Market Thoughts: October 1, 2007

Quarter End:

As the third quarter comes to an end, for the most part macro themes remain intact. A historical quarter where Crude reached all time highs, dollar broke down to all-time lows and further strength in emerging markets. Not to mention, a volatile July/August, aggressive Federal Reserve tactics and deteriorating credit conditions. In short, plenty of action.

Q3 Results: S&P 500 +1.9%, Nasdaq +4% and Dow + 3.8%.

Looking ahead:

In looking ahead, the role of the Federal Reserve is a topic of heavy interest among participants. Despite declining volatility (VIX declined 54% since August 16) in recent weeks, there are uncertainties yet to be resolved. At the same time, commodity prices are overdue for pullbacks and Chinese stock market is extremely overbought. Nevertheless, there are opportunities for near-term traders and value for investors.

As the trading rule goes: Don't call tops or bottoms. Now, that's challenging for those trading Crude, Chinese markets and US dollar. In terms of Crude and China, both themes have worked despite several overbought signals in 2007. Since 2002, the Dollar is in a clear downtrend. Currently, the Dollar Index (DXY) is at new lows and no signs of promising recoveries.

At this point, betting on trend reversal has been a risky approach for quarterly ideas. However, the odds for reversals are increasing as global themes await external catalysts.

MACRO REVIEW:

Crude: Trading 2.6% below all-time highs set on September 28, 2007. Major support at $80 followed by $75. Overbought in the near-term.

Gold: Strength continues with positive momentum. 14% removed from historical highs (850 March 1980).

US 10 Year Yield : Attempting to stabilize between 4.40%-4.60%. Short-term downtrend in place since peaking at 5.32% on June 13, 2007.

DXY (US Dollar Index): Breaking below all-time lows. Since Q1 2006, index has dropped 16% and no major signs of recovery.

S&P 500: Extended in the near-term. Expect further consolidation between 1480-1520.

EEM (MSCI Emerging Markets): Trading near all-time highs. ETF is up 357% since inception in April 2003.

Financials:

Financials continue to underperform as the Fed attempts to slow the downtrend. Yet again, can't fight the Fed, especially following aggressive rate cuts. That said, the current business cycle is less favorable, as fundamentals remain vulnerable. From a group standpoint, favor Insurance over Lenders and REITS.

Earnings Season:

In addition to macro factors, we are approaching earnings season. A period, that should set investors tone for the rest of the year. In the next 4-6 weeks, look for broad market consolidations as focus shifts to stock specific events.

Group/ Stock Review:

Telecom:

DOX (Amdocs ) Attempting to bottom between $34-37 range. Accumulate on weakness.

VZ (Verizon): Attractive entry point as stock continues its strength. Add on pullbacks with major support at $42.

Technology

For those seeking alternative ideas to energy related themes, there are areas in Technology offering attractive entry points.

NSM (National Semi): Holding above key support at $24. Poised for an upside surprise given recent weakness.

SNDK (Sandisk Corp): Continues to consolidate in the past 3 months. Appealing entry point given growing demand for flash cards and company focus on high margin products. Buying opportunity between $50-55.

Healthcare:

ABI (Applied Biosystems): Uptrend intact. Extended in the near-term. Buying opportunity between $31-33 range. Positive fundamentals with new product launch and projected revenue growth.

MATK (Martek Bio): Bottoming at current levels. Improving sales and expanding margins setting up for an upside move.

Staples:

WFMI (Whole Foods Markets): Bottoming since July 27 lows ($36). Following a 2 year downtrend, company is showing early signs of recovery.