After nearly seven weeks of uninterrupted advances, investors have been reminded what a down week feels like. We hesitate to call it the end of the bull market, a correction, or even a pullback. It’s simply a week with a loss. Afterall, the S&P 500 declined only 2.8% from peak to trough on a closing basis. You would think that fear mongers would require a larger hurdle before issuing cries of doom, but that didn’t seem to be the case earlier this week. Granted, not everything navigated the market action as smoothly as the S&P 500, but the index is still a pretty good average.
The Homebuilders sector is an example of how some industries had rougher rides than the S&P 500. The group was moving upward at a decent clip until Toll Brothers (TOL) issued an earnings report last week that failed to meet expectations. That took the whole group down, and swiftly. One popular ETF tracking the industry, iShares DJ US Home Construction (ITB), plunged more than 9% in the span of five days. Yesterday, an alternative view of the industry emerged when the Commerce Department reported a 28.9% surge in new-home sales. That same ETF promptly rallied more than 6% off its low.
Bond investors haven’t had much to cheer about this year, but all that changed the past week. The 10-year Treasury yield went from 2.05% to below 1.85%, prompting a 1.3% jump in iShares Barclays 7-10 Year Treasury (IEF) and a whopping 4.1% surge in Vanguard Extended Duration Treasury (EDV). Even gold bugs received a respite, as gold posted a 3% bounce over four trading days, although its intermediate-term downtrend still dominates the action.
Fed Chairman Ben Bernanke finished up two days of testimony to the Senate and House today. He reiterated the need for the Fed’s bond buying program but did acknowledge the concerns recently raised by some of his colleagues. He also weighed in on the sequester debate. Bernanke believes the cuts are ill-timed, and making them effective in the middle of a sluggish recovery could damage the recovery. He went on to say that where the cuts occur will have little impact on the economy compared to when they occur. In essence implying that politicians are debating the wrong issues.
The cuts imposed by sequestration will total $85.4 billion this year on the CBO’s baseline budget projection of about $3.6 trillion. In other words, it amounts to only a 2.4% cut. Nearly every American family and business has had to deal with larger budget cuts in the last decade. A 2.4% cut does not warrant this much attention. What’s all the fuss about, let’s move along.
The market lost momentum this past week, and it is clearly evident in the flattening Sector Edge chart. Industrials managed to stay on top, but it is being challenged. All three “defensive” sectors jumped into the upper portion of the rankings today as a result of keeping their downside action subdued during the turmoil of the past week. Consumer Staples surged from 6th to 2nd, Health Care moved up a notch to 4th, and Utilities lept from 9th to 5th. Hanging in at #3 is Financials, which only slid one position. Energy and Consumer Discretionary both fell hard this week and are now just below Real Estate. Telecom climbed out of the basement, and Technology held on to its 10th place spot. Materials fell three spaces to the bottom and is the first sector to flip over to a negative momentum reading.
The relative rankings in the Style Edge chart are nearly identical to a week ago, but the strength of each category has been cut nearly in half. The top nine categories are in the same order as a week ago, dominated by mid and small capitalization stocks. Mid Cap Value maintains the overall lead with six other classifications close behind. Value is winning out over Growth, but both felt some selling pressure during the week. The only change in the relative rankings was at the very bottom where Large Cap Growth replaced Mega Cap for last place. All eleven categories are holding above their 50-day moving averages for now, dispensing with any immediate concerns.
Last week, all eleven constituents on the Global Edge chart were posting positive momentum. Today reveals a much different story, with the majority now indicating they are in downtrends. Japan climbed four spots to retake the top position after giving up the honor for just one week. Pacific ex-Japan, last week’s leader, moved down just one notch. The U.S. also got pushed down a spot due to Japan’s resurgence. World Equity and EAFE round out the top five, and these five are the only ones still posting positive trends. There is an abrupt fall-off in strength between EAFE and 6th place Europe, as Europe and the euro bore the brunt of the past week’s negative market action. Emerging Markets, U.K., Canada, Latin America, and China joined Europe in flipping over to negative trends. Canada moved up two spots, and China now occupies the bottom. All categories listed below the U.S. undercut their 50-day moving averages in the past two weeks, but only Latin America has threatened to break below its 200-day average.