Market Observations: September 10, 2007
Investors continue to closely monitor economic data and speculate on pending rate cuts.
Sentiment indicators showcase fear and uncertainty in the marketplace. Once again, VIX (volatility index) climbed nearly 5% closing at 26.13. Similarly, participants witnessed a rise in the Put/Call ratio. Finally, NYSE and NASDAQ short interest ratio reached high levels.
In terms of macro outlook, further weakness in the US dollar and US 10 year yield. Last week, both (yields and dollar) reached annual lows and remain deeply oversold. Meanwhile, commodities continue to re-accelerate. Gold is setting up for a strong recovery. Crude is nearing overbought levels but uptrend remains in tact. At the same time, slowing US economy has not fully played out in the global markets. Emerging market indexes are overbought and reaching elevated levels.
Despite overall bearish sentiment, select groups offer upside surprises. In upcoming weeks, investors should increase exposure in Technology, Biotech and Media stocks. At the same time, continue to reduce financial services exposure.
Financials:
Investors should not assume that Federal Reserve intervention creates a risk-free environment especially in the financial sector. Lenders, REITS and Small Cap Banks face further downside pressure. In a period of "risk adjustment", one should expect volatility. At this point, any recovery in the XLF (Amex Financial Index), should offer shorting opportunity.
Short Ideas:
FED (First Federal), DSL (Downey Financial) and CFFN (Capitol Federal).
Biotech:
Biotech stands out as an attractive theme. For example, the BBH (Biotech Holders Trust) is showing relative strength versus the market. The sector is setting up for a strong recovery. From a seasonal point of view, September –October is a favorable period. Also, with declining financial services, demand for healthcare shares should increase.
Long Ideas:
GILD (Gilead Sciences) , HGSI (Human Genome), GENZ (Genzyme) and VRTX (Vertex).
Technology:
Technology upgrades continued last week, as we enter a favorable period. On an absolute basis, many managers should look to deploy capital into the sector. From a relative standpoint, timely long ideas are forming with bottoming patterns and improving fundamentals.
Long Ideas:
MOT (Motorola), SOHU (Shou.com), INFA (Informatica Corp.), AMD (Advance Micro), and SRX (SRA International).
MACRO LEVELS:
Crude: Overbought from an intermediate perspective. Next resistance $78.70 reached on Aug. 1, 2007. (all time highs).
Gold: Breaking out of multi-month range. After trading between $660-680 levels, the commodity is above $700 with positive momentum. Approaching all-time highs of $725, reached on May 12, 2006.
US 10 Yr Yield: Becoming oversold in the near-term after making annual lows.
US Dollar: Broke below key support 80. Following a weak non-farm payroll, global investors appear to lose confidence. Next support level 78.19, all-time lows reached back in September 1992.
S&P 500: Consolidating between 1440-1480 range. Look for pullbacks in the near-term.
FXI (China 25 Index): Remains deeply overbought, after peaking on August 27 ($154.54).
