Market Observations - 10-29-2007

Weekly Results:

S&P +2.1%, NASDAQ +2.9%, Dow Jones +2.1 % Russell 2000 +2.8%, and MSCI Emerging Markets +4.95%.

Investment tactics:

Large cap growth remains a favorable area in US markets. Primarily, driven by Technology and Healthcare. At the same time, most 'value' related stocks are mostly in the struggling financial services. Participants are seeking new growth areas, as appetites shift away from commodity based and emerging markets themes. In the upcoming months, expect higher investor demand for quality and 'debt-free' companies.

In looking ahead, stock specific selection is critical at times of uncertainty. Theme based investment is relatively difficult given the various data points from earnings season and speculation on economic outlook. Nevertheless, long-term cycle favors a rotation into Technology, select Healthcare and "cash rich" companies.

Sentiment:

Overall there is general fear in the marketplace and signs of selling pressure. Relatively less fear than the previous week as put/call ratio declined to .81 and VIX (Volatility index) fell 14%. Meanwhile, percentage of bears, according to AAII rose by 35%. Mixed data indeed, but mostly bearish.

Credit Risks:

Financial companies unraveled additional weakness on their underlying balance sheets. Most news seems priced-in although fundamental weakness is difficult to ignore. That said, year-to-date shorting Financials has been profitable. At this point, an oversold bounce appears inevitable for most groups in the sector. Pending interest rate cuts can fuel a temporary recovery but sustainability remains doubtful.

Macro Takeaway:

In short, hard assets maintain their upside move as paper assets decline.

This showcases the multi-year trend of higher crude prices and lower US dollar. And in recent weeks, this trend has widened. An inverse relationship, that plays a significant role in global markets. Any directional shift should create volatility, since consensus strongly agrees with current behaviors. Although, betting against rising crude/lower dollar has not paid-off throughout the year, the odds of a reversal are yet favorable.

In terms of paper assets, Dollar recovery has not materialized. Expect early signs of bottoming as we approach year-end. A catalyst for a recovering Dollar includes actions from the European Central Banks. Primarily, a slowing economy in Europe can lower interest rates in the region. Eventually, this benefits the US Dollar on a relative basis as the Euro declines. Rather early but worth watching.

Macro Levels:

Crude: Next key resistance level is $92. That's the intra-day high from Friday. Momentum is extended from a near and long term view. Support levels include $85, then $80 (near 50 day moving average).

Chakib Khelil, Algerian energy minister, said: "The high prices are not coming from a lack of production." Venezuela echoed those comments. Financial Times 10-26-2007.

Gold: Stretched in the short-term. Next resistance is $850, all-time highs reached in 1980.

US 10 Year Yield: Attempting to bottom at 4.40%. Current trading range is in-line, with 4 + year moving average.

S&P 500: Holding above 1500 level, as index attempting to stabilize. Few points removed from all-time highs set on October 11 (1576). Expect consolidation between 1500-1540.

FXI (China 25 Index): October 17^th highs, ($218) is a key level for the index. Upside momentum is weakening. Index attempts to stabilize and retrace towards "rational" levels.

EEM (MSCI Emerging Markets Fund): Since August lows, index has spiked above 45%. Long-term data appears extended as optimism continues.

Stock Specific:

Healthcare:

MATK (Martek Bio): Bottoming with upside promises. Increasing revenue and launch of new products (includes a product to lower cholesterol) should continue the upside momentum. Technically, charts suggest an attractive entry point between $28-30 range.

CVTX (CV Therapeutics): Bottoming around $9, following a 3+ month consolidation.

SSRX (3SBIO): Leading Chinese biotech and company continues to increase its market share. Attractive entry point at $16.

Technology:

PAY ( VeriFone Inc): Solid fundamentals with positive momentum. Company continues to expand its leadership in wireless payment services.

MOT (Motorola): Showing strength following a 25% gain in the past three months. Strong base around $18.50/18. As analyst raise targets, shares remain attractive for next few quarters.

ORCL (Oracle): Appealing entry point near $20-22 range. Strong fundamentals with growth in software sales and revenues.

Consumer Staples:

CQB (Chiquita Brands): An agricultural theme that's poised for a turnaround. Buy point between $14-18 range and showing signs of bottoming.

Media:

DTV (Direct TV): Leadership intact in an emerging sector. Breaking out above $26 with appealing fundamentals.

Telecommunications:

VZ: (Verizon): Holding above $44, uptrend momentum in place. Any price declines can create buying opportunity.