Tug-of-War

Market Commentary: It’s a classic market tug-of-war. Pulling on one end of the rope is a weak US economy caused by a steep correction in real estate, illiquidity in portions of the credit markets, and nervous consumers. Pulling on the other end of the rope are the booming international economies, especially emerging market nations, with insatiable demand for raw materials, finished goods, and everything in between. Like most tug-of-wars, there is much back and forth action. The concerns about the US are trying to pull the global equity markets down while the optimism surrounding the global growth story pulls the markets higher. The current earnings announcements drive this point home as company after company shows sluggish domestic results coupled with strong international results.

The domestic bond market is taking its cues from the domestic side of the equity tug-of-war. Concerns about a weakening US economy have driven the 10-year Treasury yield down to 4.33%, its lowest close since September 10, and its second lowest close in more than two years. Futures traders now place the probability of a rate cut next Wednesday at 100%.

Sectors: Our top three sectors, Technology, Materials, and Energy have their own mini-rotation going as they take turns providing the upside leadership. This week we have Technology on top as Energy backed off on apparent profit taking when crude oil briefly traded above $90 per barrel. The weak get weaker with Financials and Consumer Discretionary once again displaying negative trends.

Styles: Not much change in our style rankings this week, but the negative market action caused all categories to lose absolute strength. The market continues to favor Growth over Value.

International: China is distorting the results displayed on our charts below. The China market is so strong that it dwarfs otherwise very strong readings for Emerging Markets, Canada, and even the Technology sector. That is one of the advantages of including absolute strength information instead of simply producing a list in order of relative strength. It makes it obvious where the real strength (or weakness) resides and its magnitude.