Market Outlook | December 22, 2008

Weekly Result:

S&P 500 887.88 +.93%
DJIA 8,579.11 -.59%
NASDAQ 1,564.32 +1.53%
MSCI Emerging Markets 25.39 +3.98%

Year-end Reflection:

For some, reaching a closure to this year is a major relief. Clearly, a historic and violent year. Now, few participants benefited by mostly betting against cycles relating to Crude, China and Credit. In short, a lesson-filled year. In ugly times, participants examined the core of the credit system, impact of emotional response and role of government in financial systems. Perhaps, a natural market process driven by psychology. This leads to the importance of trust restoration which is a key foundation for the next cycle upturn. The past four months showcased intense action which should spillover into 2009. In looking ahead, major driving forces are bailout implementations, increase in risk appetite and shift of investor sentiment.

Positioning for first quarter:

"The newspapers may be giving us a parade of bad news, but the stock market is beginning to march to a different drummer," Richard Russell (Dow Theory Letters).

At this point, participants are accustomed to forced and panic selling. Basically, pessimism has reached new extremes and is setting up for reversal. Last week, Fed's policy of lower rates set the stage for a turnaround in risk-assessment. Again, time is required for markets and investors to digest the impact. Trading behavior in the next 2-3 weeks might not provide much desired clues. Being an optimist has gained slightly more votes than previous weeks. Option expiration combined with decline in volatility contribute to a positive week. Volatility Index (VIX) declined 17% for the week and is down over 50% since October's peak. This reinforces improvements in technicals and sentiment data. Similarly, credit markets are stabilizing as seen by a 43 basis point TED Spread decline. As for the sustainability of these indicators, they remain questionable.

Strategy :

Interestingly, global assets remain cheap and highly correlated since the summer months. Therefore, relying on pure valuation might not be enough for a turnaround. For odd makers, temptation is growing to add exposure in Crude, Small Cap and Emerging Markets. Again, Macro drivers have to line up with basic fundamentals for bottom formation. Amazingly, an irrational rally is not out of the question either. Especially, in a period where the Federal Reserve is encouraging activity. As money managers adjust in the deleveraging process this creates demand for quality assets. Therefore, this creates additional challenge in identifying the "right" price.

Finding themes in 2009, can be rewarding for years ahead. Most companies are forced to reexamine their business model. That said, Healthcare is appealing on technical, fundamentals and political outlook. So far this year, the sector dominates M&A activities. Medical Devices: 32 deals, worth $525.80 million Biotechnology: 18 deals, $468.20 million Pharmaceuticals: 19 deals, $430.43 million. iiBIG (International Institute for Business Information & Growth) Dec 9, 2008.

MACRO LEVELS:

Crude [33.87] : Testing new annual lows after a 75% decline since annual highs of $147. Long-term view suggests major support at $20. Technical's suggest an oversold bounce with lack of sustainability.

Gold [835.75] : Stabilizing with a tight range between 720 and 840. That said, longer-term trend is in a consolidation phase. Holding above $700 which serves as a support level confirming positive trend.

US 10 Year Yield [2.12%]: Similar to Crude, yields reached new lows on December 19 (2.03%). At this point, of extreme lows a sharp bounce is plausible. Charts point to a potential upside rally around 2.51% (near 15 day moving average).

US Dollar DXY [81.29] Sharp decline since late November after a 6+ month rally. Holding above 78 and becoming oversold. Index remains above 76 near its 200 moving day average.

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