Market Review: 11-12-2007

Weekly Results:

S&P 500 -3.6%, NASDAQ -6.41%, DJIA -4.01% and MSCI Emerging Markets -3.28%

Last week, sellers took full charge driving indexes lower while increasing "fear" in the marketplace. S&P 500 marked its all-time highs on October 11. Since that period, the index has given up its gains and now is back to August levels. Of course, market indexes were overbought following a strong upside move from summer lows.

Despite anxious reactions and growing uncertainty there are opportunities for long-term investors. A stock specific approach can create buying opportunities on pullbacks. A broad market decline spooked investors primarily by negative news in the Financial Services. At this point, talks of "credit crisis" and a bullish uptrend are poised for short term pauses.

Sentiment:

Fear is taking hold. Clearly, the bearish sentiment rose at a significant pace. For example, AAII Bearish Index rose by 41% during the heavy week of sell-offs. Also, Volatility climbed by 23% as the VIX (CBOE Volatility Index) reached 28.50.

Clearly, there are downside catalysts such as slowing economy, weak consumer spending and yet, the further unraveling of financial services. Not to mention, escalating macro concerns froma weaker Dollar to uncontrollable geopolitical events. All these factors contribute for headline materials but don't necessarily resolve the challenges for those seeking profitable investments.

Looking ahead:

Given an increase in selling pressure, some value is being heavily discounted. Especially, in areas not related to Energy, China, and Emerging markets. For example, neglected groups in the US such as Communication, Networkers, Telco and Media can provide bargains for those willing to jump in early. Similarly, from a sector basis, Healthcare can offer sustainable opportunity for a 1-2 year range.

Credit Risks:

Credit crisis continues to linger and more downside/bad news is not out of the question. The weakness in Financials has materialized this year as participants agree that this cycle is topping. Some lenders and banks are bound to face fundamental pressure. Intervention by policymakers along with short-term bounces are not out of the question. Nonetheless, expect stabilization in investor sentiment and fundamentals especially at this point of the business cycle.

MACRO LEVELS:

Crude: Extended in the near-term with resistance at $98.10. The commodity is up more than 40% since August 22 lows.

Gold: Few points away from all-time highs reached in 1980. Gold is far removed from its 200 day moving average. (21%), which suggests sharp short-term declines.

US 10 Year Yield: Approaching key support level at 4.20%. Attempting to bottom after a 20% decline from June highs. Similarly, Yields declined sharply in the second half of 2006 and bottomed in the fourth quarter. Let's see if a similar pattern develops at current levels.

US Dollar (DXY): Yet again all-time lows reached on Friday. Downtrend intact with no signs of bottoming.

Natural Gas: Pausing after a strong run from $5.50 to $8.66. Long-term data suggests a favorable upside potential.

STOCK SPECIFIC IDEAS:

Consumer Staples:

ADM (Archer Daniels): Strength developing from recent lows. Companies strength in corn and soybean processing should offer promising returns. Accumulate near $38-36 range.

Healthcare:

CVTX (CV Therapeutics): Sales growth combined with cost cutting sets the stage for positive moves. Growing product mix can elevate revenues for next year. Strong buy point near $9 level.

Media:

DTV (Direct TV): Leadership intact. Add on any near-term pullbacks. Notably, growth in Latin America along with expanding cost structure can create further growth.

Technology:

HTCH (Hutchinson Tech): Positive fundamentals given recent margin improvements and expectations of a profitable quarter. (Q4). Trend remains positive above $25.

BRCM (Broadcom): Deeply oversold and approaching key support levels at $30. Attractive entry point given its promising fundamentals. Although stock recently disappointed, important to note that revenue is growing and core business remains solid.

FFIV (F5 Networks): Buy point near $32-34. Global growth intact as reflected in recent earnings and appealing product cycle heading into 2008.