Ron Rowland
You’ve probably heard some news regarding Greece this past week. Indeed, the country has been stealing more than its fair share of headlines. While the banks and financial markets of Greece are on an extended closure, the rest of the world marches on. Well, sort of…
This morning, United Airlines, officially known as United Continental Holdings, Inc. (UAL), shut down all flights due to computer problems. A little while later, at around 11:30 AM EDT, the New York Stock Exchange (“NYSE”) halted all trading. Minutes later, the primary website of the Wall Street Journal was not functional. Were these three events just a coincidence, or the symptom of something more nefarious? The Department of Homeland Security claims they were indeed a coincidence and sought to reassure everyone that there was no evidence of a cyber-attack (at this time).
United Airlines and the Wall Street Journal were back in business by noon. Stocks were already down for the day and continued to trade on the NASDAQ and BATS exchanges while the NYSE was dark. Investors seemed to take the events in stride, as stocks drifted higher the next two hours. Then, when the NYSE missed its target time for reopening, the selling resumed. The NYSE did manage to reopen before the close, and it should give Greece at least a one-day vacation from being the world’s lead news story.
Chinese stocks were the darlings of world markets for the first five months of this year, but that has now changed. The SPDR S&P China ETF (GXC) peaked in late April, held most of its value into June, and embarked on a steep downtrend June 24. Today, GXC closed 25% below its April 27 peak. China A-Shares have been even frothier, with the Deutsche X-trackers Harvest CSI 300 China A-Share ETF (ASHR) zooming 48% higher for the year as of June 12, and then erasing 38% of its value in just 17 US trading days. Chinese officials are making public attempts to stem the selling, and some observers are classifying this as market manipulation. Whatever you want to call it, it is probably a source of consternation for index providers that recently decided to add A-Shares to their indexes.
Last Thursday, the Labor Department released its employment reports for June. For the most part, the reports reinforced the existing trends of moderate job growth and a falling participation rate. Employers added 223,000 jobs while 432,000 people left the workforce, pushing the unemployment rate down to 5.3% and the participation rate to a 38-year low of 62.6%. This gives the Fed additional data in support of its plan to start increasing interest rates this year.
The International Monetary Fund (“IMF”) has its own advice for the US Federal Reserve. The IMF cut its growth forecast for the US last month, and yesterday it warned the Fed will be putting the US economy at risk if it begins raising interest rates before 2016.
Today, the Fed released the minutes from the June FOMC meeting. According to the minutes, “Most participants judged that the conditions for policy firming had not yet been achieved; a number of them cautioned against a premature decision.” Weighing on this decision, members had new worries about Greece, which brings us back full circle to Greece.
Sectors
The sector rankings are moving toward a defensive stance. Health Care, Utilities, and Consumer Staples comprise the three classical defensive sectors – those which tend to perform the best on a relative basis during times of market weakness. For most of this year, the trio has not been acting as a group, with Health Care providing much of the upside market leadership while Utilities and Consumer Staples have generally lagged. That is now starting to change. Consumer Staples moved from fifth to fourth and flipped back into the green. Utilities, on strong market gains, soared from tenth to fifth and greatly reduced its negative momentum. This places all three of the defensive sectors in the top five. Consumer Discretionary and Financials are the other two sector in the upper tier as they continue to hold down second and third. Real Estate, soon to become an official GICS (Global Industry Classification System) sector, is also acting defensively. Following the lead of Utilities, it jumped out of last place to grab eighth. The improvements noted above resulted in all other sectors falling lower. Technology slipped one spot while Telecom, Industrials, Materials, and Energy all find themselves two spots lower than last week. Energy is back on the bottom, ending Real Estate’s 11-week occupancy of the basement.
Styles
The style rankings are showing little conviction in either direction. Momentum scores range from a high of 6 to a low of negative 7. This narrow 13-point difference between the two extremes is tighter than last week’s 21-point spread. Although short-term volatility has picked up, the intermediate-term data suggests a trendless environment. Small-Cap Growth moved up a notch to grab the top-ranked honors as Micro-Cap, the former leader, slipped to second. Small-Cap Blend held its third-place position, continuing the market’s current bias of favoring small capitalization stocks. This changes dramatically for the next three spots, which are now held by Large-Cap Growth, Large-Cap Blend, and Mega-Cap. Small-Cap Value was the casualty in this rearrangement, falling from fourth to eighth. Large-Cap Value, Mid-Cap Blend, and Mid-Cap Value bring up the rear.
Global
International markets are where much of the action has been this past week. Japan was successful in maintaining its status as the only global category in the green. However, that distinction is now in jeopardy as the Tokyo Nikkei Index plunged 3.1% overnight. The US and World Equity kept their second and third-place spots. A week ago, they were in a near tie with the three categories directly below, but those three increased their downside momentum substantially. EAFE and the UK both moved up as Europe dropped two spots lower. Europe and the next four categories are bunched together in a narrow range and are exhibiting strongly negative momentum. Pacific ex-Japan moved three spots higher while Canada improved by two. Emerging Markets slid lower, and the popular iShares MSCI Emerging Markets ETF (EEM) fell another 3.5% lower today, undercutting its December low. Chinese stocks are in the midst of a free-fall. The China category plunged from seventh to last in the rankings, and it now sports a horrendous -52 momentum reading, which implies its intermediate-term trend is declining at an annualized rate of 52% a year.