Market Thoughts | July 28 2008

Weekly Results:

S&P 500 1,257.76 -.23%
NASDAQ 2,310.53 +1.22%
Russell 2000 710.34 +2.49%
MSCI Emerging Markets 42.46 -1.52%

A confusing period given mixed economic and earning data. Once again, Financials and Energy are at the center stage and at extreme ends of market performance. This trend is a topic of interest for policymakers and investors. Interestingly, politicians are seeking “praises” for actions leading to declines in Crude. Perhaps, this makes sense in an election year. On the other hand, veteran observers point out a cycle correction in commodities. Meanwhile, investors question the legitimacy of recent downtrend in Crude and growing optimism in equity markets.

In the past year, participants have witnessed peaks in themes related to Credit and China. That said, Crude appears next in line to retrace from escalated levels. The big picture suggests a trend shift in the global macro cycle. At this point, observers will attentively watch overall buying interest in Crude, results in earnings of energy companies and pending legislations.“Investors who have built up positions in Energy names throughout oil's run-up this year surely have a sour taste in their mouths this month. Since oil peaked on July 11th, the average S&P 1500 Energy stock is down 9.96%, while the S&P 1500 as a whole is up about 2%.” - July 27, 2008 Bespoke Investment Group.

From portfolio management view, earnings season can create near-term movements in weeks ahead. When assessing portfolios on fundamental basis, its important to keep in mind macro conditions, investor sentiment and geopolitical factors. Focusing on stock specific calls and isolated groups makes sense since a clear area of leadership is undefined. At this junction, the environment requires for one to trade less and consolidate stock holdings. “There were 1304 new lows on the NYSE Tuesday July 15. That number dropped to 51 last Wednesday.” Alpha Investment Management – 7/26/2008. Perhaps, this signals a turnaround but additional catalysts are needed for sustainability.

Technology and Healthcare appear mostly scattered and making sector calls presents less than favorable odds. Biotech continues to demonstrate relative strength. IBB (I­shares Biotech Index) jumped from $76 to $86 in the past five weeks. Conversely, Large Cap Pharmaceutical is not an easy place to pick stocks especially given regulatory risks.

Healthcare Ideas: BLUD (Immucor), GENZ (Genzyme) and ILMN (Illumina Inc), JNJ (Johnson & Johnson) and TECH (Techne).


KEY MACRO LEVELS:

Crude: Declining from all-time highs of $147 to $123. Next critical level between $120, followed by $112-115.

Gold: Failing to reach March highs of $1011. Consolidating back to a trading range between $880-920. Approaching 200 day moving average of $880.

US 10 Year Yield: Attempting to hold above 4%. Annual highs of 4.27% serves as a key resistance level reached on June 13.

DXY – US Dollar: Once again, stabilizing between $72-73. No major evidence of a recovery. Index remains above $72 since mid April.

S&P 500: Recovering from annual lows of 1200. Next key level include 1300 followed by 50 day moving average of 1324.