01/14/09   Waiting to See Who Goes First

Editor’s Corner

Waiting to See Who Goes First

Ron Rowland

Recent market activity resembles a giant poker game, with everyone “checking” when it is their turn to bet.  Nobody wants to go until they see what the other players do.  As much as investors would like to forget about 2008 and start a new game, it appears the market is not going to give us that option.  Today was something of a 4Q flashback as disappointing retail sales numbers spooked traders and pushed the benchmarks down to the lowest point since early December.
We have suggested this bear market will not end without at least one retest of the November 2008 lows; that process may now be underway.  The S&P 500 ticked as high as 943.85 last Tuesday (1/6) and as low as 836.93 today.  That’s a decline of more than -11.3% in the span of seven market days.  Clearly, the bear is still alive.  The short-term uptrends, developed off the November lows, were broken the last few days, and long-term and intermediate-term trend indicators are still firmly negative.  There will be a steady stream of 4Q earnings reports (or non-earnings reports, as the case may be) for the rest of January.  A few positive surprises would be quite helpful, but we have a hard time being optimistic on that front.
The announcement this week that Citigroup (C) will sell its Smith Barney brokerage unit to Morgan Stanley (MS) may mark the beginning of a major industry restructuring.  It appears the “financial supermarket” model is dead.  Banks are under pressure to focus on banking, so it will not be surprising to see more brokers cut loose from their formerly deep-pocketed parents.  That may sound like a good thing, but it happens just as investor confidence has taken a serious blow.  It is far from clear how many people still trust their financial advisors in the age of bailouts, bankruptcies, and Madoff.
Investors are still seeking safety above all else, which is one of the reasons Treasury yields are again falling after a brief respite around year-end.  The 10-year yield is back down in the 2.2% area after moving as high as 2.6% last week.  In their annual forecasts, many strategists suggest it may be time to look at investment-grade corporate bonds.  We would agree, with the caveat that only the highest-quality issues be considered – and that the rating agencies cannot be trusted after so many failures in 2008.  The same goes for municipal bonds, except that even more caution is in order.
Last week we expressed skepticism about the big jump Consumer Discretionary made in our sector momentum rankings.  Our doubts were justified as the sector fell more than 10% and slid down in our rankings as well.  Telecom moved up to second place, while Health Care and Utilities round out the top three.  Financials and Materials are still in the basement, with Financials enhancing their hold on last place.
A quick glance at the Style rankings reveals what looks like an 11-way tie for first place.  It’s true; all the categories are equally bad.  However, the fact that Large Growth is the best category and Large Value is the worst suggests that the relative positions are not especially meaningful at the present time.  On a related note, the “January Effect” of small cap outperformance may or may not be working, depending on exactly what time frame you consider and which benchmarks you use.  On a year-to-date basis, the Russell 2000 is lagging both the S&P 500 and the Dow.
China is once again proving itself to be the most volatile market on the planet.  It slid from the top of our rankings last week with an RSM value of +22 to just one step off the bottom this week with an RSM of -62.  Japan is once again in first place, relatively speaking, though like every other market it lost momentum in absolute terms over the last five days.  The USA moved up to third place, which is less reflective of any strength here than of even greater weakness everywhere else.   


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.

“Let them eat cake.”

Marie Antoinette


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