Market Performance and Outlook: the Dance of the Stairsteps
Given all the turmoil we thought it might be time to pull together another graphically-based assessment of where the markets have been and where they might be going. So instead of putting our summry together with the regular market readings in the Readfest we'll try for a comprehensive review of the various marketspaces followed by our regular excerpt exercise. And as usual we'll start with the SP500, which we use as our benchmark for central tendencies.
BtW we won't necessarily be updating our Structure/Fundamentals/Technical/Sentiment framework because, for all practical purposes, what we had to say the last time is holding up pretty well. And you can consider our running posts as sitting within that context and updating it for currency as appropriate. Market Assessment: Running of the Bulls or Cusp Points ? In particular this post refreshes the technical assessment though they're consistent and implicitly refreshes the sentiment assessment. Which, just for the record, we consider much too optimistic but increasingly woven with fear.
Now as to the SP500 take a look at the composite chart at the right which puts 10-Day and 6-Months together. In the 10Day you can see where the Fed saved civilization for us philistines and speculators (we're just waiting for the pundits to start with the Sodom and Gommorrah metaphors). And then we started to slowly give it back. We've talked several times about the "SAVE" and the current Business Cycle so our views on the context should be pretty clear. What was interesting is that the stair-step we noticed and commented on in our last market post continues. The downtrend wasn't broken and the "rally" stopped right at the 50-day MA. A sign of at least profound uncertainty and perhaps weakness. Now in the prior two downsteps the "flags" were busted to the downside but not this time, not yet. Which means the running debate between the "there's lots more to come" school (ours) and the U-shaped mild recovery and late year uptick school continues to be played out on a daily basis. The upcoming Employment reports will be fascinating for, among other things, their impact on the outlook. For a comprehensive review of the overall economic situation try WRFest 30Mar08(Economy): GDP, Housing, HF, Oh My !.
BTW - we strongly suggest you keep reading, or at least keep skimming, to the other markets section where we discuss Interest Rates, Gold, Exchange Rates and the Oil's interactions and the risks of a dropping dollar leading to an unpegging by the major exporter nations. Which could add another big brick to the wall.
Market Comparisons
The composite chart at right compares foreign and US Markets to each other on a 6Mo and since Jan07 basis. Again it looks to us like the interpretation is pretty straight-forward, consistent with what we've been saying for quite a while AND indicates a change in the dynamics. The markets are proxied by ETFs though there's some currancy translatation issues if you want local returns but are Europe (IEV), Japan (EWJ), China/Asia (EPP), Emerging Markets (EEM) and the US (SP500, RUT, Nasdaq). The foreign/emerging bubble appears to be gone, markets are moving largely together but, as folks have been noticing, US relative performance ain't bad.
Sector Comparisons 
These two composite charts look at SP major sectors using ETFs as proxies again in two groups. The first those that had been performing at or below the general market trends and the second the sectors performing above. The sectors are Finance (XLF), Healthcare (XLV), Staples (XLP) and Discretionary (XLY) in the first composite, again on a 6Mon & Jan07toDate basis. Actually you see our themes playing out in a way. Nobody's really gone anywhere except Finance and Discretionary on the downside. Which gets back to what view of the outlook is priced in.
In the second composite the sectors are Technology (XLK), Utilities (XLU), Industrials (
XLI), Energy (XLE) and Telecom (IYZ). These are the sectors that have been doing relative better. Oddly in the last six months the only sectors doing worse than the SP500 are Tech & Telecom, though the latter has been in the dumps for a while. Everybody else except energy is flat but in the last six months even Energy is down. There are a bunch of pieces you need to put togther here by the way. If our thesis about worldwide linkages is correct sectors that benefited from globalization will show damage and perhaps more than expected, e.g. Industrials. And while we strongly believe that Energy and Commodities will be under imbalance pressures for a long time there's both a short-term speculative component and an intermediate developing country component that might take hits. As for the other sectors it's a worthwhile exercise to compare our GDP component work (More on GDP and Economic Outlook) to sector earnings and ask youself if the analysts expectations will hold up.
Other Markets
Now the overall situation is getting complicated, inter-linked and convoluted enough we'll also add in an overview of some of the other key market indicators: Interest Rates, Gold, Exchange Rates and Oil (though again we'll point out that the recent economic updates dive into the monetary indicators pretty deeply). The first composite chart is a 1-year look at 10-Yr Treasures (TNX) and the XAU gold indicator together. Notice that TNX has dropped precipitously while XAU has jumped in almost a mirror image. Part of that is inflation hedge as rates come down.
The other interesting comparison is between exchange rates and Oil. Here another 1-year
composite with the Euro/$ rate on top and the DJAID Oil index on bottom. The $ has fallen significantly and rapidly against the Euro as the interest rate differential between the Fed and the ECB has widened. Not a surprise - they're focused on inflation and we're focused on avoiding a Recession turning into something worse. But it is the biggest policy gap in a long,...long time. Gee, oddly as the $ gets cheaper Oil gets much more expensive. Wonder how that happens.
The biggest danger here is that the ME/Gulf states peg their currancies to the $ which is both costing them money, depreciating their investment returns and generating high inflation. If you haven't noticed rising food costs are generating accelerating unrest thruout the ME and the rest of the world. Similarly China keeps the Yuan pegged to the $ to help out its' export industries but as the result of all the money flowing into China inflation is getting pretty serious there to. If both these groups were to unpeg their currencies from the $, as many have urged them, you'd see a major collapse in it's value. And resultant huge pressures to raise interest rates to protect it. Which would in turn feedback and accelerate the economic downturn.
Whee, we'd have fun then !