Market View: July 30, 2007

Market View: July 30, 2007

A long awaited pullback in equity markets unfolded last week with intense market reaction. A correction was inevitable, as investors looked for a macro catalyst to spark a directional shift.

Credit Risk:

Once again, credit related risk triggered sell-offs across the broad market. This should not be a surprising given the following recent events. Homebuilder peaked last year, fundamental weakness in lenders and financials were the worst performing sector in the first half of 2007. At this point, selling might seem overdone in the near-term. Overall, any recovery should offer opportunity to sell/short themes in financial related areas. At the same time, sell-offs across all sectors offers bargains in select places as investors reshuffle existing positions. Therefore, it is worthwhile to track emerging trends as new themes develop.

Big Picture:

Last week S&P 500 dropped 4.9%, along with a 7% decline in the Russell 2000 Index. These results can cloud investor’s minds and enable bears to chalk up the gloom and doom stories. Nevertheless, the flight to quality or the risk-aversion process is in full gear. Looking ahead, macro themes will continue to play a bigger role as the stock market consolidates. Crude and China, key macro indicators are worth tracking in the upcoming weeks. In both cases, a strong performance in the first half of 2007 while being stretched at current levels. Importantly, investors in these themes are looking for a long-term payoff and not necessarily concerned with near-term behaviors. In this case, both are poised for at least minor pullbacks. Especially, at a time where global assets are near elevated levels. Perhaps, the risk of holding these assets are not attractive as they used to be. Simply, we are at an inflection point of the cycle.

Themes and Groups:

A quick reminder, the next few weeks offer buying opportunity in favorite themes. At this point, continue to like select US Technology, Communication and Media. From a style perspective, Large Cap Growth is attractive at the index demonstrates early signs of relative emergence. Healthcare is poised to offer some attractive value, despite the difficulty of idea selection in the sector. On the other hand, any upside moves, can create further shorting opportunity in the weakening financial sector. Also, as stated above, look for near-term declines in Crude and China related groups.

Key Indicators:

Crude: Continues to make new highs. $77.95 is a key resistance level to watch from 2006 peak. Also, momentum is nearing overbought zone.

Gold: Remains in a trading range. Further consolidation ahead, between $480-440. Noteworthy, support level is at the 200 day moving average ($647.63).

Natural Gas: Attempting to recover from sharp declines. Near-term range is between $5.78-6.20. Oversold and should stabilize around $6 levels.

S&P 500: Following a near 6% decline, since July 16 highs, index is becoming oversold in the near-term. Further consolidation ahead with major support at March lows at 1363.98. From a psychological point of view, the March lows can be critical levels to decide between buyers and sellers.

US 10 Year yield: Since mid June, declines have placed yields below 4.80%. Now, deeply oversold around 4.75% and poised for minor recovery in the near-term.

US Dollar: Downtrend remains in tact. Early signs of bottoming on July 24 at $80.04. A very tight range to make any conclusive bets, but phase two of a recovering dollar might be underway. Again, duration might not be sustainable, as for now index is far removed from key moving averages.

Japanese Yen: Once again attempting to bottom. A noticeable 4%+ recovery since June 22. A rising Yen can symbolize an early sign of shrinking global liquidity. Clearly, oversold from a long-term perspective.

Bank Index (BKX): Expect near-term bounces, as index attempts to stabilize around 104/105 range. Outside of trading opportunities, not a timely entry point for long-term players.

Style Perspective:

Small Cap Value weakness continues led by financials. Therefore, trim exposure to funds in that area until better entry points. Favor Large Cap Growth given its high exposure to Technology, Media and Healthcare.

IDEAS:

Communications:

VZ (Verizon): Pullbacks closer to $40 range offer attractive entry points.

Healthcare:

JNJ (Johnson & Johnson ): Accumulate between $58-60 ranges. Attractive value from a long-term view.

CBST (Cubist Pharmaceuticals): Although extended in the near-term, this momentum driven name has further upside. After a neutral 2006, stock is poised for further upside recovery.

ABI (Applied Biosystems): Declines can create opportunity to accumulate closer to $30 level.

GENZ (Genzyme): In a tight trading range closer to $60 level. Accumulate on any pullbacks as the stock is poised for a break-out from multi-month consolidation.

MCK (McKesson): Attractive entry points at current levels between $56-54 levels. Strong balance sheet and a leader among pharmaceutical distributors.

Airlines:

CAL (Continental Airlines): Deeply oversold as Crude continues to make new highs. At current levels ($31/30), attractive risk/reward and an inverse play on Crude. Clearly, a higher risk and speculative play but one can capitalize by being ahead of markets.

Energy:

PTR: (Petrochina): For those looking to short both Crude and China this might be one way. Recent peak at $160. Consolidating from overbought conditions. Near-term support around $140. Any strength, can offer attractive entry points for shorts.