Market Commentary: The stock market sell-off continues with little end in sight. Today the Dow and S&P 500 both broke below their August lows. Long-term trend indicators are beginning to turn decisively bearish, which may lead to even more selling pressure in the near future. Wall Street is increasingly shrill in its attempts to jawbone the Fed into a rate cut. Ben Bernanke does not seem inclined to accommodate; the much-heralded injections of liquidity in the last few days were really quite small. The Fed is still focused on getting inflation back down to its target rate of 2%. If that means a few more hedge funds have to blow up, we think Bernanke is prepared to let them do so.
Treasury bonds are quickly becoming the asset class of choice for legions of former equity investors. Anyone who needs liquidity right now has little choice but to get it by selling stocks. With no one willing to take on any kind of credit risk, the non-government bond markets have largely ground to a halt. The great fear now is that the much-publicized subprime problems are only the tip of the iceberg. The decision by a Chicago cash-management firm called Sentinel Management to suspend redemptions for its investors is causing open speculation that one or more money-market funds may “break the buck..” So far we see no hard evidence of such a thing, but it can’t be ruled out. Whatever the underlying fundamentals may be, financial markets are in a panic mode right now. People are doing irrational things, which means anything can happen. Cash is the king for now.
Sectors: Those sectors that were still holding slightly positive in our momentum ratings (Technology, Consumer Staples, Energy) turned negative over the last week but are still stronger than anything else. Financials and Consumer Discretionary, and to a lesser degree Materials, deteriorated further and maintained their rankings at the bottom of the list. Sector action continues to grow more and more characteristic of a defensive, almost recessionary equity market. If this trend continues, we would look for Technology to lose some of its strength while Health Care gains ground. Financials are now to the point that a recovery may take months or even years. Due to its large capitalization, this sector will act as an anchor holding back the cap-weighted market benchmarks for some time to come. The good news is that we will likely have more opportunity to add value through sector rotation in the coming months.
Styles: The picture grew increasingly bearish this week as Mega-Caps gave up their top ranking to Small Growth, which itself lost momentum in absolute terms. The blue chips had been the last refuge for equity investors; the fact that they are now breaking down suggests we may be getting close to a capitulation low. It does not necessarily follow that a recovery will quickly follow, however. At the other end of the scale, Micro-Caps slowed their decline a bit but remain in a firm downtrend.
International: Global markets turned further negative, with all except China now showing negative momentum. Even China is decelerating quickly and will likely enter its own downtrend soon. The good news is that the U.S. improved its relative position against other markets over the last week. The bad news is it did this only because foreign markets, notably Europe, Latin America, and Japan, were losing ground even faster than the U.S. The liquidity crunch is clearly global in scope, and we are learning that European institutions were apparently heavy buyers of U.S. subprime debt. U.S. investors looking for a safe haven are not finding it overseas.
Treasury bonds are quickly becoming the asset class of choice for legions of former equity investors. Anyone who needs liquidity right now has little choice but to get it by selling stocks. With no one willing to take on any kind of credit risk, the non-government bond markets have largely ground to a halt. The great fear now is that the much-publicized subprime problems are only the tip of the iceberg. The decision by a Chicago cash-management firm called Sentinel Management to suspend redemptions for its investors is causing open speculation that one or more money-market funds may “break the buck..” So far we see no hard evidence of such a thing, but it can’t be ruled out. Whatever the underlying fundamentals may be, financial markets are in a panic mode right now. People are doing irrational things, which means anything can happen. Cash is the king for now.
Sectors: Those sectors that were still holding slightly positive in our momentum ratings (Technology, Consumer Staples, Energy) turned negative over the last week but are still stronger than anything else. Financials and Consumer Discretionary, and to a lesser degree Materials, deteriorated further and maintained their rankings at the bottom of the list. Sector action continues to grow more and more characteristic of a defensive, almost recessionary equity market. If this trend continues, we would look for Technology to lose some of its strength while Health Care gains ground. Financials are now to the point that a recovery may take months or even years. Due to its large capitalization, this sector will act as an anchor holding back the cap-weighted market benchmarks for some time to come. The good news is that we will likely have more opportunity to add value through sector rotation in the coming months.
Styles: The picture grew increasingly bearish this week as Mega-Caps gave up their top ranking to Small Growth, which itself lost momentum in absolute terms. The blue chips had been the last refuge for equity investors; the fact that they are now breaking down suggests we may be getting close to a capitulation low. It does not necessarily follow that a recovery will quickly follow, however. At the other end of the scale, Micro-Caps slowed their decline a bit but remain in a firm downtrend.
International: Global markets turned further negative, with all except China now showing negative momentum. Even China is decelerating quickly and will likely enter its own downtrend soon. The good news is that the U.S. improved its relative position against other markets over the last week. The bad news is it did this only because foreign markets, notably Europe, Latin America, and Japan, were losing ground even faster than the U.S. The liquidity crunch is clearly global in scope, and we are learning that European institutions were apparently heavy buyers of U.S. subprime debt. U.S. investors looking for a safe haven are not finding it overseas.
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