Weekly Results:
S&P 500 +.54% DJIA +.33%,NASDAQ +.83%, Russell 2000 +.11% and MSCI Emerging Markets +.91%
Digesting the past 12 months
The past year has witnessed several extremes in global markets. A historic and a well documented period indeed!
For instance, a peak in Financials, a sharp rise in volatility, and a surge in commodities. Other trends include the decelerating dollar, an unraveling of credit risk, lower interest rates, and a rush to safety and a lack of long-term commitment. Of course, hindsight is 20/20 assuming previous patterns will continue to work has its risks. At this point, trend-followers and those chasing performance can not rest comfortably either. The possibility of a trend shift is difficult to ignore. The very turbulent markets of past months do challenge ones rational thoughts. Given these factors investors can focus on actionable themes, concepts and stocks. In other words, reaching broad market conclusions does not necessarily translate into desired results.
Tactical Approach:
During an election year, there is a growing political focus on the economy. In this upcoming week attention will focus on actions from the Federal Reserve, earnings and monthly economic data. The current picture of oversold markets, hope of optimism and a relief from wave of bad news can create an upside bias. Therefore, managing risks on short positions and time sensitive trades can be rewarding.
In one sense, the on-going bad news has reached extreme levels: housing concerns, economic slowdown and weakness in the credit system. Last week, consumer confidence fell to a 26 year low which entices aggressive investors to step in. March 17th set the possible lows in the S&P 500 at 1256. On that same day, VIX (Volatility Index) peaked at 35 and Dollar Index (DXY) reached annual lows at 71.28 . These annual levels serve as a key barometer for a trend shift.
On the other hand, this market requires both long/short ideas from a directional basis. Similarly, sector specific bets alone is not enough to capture favorable results. In other words, the fallout of the credit crisis lingers as fundamentals of small cap banks and REITS remain vulnerable. Nonetheless, a relief rally seems plausible given the oversold technicals, calming of volatility and accumulating cash sitting on sidelines. Again, the market performance of last year can taint one's view. It is important not to lose longer term trends in which neglected themes offer value.
Conviction and Volume:
The sustainability of recent recovery and hopes of optimism is going to be tested. Lots of attention on near-term data, but trading volume is rather below average. Perhaps, this explains the "wait and see" attitude of participants and lack of major conviction. New York Stock Exchange program trading accounted for 24% of overall volume last week. That's below a 52 week average of 30.5%, and reflects the declining volume by institutional investors. Therefore, there is plenty to decipher in the weeks ahead.
Stock Specific:
- Technology: CSCO (Cisco), LSI (LSI Corp), ORCL (Oracle), CREE (Cree Inc) and FLEX: (Flextronics)
- Healthcare: Favor Biotech over pharmaceuticals. GILD (
- Consumer Staples: WMT (Wal-Mart) and HSY (Hershey Co)
- Chemicals : DD (Dupont)
Macro Levels:
Crude: All-time highs reached on April 25th at $119.25. Extended in the near-term with next key support at $110.
Gold: After peaking on March 17th ($1011), the commodity is down nearly 12%.
US 10 Year Yields: Since late January yields have risen sharply. Major resistance closer to 4%. Expect pause in the near-term.
US Dollar (DXY): Attempting to bottom between 71-73 range. Further upside evidence needed for confirmation of an uptrend.
S&P 500: Next major resistance near 1400. Followed by 200 day average at 1436.
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