Market Commentary: The equity markets staged their best gain in years last week. However, in a demonstration of just how volatile these markets are, most of those record gains were wiped out in the first two trading days this week. The US dollar lost strength last week while gaining strength in the last three days. As a result, the volatility in international markets was magnified as viewed from the eyes of a US investor.
A consensus is building that the US economy will experience a recession this year or has already entered one. Whether or not a recession becomes a reality is probably a moot point. What is important to investors is the severity and longevity of any particular recession. Real estate, financial services, and retailing are segments of the economy that are clearly in a recessionary mode already. However, the market likes to look ahead, and if the market believes that the monetary and fiscal stimulus activities that are currently underway will help these sectors going forward, then it is possible that we are at or near an intermediate-term bottom in the equity markets. If the market believes that the stimulus will not work, and that problems will continue to spread to more sectors of the economy, then perhaps there is more downside yet to come. Many technicians believe that a retest of the January lows is now underway. If true, we will be anxious to see the results of that test.
Daily volatility remains at high levels in the bond markets as well. Still, the move pales in comparison to the equity markets and the extreme late January corrections in the Treasury markets. The panic low 3.3% yield on the 10-year Treasury has not been approached again, indicating that bond investors now believe the worst may be behind us.
Sectors: Last week’s rally was led by the beaten-down sectors, leading many to believe that much of the buying activity was nothing more than short-covering. The first few days of this week have tended to favor the defensive sectors once again. It stands to reason a change in leadership is not a given at this time. The Materials sector remains on top of our rankings and is trying hard to separate itself from the pack. The Industrial sector is picking up steam, thanks to a strong showing by the transportation industry.
Styles: Our current style rankings look like a complete flip-flop from just a few weeks ago. However, this could also be an oversold bounce of those styles that have been the weakest since the October high. Compared to our sector and global rankings, the styles are still relatively clumped together and have a higher probability of the relative rankings changing again in the short-term.
International: Latin America continues to be the global leader on a relative basis. The USA has climbed in the rankings due to the magnified volatility in international markets that we mentioned above. Canada continues to exhibit above-average relative strength, and some smaller countries, such as Malaysia, are also outperforming their peers.
Sectors: Last week’s rally was led by the beaten-down sectors, leading many to believe that much of the buying activity was nothing more than short-covering. The first few days of this week have tended to favor the defensive sectors once again. It stands to reason a change in leadership is not a given at this time. The Materials sector remains on top of our rankings and is trying hard to separate itself from the pack. The Industrial sector is picking up steam, thanks to a strong showing by the transportation industry.
Styles: Our current style rankings look like a complete flip-flop from just a few weeks ago. However, this could also be an oversold bounce of those styles that have been the weakest since the October high. Compared to our sector and global rankings, the styles are still relatively clumped together and have a higher probability of the relative rankings changing again in the short-term.
International: Latin America continues to be the global leader on a relative basis. The USA has climbed in the rankings due to the magnified volatility in international markets that we mentioned above. Canada continues to exhibit above-average relative strength, and some smaller countries, such as Malaysia, are also outperforming their peers.
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