US stocks remain firmly in first place among the five major asset categories Dorsey Wright & Associates analyzes on a relative strength basis. The International stocks category is second, followed by Bonds, Currencies, and Commodities. When Cash is added, it assumes the number five position just ahead of Commodities. The International stock category continues to separate itself from Bonds as bonds stagnate and international stocks continue to provide positive gains in 2013.
The CBOE Volatility index (VIX) closed at 12.42 this past Friday falling from last Friday’s close of 13.02. The VIX is an indicator of investor nervousness of future market changes, and the current reading suggests that the probability of a major market sell-off is subdued in the very near term. I must remind readers that the VIX is also one of the most volatile indices in the markets and can change sharply in a down market.
The Dorsey Wright & Associates analysis suggest that middle capitalization stocks are favored, as is growth over value, and equal-weighted indexes over capitalization-weighted indexes. Equal-weighted indexes are those where each stock in the index is weighted the same, while in capitalization-weighted indexes the larger stocks have the largest weighting consistent with their size relative to the other stocks. On a relative strength basis, the top three major economic sectors are: Consumer Discretionary, Financials, and Health Care. Financials and Health Care exchanged places since my previous Market Update and Commentary. Industrials remains in fourth position followed by Real Estate. Energy and Utilities are in the bottom two sectors. US Treasuries and International Bonds are favored in the Bond category, while US and Developed Markets are favored within the International stock category. Energy and Precious Metals are the favored sectors within the Commodity category.
The next two weeks will have a number of important economic reports. Housing will be the focus of next week, while Fed Chairman Ben Bernanke is expected to address Congress on February 26th and 27th, and the first revision of the 4th Quarter GDP report will be announced on Thursday, February 28th. Other key reports include the January Consumer Price Index (21st) and the February ISM Manufacturing Index (March 1st). As I noted earlier, the GDP report will be closely watched and a positive revision is expected. Other reports are not expected to show much change from previous readings.
My next Market Update and Commentary will be published in two weeks.