13 Straight Weeks and Counting

Market Commentary: Equity markets rallied strongly this past week with an especially large move occurring last Thursday as the Dow posted a 283 point gain. Earnings season is in full swing, but it is too early to get a good read on the overall tone of the releases and the future outlook. Suffice it to say, the consensus expectation for lower year-over-year and quarter-to-quarter results will probably be correct, and companies will try to lower expectations for the second half of the year. The weekly see-saw pattern we are following has extended its run to 13 straight weeks by posting a gain these past five days.

The bond market is gaining strength, and the 10-Year Treasury yield dropped to 4.99% in today’s trading. Recent action might be considered a “flight-to-quality” in light of the continuing fallout from the subprime mess. However, the drop in the 10-Year Treasury yield only brings it back to its 50-day moving average, making it difficult to claim that Treasuries are truly benefiting from the subprime turmoil.

Sectors: Although portions of the Energy sector posted declines for the past one-week period, it wasn’t enough to prevent the sector’s momentum reading from increasing. We still have a major split between the “haves” and the “have-nots” on our sector rankings: Energy, Materials, Technology, Industrials, and Telecom are all in strong uptrends, while Financials, Utilities, Healthcare, Consumer Discretionary, and Consumer Staples are floundering. Bear Stearns told investors in its two failed hedge funds that there is little to no value left in those funds and that investors should expect little or none of their money back. This has been putting further pressure on the Financial sector.

Styles: While most market segments improved this past week, Micro-Cap stocks managed to lose some momentum. This had the added effect of creating a discontinuity in our style rankings. The drop-off in momentum as we move down the style rankings is relatively smooth with each successive category shedding just a point or two from the higher ranked style. That relationship holds true until we reach the last group, the Micro-Caps, where the difference is a full seven points.

International: Although the markets of China didn’t actually decline this past week, the gains were smaller than its recent trend, resulting in a small drop in the momentum reading back into the double-digit arena. Latin America had impressive gains, which helped propel the Diversified Emerging Markets category to new highs.