Similar to days in June, markets are jumping out to new highs on a global scale. It is difficult to find major sellers in this atmosphere. A period in which, Central Banks appear to 'restore' confidence, and a growing risk appetite especially among participants in emerging markets. Perhaps, July briefly reminded us about existing credit risks. While it seems like February was a long time ago, when speculative markets sharply declined. Nevertheless, the uptrend remains intact. At the same time, the risk/reward for new entry points remains rather questionable.
Sentiment:
Volatility is relatively tame since mid August. But last week, VIX rose 4% signifying hints of trend reversal. Upcoming option expiration at weeks-end can create further turbulence in market behavior. Finally, earnings season should provide a gauge on investors expectation and overall sentiment at this junction of the business cycle.
Investment Approach:
Continue to favor technology based themes especially related to communication, media, networking and telecommunication. Increase in Wall St financing should boost sector higher and expect more deals given attractive valuations. That said, stock specific selection is critical since some parts of Technology are not as "cheap".
On a selective basis, Healthcare groups offer attractive entry points. Big Pharmaceutical companies are attempting to increase their pipeline which benefits smaller/specialty based companies. Similar to Technology, expect deals in upcoming quarters.
Meanwhile, the fundamental in Financials are vulnerable. On pending market pullbacks, lenders and REITS are poised to lead downside moves. Also, surprises in Federal Reserve actions and lower than expected numbers can spark more selling across the sector.
Macro Levels:
Crude: Hovering around all-time highs. Two key near-term resistance levels: $84.05 – intraday highs from October 12 and $83.76 reached on September 28. Otherwise, uptrend remains intact.
Gold: Making cycle highs and $100 removed from record highs reached in March 1980 at $850.
US 10 Year Yield: Attempting to bottom. Early indication of a bottom at 4.40%. And yet, far removed from yearly highs of 5.32%.
S&P 500: Once again, registered all-time highs this week. Investors watch for 1555 level as a key support level. (July highs)
FXI (China 25 Index): Fund is up a remarkable 82% since August 16 lows. Plenty of acceleration as momentum players continues to deploy capital, despite overbought conditions. Perhaps, this can explain comments from Alan Greenspan that the Chinese "economy might be overheating".
EEM (MSCI Emerging Markets Fund): Similarly, index is making all-time highs. Not surprising given the funds top holdings are in Chinese equity market. (15% of overall fund).
TECHNOLOGY:
MOT (Motorola): Despite recent run-up, stock offers buying opportunity on pullbacks. First support level near $18 which is near its 200 day moving average.
BRCM (Broadcom): Presents investment opportunity especially with growth potential in digital TV and multi-media. Bottoming long-term technical profile as a breakout above $35, displayed strength among buyers.
TELCOMMUNICATION:
VZ (Verizon): Solid growth potential as positive trend continues. After bottoming in August 2006, stock is setting up for sustainable upside move.
MEDIA:
DTV (Direct TV): Breaking out from multi-month trading range. ($22-26) Attractive entry point for long-term investors. Growth in HD TV, strength in revenue, and upside potential in Latin America sets up a promising outlook.
HEALTHCARE:
CBST (Cubist): Appealing for buyers above $21. Product development in anti-infectious drugs should continue to improve.
MATK (Martek): Improving fundamentals, with positive near-term momentum. Accumulate on pullbacks and a buy idea in the Small Cap space.
