- “Extended” charts versus high bearish readings
- Rising 10 year yield
- Inflation concerns versus attractive equity valuation
- Favorable entry point in US Technology
Quick Summary:
Markets might appear extended but investor psychology remains negative. There are opportunities to profit in select themes. While adding stocks on watch list and trimming in select areas. Rising yields is a key macro event and inflation concerns are worth tracking. Continue to favor Tech, Media, Telco, and communication related areas.
Equity Markets:
March 2000 highs in the S&P 500 currently stand at 1552.87, as we closed few points away at 1536.34. In one sense, we have recovered back to those highs after seven years and serves as a “resistance” level. On the other hand, positive influences in the market continue to emerge. Similarly, there are opportunities in areas that peaked in 2000 ie. Large Cap Technology. Once again from a cycle perspective – Technology offers attractive ideas.
Currently, one might assume that the bearish camp is “sick” of fighting the tape but that’s not the case when reviewing sentiment data. Surprisingly, the bearish readings (according to AAII) increased to 48%. Also, Market Vane data points out over 65% bearish reading vs. less than 25% bulls. Therefore, despite what appears to be extended levels, psychological readings have a significant negative bias. I would use this opportunity to buy attractive themes.
At the same time, inflation risks are in the market place. Cost of borrowing is relatively cheap and a stock market upswing with declining currency can taint the euphorically bullish market. These arguments have been laid out by bears for a while and only time will tell.
Historical Perspective: The first week of June during the 3rd year of the Presidential Cycle is the strongest part of a strong month.
Bond Yields / Currency:
In the month of May, the US 10 year yield recovered significantly. A strong run from 4.64% while closing Friday at 4.95%. Similarly, the Canadian dollar surge along with the 10 year yield. An interesting correlation that is worth tracking. Perhaps, foreigners are switching out of the US 10 yr driving prices higher. Also, the marketplace might suggest inflation with the rise of yet another asset class.
US dollar holding in above a key long-term support level. Further weakness in the Yen as it made new lows. In other words, the downtrend continues.
Commodities:
Crude: Continues to face a strong resistance around $65. Outside of geopolitical forces, maintain a negative/neutral bias going into this summer. Looking for a recovery closer to $60. (near 200 day mva.)
Gold: Near-term entry opportunity closer to 660. Oversold in the near-term but not sure on the upside potential. Poised for recovery in the near-term w/ next exit around 680.
Financials:
REITS last week surged higher driven by takeout events. Regardless, continue to have a negative bias given the run up and lack of sustainability ahead. The faith is tied to macro events.
Again, not favorable to add at this point of the cycle.
Technology:
CSCO- emerging here at oversold levels.
FFIV- With all time highs at $160, stock continues it uptrend from a long-term view. Accumulate closer to $80.
JNPR- Breaking above $24 with next resistance at $28. Attractive entry point.
NT- Climbing out of $24 range with positive momentum.
NTGR-Although extended in the near-term, the longer-term outlook remains positive. Accumulate on pullbacks.
FDRY- Similarly, strong run recently with further pullbacks offering attractive entry points
COMS-Part of the networkers theme. Positive trend building despite choppy trading patterns.
Interesting Take:
This is the very first time in modern history that we've seen a prolonged worldwide interval of equity arbitrage. That's where you borrow money to buy equity, earning more from the equity than you owe in interest on the borrowed money. The arbitrage comes in three forms: corporations buying other corporations for cash, corporations buying some of their own shares for cash and private equity investors buying corporations using mostly borrowed money. The arbitrage has to do with the fact that the earnings yield on equities (earnings divided by price) is often more than the after-tax cost of money (which is, roughly, two-thirds of whatever your long-term interest rate is).
Ken Fisher 05.07.07 Forbes.com
