Market Commentary: The global sell-off accelerated this past week pushing all major equity benchmarks into deeply oversold territory. President Bush’s proposal for a stimulus package last Friday was met with a yawn from Wall Street. With US markets closed Monday, international markets took the reins and pushed the markets much lower. Tuesday was an around the world encore, and this time the US markets were open and could join in. Bernanke and crew sensed that something needed to be done. Before the market opened, they announced an emergency reduction of 75 basis points in the Fed Funds rate to 3.5%. The Fed action seemed to help mitigate the damage, but there were still signs of panic selling once trading began. Wednesday’s action started off looking like a repeat of Tuesday – down big at the open followed by a feeble rally attempt throughout the day. However, the rally caught a good tail wind mid-day, and the US markets staged one of their best days since November.
The big question is where do we go from here. Many benchmarks have already reached bear-market status by declining 20% or more. The S&P 500 and Dow Jones Industrial Average have both avoided that moniker for the time being, but both have fallen nearly 19% on an intra-day basis from their October highs.
Equity market panic has been evident in the bond market as the 10-year Treasury yield plunged to 3.3% this morning, before closing at 3.43%. In the past 45 years, there has only been one month, June 2003, where the yield was lower. It might actually be longer than 45 years, but our data source only goes back as far as 1962. There are few guarantees when it comes to investing, but if you buy a 10-year Treasury today and hold it for 10 years, you can pretty much guarantee that you will only get 3.4% per year, before taxes and inflation, for the next 10 years. The Fed Model, as maintained by Ned Davis Research, now shows stocks undervalued by 51%, the most undervalued level on the chart that begins in 1981.
Sectors: The defensive sectors remain on top of our relative strength rankings, but they were caught up in the selling this past week also. The Utilities sector is usually thought of as an “interest-sensitive” sector. When interest rates decline, yield seeking investors often buy utility stocks as an alternative. However, that was not the case this past week as even utility stocks sold off sharply. The downside momentum for many sectors has now reached unsustainable rates, and an oversold rally has likely begun. In the past few days, the short-term relative strength has been in favor of those sectors that have taken the worst beating this cycle – namely the Financials.
Styles: Nothing has changed on a relative basis. Growth is favored over Value and Large Cap is favored over Small Cap. On an absolute basis, all styles are suffering with many already in bear market territory. The July 2006 low for the Russell 2000 Small Cap Index failed to provide any technical support this past week, which makes the index vulnerable to another 10% decline.
International: International markets became extremely volatile this past week. The Hong Kong market underwent a 10% decline on Tuesday. Today, bankers in Hong Kong lowered interest rates by 75 basis points, matching the US rate reduction, and shares surged by 10%. Mainland China markets came under heavy selling pressure this week, pushing China to the bottom of our relative strength rankings. We will now see if today’s rally in the US markets carries over to the international markets.
Sectors: The defensive sectors remain on top of our relative strength rankings, but they were caught up in the selling this past week also. The Utilities sector is usually thought of as an “interest-sensitive” sector. When interest rates decline, yield seeking investors often buy utility stocks as an alternative. However, that was not the case this past week as even utility stocks sold off sharply. The downside momentum for many sectors has now reached unsustainable rates, and an oversold rally has likely begun. In the past few days, the short-term relative strength has been in favor of those sectors that have taken the worst beating this cycle – namely the Financials.
Styles: Nothing has changed on a relative basis. Growth is favored over Value and Large Cap is favored over Small Cap. On an absolute basis, all styles are suffering with many already in bear market territory. The July 2006 low for the Russell 2000 Small Cap Index failed to provide any technical support this past week, which makes the index vulnerable to another 10% decline.
International: International markets became extremely volatile this past week. The Hong Kong market underwent a 10% decline on Tuesday. Today, bankers in Hong Kong lowered interest rates by 75 basis points, matching the US rate reduction, and shares surged by 10%. Mainland China markets came under heavy selling pressure this week, pushing China to the bottom of our relative strength rankings. We will now see if today’s rally in the US markets carries over to the international markets.
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