Chinese Checkers

Last evening the Chinese government reported its economy grew at a faster-than-expected 11.1% annual rate in the first quarter. This would seem to be good news, but in fact Chinese stock benchmarks plunged in reaction. This was due to fear that authorities will raise interest rates to keep the economy from overheating. In yet another textbook illustration of how important China is to the global marketplace, stocks fell in Asia, then Europe, and finally in North America. By late afternoon, U.S. markets were off their morning lows but remained weak.

As ugly as today's opening hour was, in the big picture the benchmarks are still in a consolidation period. The S&P 500 easily held above the breakout line we mentioned in our last update. On the other hand, small cap stocks are failing to keep pace. The Russell 2000 Index challenged its February highs on Monday and again Tuesday but could not hold above that point. If the small caps cannot sustain their momentum, it calls the broad market rally into question. Nonetheless, it is encouraging that today's Asia breakdown did not lead to the kind of sharp sell-off we saw on February 27th.

Our new positions in the energy sector are down slightly but retain positive intermediate-term momentum, and they remain at the top of our RSM rankings. Fundamental news is also positive. Energy producers and energy service companies continue to report strong earnings growth. Though crude oil fell back below $62 today, a research report from Merrill Lynch forecasted rising demand in the coming months. Refineries are again operating at near-capacity as they gear up for summer gasoline production.