Market Commentary: Roughly half of the recent correction has now been recovered. This is called a 50% retracement and is considered typical action in financial markets. The recovery attempt stalled, or ran into resistance, late yesterday and today with many broad domestic market indexes trying to retake their 50-day moving averages. This is also considered typical action for financial markets. Volume has been lackluster during the two-week recovery, which tends to reinforce the stalling action. Volume is expected to start picking up soon as the seasonal slow period is now behind us. During the month of August, volume was a significant factor during the downswing and was noticeably light on the upswing. Now we will see what September brings.
The bond market is still mired in the process of sorting out the quality issue. There are still large pools of debt instruments labeled “unknown” with pricing that reflects that uncertainty. At the recent height of the liquidity crisis, it appeared that the only distinction being made was government or non-government. Now some level of order is being restored to some segments of the bond market. As a result, prices are drifting upward on lower quality bonds that can be separated from subprime slime. A Fed rate cut is being taken for granted later this month. This coupled with today’s release of the beige book pushed the 10-year Treasury yield down to +4.473% today, a new low for 2007.
Sectors: A 50% retracement is also common among sectors. However, we typically see a wider divergence of results here. Technology, Energy, Industrials, and Telecom are currently exhibiting a 50% or better retracement and are performing above average. The retracements for Financial, Consumer Discretionary, Health Care, and Utilities have fallen far short of the 50% mark, indicating significant weakness. These results are also reflected in our relative sector rankings.
Styles: The style segments have also had two weeks of recovery with non-uniform results. As indicated by our relative style ranking chart, Mega Caps and all forms of Growth have achieved a 50% retracement level, while the Micro Caps and Value have failed to do so.
International: The 50% retracement phenomenon is not limited to domestic markets. Most global markets have also traced a similar pattern the past two weeks. The most notable exceptions are Japan, which has fallen far short of the 50% level, and China, which raced to a new high more than a week ago.
The bond market is still mired in the process of sorting out the quality issue. There are still large pools of debt instruments labeled “unknown” with pricing that reflects that uncertainty. At the recent height of the liquidity crisis, it appeared that the only distinction being made was government or non-government. Now some level of order is being restored to some segments of the bond market. As a result, prices are drifting upward on lower quality bonds that can be separated from subprime slime. A Fed rate cut is being taken for granted later this month. This coupled with today’s release of the beige book pushed the 10-year Treasury yield down to +4.473% today, a new low for 2007.
Sectors: A 50% retracement is also common among sectors. However, we typically see a wider divergence of results here. Technology, Energy, Industrials, and Telecom are currently exhibiting a 50% or better retracement and are performing above average. The retracements for Financial, Consumer Discretionary, Health Care, and Utilities have fallen far short of the 50% mark, indicating significant weakness. These results are also reflected in our relative sector rankings.
Styles: The style segments have also had two weeks of recovery with non-uniform results. As indicated by our relative style ranking chart, Mega Caps and all forms of Growth have achieved a 50% retracement level, while the Micro Caps and Value have failed to do so.
International: The 50% retracement phenomenon is not limited to domestic markets. Most global markets have also traced a similar pattern the past two weeks. The most notable exceptions are Japan, which has fallen far short of the 50% level, and China, which raced to a new high more than a week ago.
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