Market View – October 22, 2007

Big Picture

The political climate combined with decisions by policy makers continues to heavily impact global markets. For example, recent geopolitical events sparked further upside move in Crude prices. Other policy related issues include: weaker dollar and upcoming actions by the Federal Reserve.

These factors can serve as downside catalyst especially at this junction of a bull market. Similar to July, markets made new highs and now are beginning to decline. Once again, 'credit risk' remains a downside catalyst while negatively impacting the financial services. Last week, companies in Financials continued to unravel fundamental weakness.

As we near key inflection points, fear sharply sets in, especially with cycle winners trading at escalated levels. Many global indexes continue to trade near overbought levels. Chinese markets are reaching "bubble –like" levels, which begs the question of a potential top. Even for aggressive risk takers, finding entry points with rational justification is becoming difficult. At the same time, there are opportunities to enter in "neglected" and undervalued areas.

Sentiment

Plenty of stock specific events especially with earning season. Meanwhile, the broad markets continue to witness rise in volatility. Noticeably, VIX (volatility index) rose by 29% this week as participants took profits in search of safety. Evidently, percentage of bulls dropped by 23% (AAII). Likewise, the put/call ratio reached 1.13 signifying overly pessimistic outlook.

Credit Risks

As seen in the summer months, credit risk is resurfacing and driving financials lower. Lenders and smaller Banks remain vulnerable based on weaker fundamentals and unfavorable business cycle.

Investment Strategy:

Technology: Select groups are favorable from a rotational perspective. Most stocks appear stretched in the near-term. Nevertheless, near-term declines can offer bargains. Given the sectors make up, stock-specific attributes are vital when seeking ideas.

Long Ideas: MOT (Motorola), BRCM (Broadcom), AMD (Advance Micro), and CSC (Computer Sciences).

Healthcare: Pharma is a theme that has underperformed in the past cycle. For value seekers several names present a timely purchase point. For example, PPH (Pharmaceutical Etf) is attempting to bottom at current levels ($78-80).

Long Ideas: CVTX (CV Therapeutics), IMGN (Immunogen Inc.) and WAT (Waters).

Financials:

Although selling appears overdone, use recoveries as shorting opportunity.

Short Ideas: DSL (Downey Financials), FED (First Federal), WFSL (Washington Federal) and AF (Astoria Financial).

Macro Levels:

Crude: Once again, making new highs. $90 remains a key resistance level. For those keeping score, the commodity has soared over 739% since lows in December 1998 ($10 a barrel). At this point, beyond supply/demand, the index is reacting more on speculation and geopolitical factors.

Gold: Reaccelerating with next key resistance at $850. Extended and poised for pullbacks. Next key support levels include: $755 and $730.

US 10 Year Yield: Attempting to bottom at current levels. Slightly below 4.40% a key support level in the past few years.

S&P 500: After peaking at 1555 in July, recently index paused at 1576. Intermediate-term data suggests further downside between 1500-1450 ranges given the overbought conditions.

FXI (China 25 Index): Due for pullbacks especially following a 90%+ gains since August 2007 lows. Index remains far removed from 50 day ($163.15). Overall, watch for sharper declines in the near-term.

EEM (MSCI Emerging Markets Fund): Extended momentum after a 3+ month surge. Watch for pullbacks near $140-144.