Market Thoughts - October 27, 2008

Weekly Results:

S&P 500 876.77 -6.78%
DJIA 8,378.95 -5.35%
NASDAQ 1,552.03 -9.31%
Russell 2000 471.12 -10.51%
MSCI Emerging Markets 20.22 -16.73%

Following the bursting of bubbles, it is normal to evaluate the causes of peaks and assign blame. Given various mainstream topics, it is clear headlines contain political and regulatory flavor. Simply, plenty of noise out there with rear-view examinations of an already peaked market. Similarly, it is becoming hard to avoid the frantic discussions of "Gloom & Doom" scenarios. Recently, emotional market responses seem to be the norm; this clarifies new extremes in volatility and sentiment readings. Last summer/fall set the tone for a major cycle shift. The origins of a visible credit crisis and peak in emerging markets served as early clues. The results of that "shift" are taking ugly turns with less predictable behaviors. Overall, there is a growing acknowledgement that this unraveling process was inevitable. Perhaps, this is an early step towards the confidence restoration process.

Market peaks come as more of a "shock"than a smooth trend. Many are forced to adjust to new emerging realities. For example, Crude is below $80, S&P is at a 5 1/2 year low, economic deceleration continues and the dollar has emerged . At the same time, contraction in Financial Services is an ongoing theme.

Assets managed by hedge funds may shrink to $1.3 trillion within six months from about $1.7 trillion as investors withdraw their money amid declining returns, according to Credit Suisse Tremont Index LLC. "Institutional investors are monitoring their portfolios very closely, and we expect to see continued redemptions," Oliver Schupp, president of NY-based Credit Suisse Index Co., said, "there will be a high degree of closures with many small funds pushed out." Investors withdrew a record $43 billion from hedge funds last month, stated TrimTabs Investment Research.

Money Management/ Trading:

Those relying on correlation and mean-reversion are struggling to dissect the current environment. It is understandable, that bottoms and tops are hard to time and indentify. Nonetheless, the market continues to tempt optimist and eager investors. In addition, pundits and veteran participants have pointed out that bargains are available. Interestingly, picking stock specific ideas has a shorter-term emphasis. Again, disruption in natural market flow can increase overall risk exposure.

"The removal of liquidity and deleveraging that's taken place around the world has caused tremendous dislocation in the price of those cash assets relative to the value of the underlying derivative hedges." (MarketWatch Oct. 24, 2008)

Macro Levels:

Crude [$64.15]: Holding above intra-day lows of $62. Nonetheless, an established downtrend as the commodity failed to rally. Following an usual rally on September 22, Crude has fallen by nearly 50%. Basically, it remains in a correction phase between $60-80.

Gold [712.50]: Down 27%+ since July 15th. Interestingly, Gold has not witnessed price appreciation in an environment of risk-aversion. Approaching 700 level, last visited a year ago (fall 2007) and served as a breakout level.

US 10 Year Yield [3.68%]: Normalizing around 3.60% in the last 2 months. Major support near 3.50%. In the short-term, signs of stability after mid-September 2008 lows.

US Dollar –DXY [86.44] : After forming a base between March and July, the currency index has broken out. Now, overbought and poised for minor corrections.

S&P 500 [876.77] : Staying above October 10 lows of 839.80. A short-term trading range forming between $750-900.

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