Market Themes – August 13, 2007

Market Themes – August 13, 2007

The last few weeks showcased that multi-year movements are nearing a trend shift. In the past 4+ years, investors have witnessed, a rise in Crude prices, low borrowing costs, low volatility and surge in global equity markets.

The last few weeks displayed the following:

Higher volatility

Credit risk unfolding

Crude retracing from overbought levels

Equity markets pausing

That said, the reshuffling process continues across various markets. Recent behaviors examined below:

Higher Volatility:

Another turbulent week, as the VIX (CBOE Volatility Index) continued to climb near 30. Index reached its highest level since 2003. Part of the volatility is caused by global headlines and actions triggered by Global Central Banks. Investors reacted to numerous data releases which in general, lead to mixed messages and confusion. Taking a step back, the 4+ year uptrends are being challenged. Therefore, it is natural to see higher volatility given an inflection point in the market cycle. Also, short-term trading faces higher risk tolerance as investors seek a comforting trend.

Credit risk unfolding:

In terms of credit risk, many themes reached oversold levels in the near-term. Although, financial themes such as Lenders, REITS, Homebuilders and Banks are attempting to recover in the near-term, sustainability is not clear. In other words, credit risk has not fully played out from a fundamental and cycle viewpoint. Of course, insider buying and corporate stock buy-backs can propel financials to slowly recover. From a long term view, current recoveries can be viewed as temporary relief.

Crude pulling back:

Since an August 1^st peak, Crude has declined over 10% and was down 5% for the week. At this junction, (outside of geopolitical events) long term charts are overbought and suggest further downside moves ahead. Downside pressures include: slowing demand and “priced-in” hurricane season. Finally, expect fund managers to unload long positions especially at current levels.

Equity markets pausing:

Clearly, few rough summer days ahead, especially for groups in the financial services. Further consolidation ahead as investors look for guidance from the Federal Reserve. As bulls and bears debate the broad market status, the next few weeks offer several opportunities. From a bottom-up approach, Healthcare, Media, Telecommunication and Technology present a buying opportunity: In the weeks ahead, markets are poised to favor risk-averse and low beta themes. Nevertheless, sector themes can be more rewarding given the current macro environment.

Macro Levels:

Crude: Further declines from August 1^st and all-time highs of ($78.70). First stabilization point in the near-term close to $70. Remains far removed from 200 day moving average with next support level closer to $65.

US 10 Year Yield: Settling near 4.80%. Deeply oversold between 4.60-4.80%. Expect near-term recovery.

Gold: Attempting to bottom around $660. Favorable odds for an upside move in the near-term.

S&P 500: Oversold in the short-term. Holding above 1440 - a key near-term level.

FXI (FTSE/China 20 Index): Following recent corrections, index is holding above $130 range.

OSX (Oil Service Index): Attempting to stabilize between 250-260.

BKX (Bank Index): Early signal of recovery between 104 -108. Key support level 101.48 (August 6^th lows).

ACTIONABLE IDEAS:

Healthcare:

JNJ (Johnson & Johnson): Offers a value and low beta idea in healthcare. Accumulate between $60-62 levels.

ABI (Applera Biosystems): Following multi-year underperformance, ABI is showing early signs of bottoming. Strength developing since May 31 lows. Accumulate on near-term pullbacks.

GENZ (Genzyme): Strong support level closer to $59-60 range. Despite negative headlines, stock is positioned for a long-term recovery.

ECLP (Eclipsys Corp): Positive momentum building. Stock presents an exposure to medical information group. Pullbacks near $20/22 level are worth a look.

Technology: Nasdaq has demonstrated relative strength versus the S&P 500 in the past 2+ months. Once again, use pullbacks as buying opportunity in select names.

BRCM (Broadcom) : Strength continues following a bottom on June 29^th. Add to any weakness as long-term picture looks appealing.

TLAB (Tellabs): Near-term oversold, buy point near $10.

PAYX (Paychex): Leadership in tact. Accumulate closer to $40 on any pullbacks.

EBAY (Ebay Inc): Pullbacks near $32-34 range offer buying opportunity.

SNDK (Sandisk): Further signs of strength. Trend remains

Airlines:

CAL (Continental Airlines): Deeply oversold and far removed from its 200 day moving average. Declines in oil prices and improving fundamentals suggest an attractive entry point at these levels.

Media:

GMST (Gemstar): Intermediate-term uptrend in tact. Approaching key support level around $5.50.