slots remain the same with Latin America fighting to maintain its positive trend, while Japan remains the only category in the red.



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’m going home now.”

Felix Baumgartner from 128,000 feet, October 14, 2012


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