Here is a quick reminder. Here are the closing values of key macro indicators at the end of Q2 2006: Crude $73, US 10 Year 5.14%, Gold $613, Nat Gas $6.13, S&P 500 1270 and DXY (dollar index) $85.
Interestingly, key macro indicators have not changed dramatically in the past year. In fact, crude, 10 year yields, gold and natural gas are very close to July 2006 levels. What is different? SPX rose significantly higher as the Dollar declined. Of course, higher stock market with weaker dollar is nothing new. An inverse relationship- which goes back to late 2002, illustrated again so far this past year. Therefore, overall big picture themes are in tact. Although, weakness in financials, especially in REITS and lenders became apparent in part I of 2007. Other key themes include: reacceleration of emerging markets, (specifically China) and increase volume private equity deals. Nevertheless, markets are complacently awaiting a trend shift. Current conditions favor a recovering dollar, correction in China, and continued downtrend in credit related themes.
At this point, the S&P 500 is poised for minor corrections. Momentum showing signs of stalling, as signaled by recent highs of 1540 on June 1, 2007. Perhaps, group selection is wiser than setting targets for the index. In any trend shift, there are opportunities in US technology themes which continue to offer attractive entry points.
MACRO REVIEW:
Crude: Expecting stabilization around $70 level. Once again, geopolitical factors sparking higher price movement. Last summers high of 77.95 a level to watch.
US 10 Year Yield: Consolidation phase around the 5% level.
Dollar: Signs of recovery that began on April 27. Bottoming process favors an upside bias for year-end.
Gold: Attempting to recover with first support at $640.
Natural Gas: Near-term, signs of bottoming closer to $6.50.
Review of key themes:
- Technology Emergence: Continue to favor semiconductors. SMH (semi etf) 6+ month of consolidation. Setting up for a recovery.
- Financial Weakness: As observed in the first half, downtrend should continue in most groups. Following any oversold bounces, further declines ahead especially in areas associated with "credit" risk.
- China extended: At these escalated levels, it is worthwhile trimming. Extremely overbought stocks are in commodity related groups.
- Media/ Telecom: A promising theme showing signs of sustainable uptrend. Accumulate on pullbacks.
As July 4th approaches, my warmest wishes to all Americans, those sharing American values and soon to be Americans. Specifically, for those dreamers, who work hard and find ways to create capital. Happy 4th!!!
