Broad Markets:
A positive week mainly sparked by rate cuts. A cheerful reaction by bulls, puzzling for shorts and yet a confusing outlook ahead. Capital inflow into SPY (S&P 500 ETF) rose significantly. Data suggests that buyers are slowly rotating into equity markets. For example, Investors added $13.26 billion from 9/12 to 9/19. (trimtabs.com).
At the same time, Volatility declined from elevated levels as VIX (Volatility Index) is below 20. A key note, last Friday was known as "quadruple witching". That's when equity index futures, equity index options, equity options and single stock futures all expire. A quarterly event, which contributes to abnormal trading patterns.
Macro Review:
Trends that remain in tact: Surging oil prices, declining dollar and re-accelerating gold. These indicators are approaching record levels and breaking key technical levels. Importantly, the relationship of higher commodity prices and weaker Dollar became significantly apparent when the S&P bottomed in March 2003. The multi-year strength in Crude, Gold, China and Canadian Dollar is nearing a trend shift. At least, these themes are becoming overbought in the near-term.
Crude: All-time highs reached on September 19 at $82.50. First support level, near $80 followed by $75. Currently, 26% removed from its 200 day moving average.
Gold: Poised for near term pullbacks after breaking previous highs from May 2006. Next major resistance level $850 (All-time highs from March 1980). An upside move above 15% needed to record new highs.
US 10 Yr Yield: Oversold recovery from yearly lows (4.29%). Major resistance at 4.80%, although further consolidations at current levels.
Dollar (DXY): Few points away from all-time lows $78.19. At this point, seeking external catalyst for a recovery.
S&P 500: Positive trend in tact. Becoming overbought in the near-term. Next resistance level 1555.
EEM: (MSCI Emerging Markets): Breaking out to all-time highs. Long-term uptrend intact, while nearing escalated levels in the short-term.
Financials:
Financials underperformed the market in the first half of the year but some analysts and corporate insiders are rather optimistic. Fundamentals for homebuilders and lenders suddenly improved following rate cuts. Perhaps, a knee-jerk reaction or an oversold bounce. Nevertheless, it is difficult to fight the Fed, as seen by huge jumps following interventions by the Federal Reserve. At the same time, investors should not forget the bleak earnings outlook for the sector, slowing economic data and unfavorable period in the business cycle.
Communication, Networkers, Telecom and Media
Stocks in Technology, Telecom and Media groups offer appealing entry points. As we approach year-end, strength in technology continues. Stability in macro related themes can benefit the sector. Stock/Group exposure in communication, networkers, telco and media offers favorable odds.
From private equity perspective, select Technology companies are attractive as buyouts candidates given lower debt/equity ratio. Once again, from a cycle view, larger cap names are poised for relative outperformance.
STOCK IDEAS:
Telco:
VZ (Verizon Communications): Positive long-term trend above $40. Strong fundamentals and increasing customer base should contribute for further upside move. Accumulate at current levels.
Media:
GMST (Gemstar-TV): Breaking out and making yearly highs. Given the balance sheet strength and revenue growth, GMST is a takeout candidate. Regardless, investors should add on any pullbacks.
Technology:
MOT (Motorola): Early signs of recovery after August lows. Look for additional upside moves, especially with increasing global handset demand. Relatively oversold and holding above $16. (key long-term support).
WDC (Western Digital): Attractive relative strength. Improved demand and promising product mix. Add on pullbacks, as trend remains positive above $22.
ERTS (Electronic Arts): Holding above $50, key support level. Following 2+ year consolidation, stock is poised for recovery.
OVTI (OmniVision Tech): Recovering from oversold levels. Solid fundamentals with increasing demand and positive guidance. For the quarter ahead, attractive risk/reward ($19-25).
Healthcare:
ABI (Applera Corp. Applied Biosystems): Relative strength emerging and breaking above $34. Accumulate on pullbacks.
MATK (Martek Biosciences): Recovering from long-term oversold levels. Positive near-term momentum as trend remains positive above $26.
