Actionable Market Themes: 6-25-2007

As the first half draws to a close, investors can reflect on key drivers of global markets. Crude, China and Credit.

Let’s start with Crude and China. Macro themes with long-term sustainability but poised for pullbacks especially given the current extended levels. For near-term market participants, betting against these themes can be rewarding along with a broad market corrections. Taking a step back, reminds of the bullish trend in emerging markets that began 4+ years ago. Although, the long-term trend remains positive for crude and emerging markets, current entry points don’t offer an attractive risk/reward. Evidenced further by the continuation of this uptrend in the first half of this year. Therefore, the overbought argument has strong legitimacy as we enter the third quarter.

Takeaway: Bulls in Crude and China can wait for better entry points or rotate to other areas in the weeks ahead. Also, REITS and Lenders are vulnerable to downside risk. Meanwhile, select segments in Technology offer attractive entry points.

Chinese markets are reaching escalated levels, as exhibited by several indexes including FXI, (China 25 Index) which has soared close to 30 % since April 2007. FXI is overbought following a strong run at 110 range. Index is up 100% since lows in June 2006. The “bubble” in Chinese markets resurfacing as the lofty movement is clearly reflected in the charts. In regards to FXI, look for near-term correction closer to 100.

Sell-offs in China, can serve as a catalyst for overall equity downturn. For near-term traders, PTR offers an actionable trade on the short side. This particular stock reflects both themes of extended Crude and Chinese markets.

Crude: Reaching close to $70 level, as the commodity remains extended. June 21 highs of $69.85 serves as key resistance level. Of course, news driven events can serve as a wildcard. Regardless, stabilization ahead between $69-64 ranges.

Gold: A 6% drop since April 20 2007 highs. Next support level is around $640. Intermediate-term perspective suggests further downside ahead before a recovery. Also, HUI appears few months away from bottoming.

Natural Gas: Following recent sell-offs, index trying to bottom around $7 range.

S&P 500 Index is up 26% since last summer lows. Tight range forming between 1500-1540 levels. Next downside levels -1480 followed by 1460. At these levels, many bulls should look to add. In the near-term, index remains neutral as sector rotations take hold.

10 Year yield: Expecting stabilization between the 5-5.20% range in the near-term with consolidations ahead.

US Dollar: Signs of recovery since April 27 lows. Bottoming process favors an upside bias for year-end.

Canadian Dollar: Part of the global resources theme that is overbought. Early signs of peak/pause in the near-term.

REITS: MSCI Reit index is down near 20%. Currently, reaching oversold territory. Use strength to sell or add to shorts. Once again, least favorite names include, SPG, BXP, HST and VNO.

The third key theme in the market place is credit risk. In terms of US markets, credit risk continues to resurface in the market place as seen by subprime weakness, overleveraged funds and excessive bad loans. This week headlines discussed the collapse of a hedge fund which can trigger fear and reiterate the status of pending credit risks. This theme should contribute to rotation out of financial related areas. Again, lenders and REITS are at further risk.

Lenders: Short ideas in FED and CFFN. Midwest lender CFFN elevated since 2001, showing signs of stalling as earnings came in weaker. S&L’s are vulnerable at this stage, along with FED a California lender.

Technology, Media and Telecom

A pending correction in emerging markets should not discount the attractiveness of US Equity in particular technology related themes. Groups which includes semis, telecom, networkers, comm equipment and media. Continue to accumulate in the Tech, as pullbacks offer entry points to a cycle theme. Early entry points can offer further rewards for the second half of 2007

MOT: Value play, in a trading range poised for a turnaround. Above $17 – stock remains attractive for near-term entry points.

Similarly, AMD: Deeply oversold, bottoming process continues and offers opportunity to buy. Looking at $18 as the next resistance.