Exceeded Expectations Trump Negative News


	Wednesday, April 23, 2008 *Editor's Corner* Exceeded Expectations Trump Negative News Ron Rowland The market responded positively to the latest earnings announcements and corporate guidance about the remainder of 2008. That is not to say that all the company proclamations have been good; just that the market has interpreted them as good. As we have been saying, it is not a matter of how good or bad the earnings are, it is how they stack up against expectations. With 183 of the S&P 500 companies reporting so far, the ratio of positive surprises to negative surprises is running 2:1. That ratio could change before earnings season winds down, and expectations for next quarter are always vulnerable to further downside revisions. For now, the market likes what it hears and has responded by moving up. Talk of possible Fed action has died down even though the next FOMC meeting is less than a week away. The current consensus is calling for a quarter-point reduction. Most investors are convinced that the Fed will eventually have to shift gears from fighting recession to fighting inflation. However, the timing of that shift is still a huge question. Executives from large financial institutions say some credit markets have improved, but they are still bracing for further defaults in retail mortgages. Sectors It was another stellar week for the Energy and Materials sectors as the global demand for natural resources story continued to play out. Crude oil hit the $119 level, making two-digit oil prices seem like a distant memory. The Technology sector made impressive strides this past week after Google (GOOG) vaulted back above $500 per share on better-than-expected earnings. Within the Technology sector, results from semiconductor companies have been mixed, while software and other subsectors have been overwhelmingly positive. Styles All style segments improved this week with little change in the relative strength rankings. Investors need to look beyond the name when it comes to style investing. ETF sponsors and mutual fund companies use widely differing criteria for defining "value" versus "growth" and "small cap" versus "large cap" stocks. Sometimes, the various segments move uniformly enough that these differing criteria do not produce a noticeable impact on performance. Other times, the distinctions can yield vastly different results between the various ETF and fund families. We use the Russell family of indexes in the creation of our style rankings. As such, the rankings for style-oriented ETFs and mutual funds from other index providers might be quite different. International All segments of our global equity rankings have positive intermediate-term momentum. Latin America continues to show tremendous strength and remains atop our rankings. China seems to have shaken its recent slump and continued to build on those gains today. If the trend continues, we expect the US to replace China as the weakest global market soon. Note: The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value. "Anyone who lives within their means suffers from a lack of imagination." Oscar Wilde (1854-1900) Playwrite, Poet Pick-of-the-Week Global Materials Growing: MXI Brandon Clay We are strongly influenced by a sector rotation mindset. In other words, we like buying strong sectors and segments of a market, while avoiding weaker areas. Historically, this has been a very successful investing strategy. As of yesterday, one of our paid strategies has enjoyed a 1,889% cumulative appreciation, while the S&P 500 has only risen 489% at the same time. We use this same technique for our Picks-of-the-Week. Since January 1, Energy and Materials have dominated the market. The S&P Energy SPDR (XLE) has risen +6.9% and the S&P Materials SPDR (XLB) has gained +5.8% (as of 4/22). At the same time Financials, Technology, and HealthCare have taken a bath losing on average -10.7% each (as of 4/22). You may have noticed many of our picks are from these stronger sectors. That's one of the reasons these picks are up for the year, while the rest of the market is down. And here's the best part -- you get these picks for no charge. We've been eyeing one area that looks ready for more growth. It represents the entire global materials sector. Moreover, it's been rising in our proprietary rankings for the past few days. It's the S&P Global Materials Sector Index Fund (MXI). As the name implies, S&P Global Materials Sector Index fund is a global ETF - including U.S. and international companies. Its major holdings are in BHP Billiton, Rio Tinto, Anglo American PLC, BASF and Monsanto. Each business is dependent upon commodities. As demand for mining and natural resources has risen across the globe, companies supplying these resources have risen accordingly. Businesses tied to the global economy have fared better than most -- especially since the U.S. slowdown. Here's what's happening in the sector... While banks shy away from mergers and acquisitions, Rio Tinto is doubling their bid for a land lease in South Africa. Rio continues meeting global demand for materials and eyes further growth in the sector. Even more impressive, diversified materials giant BHP Billiton has seen production increases in 12 commodities for the first 9 months of their fiscal year. This Australian-based mining company has ridden the coattails of strong commodity demand in the global economy. The trend is steadily rising. U.S. materials behemoth Monsanto recently authorized an $800 million share buy-back. This indicates Monsanto's bullish confidence in the sector for the near term. News items like this continue to bolster the materials sector in a flat market. Last week, the Global Materials Sector Index Fund broke above overhead resistance. MXI sailed through last October's high of $80.18 with ease. Right now, it seems to be giving investors one more chance to jump on board before going higher. MXI is poised to continue the strong uptrend in the next few weeks. If you're looking to build on your commodities holdings, look no further than MXI. All the best. Note: Keep in mind, the Pick of the Week is usually intended for aggressive investors. Don't risk money you can't afford to lose. You will need to decide when (and if) it is time to sell. 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