Weekly Results:
S&P 500 -4.39% NASDAQ -6.43% Russell 2000 -6.71% and MSCI Emerging Markets 147.41 -3.36%
Despite a holiday shortened week, S&P 500 fell more than 4% to start the year. Perhaps, this further confirms the existing uncertainty and growing pessimism. Once again economic data is the main focus for investors. Last week produced weak economic results in labor, housing and factory sectors. Friday's non-farm payroll triggered "panic-like" sell offs. For the most part, declines are not surprising given the junction of the market cycle.
Investor sentiment is overly depressed along with excessive negative coverage in the mainstream media. For example, last week Volatility index rose by 18% and put/call ratio increased by 16% --again indicating more fear. Stock market continues to reflects weakness since mid 2007 which has turned near term indicators into oversold territory. That said, being a bear is heavily fashionable but dangerous when too extreme. Nonetheless, expect sideway swings in the weeks ahead.
In period of uncertainty and confusion, it is helpful to list out key points which can serve as a road map.
First quarter themes:
- Markets are pausing from muli-year bullish run
- Growing probability of a trend shift especially in an election year
- Take advantage of rotational opportunity
- Accumulate quality areas for cheaper value mid year
- Credit risk themes are yet to be resolved leaving most financials vulnerable
- Reactions to Economic data will dictate investor sentiment
- Expect volatility to increase and remain above average levels
Actionable steps:
Trim risk exposure in previous cycle winners. Such as Small Cap, Emerging Markets and Commodity based themes. After a strong 5-7 year cycle, in these areas the risk/reward outlook is not as attractive.
In the upcoming months, investors will have the opportunity to build smaller position in investment ideas. At this point, buying long ideas might not offer a timely entry point; the 1st quarter is a challenging period, therefore raise cash or slowly accumulate stocks in innovative related groups.
Stock Specific Ideas:
Technology:
CREE (Cree Inc): Early signs of long-term recovery at current levels. Stock remains timely despite broad market sharp-sell off. Competitive edge with efficient product in and technology such as LED (light emitting diode) creates opportunities for long-term investors. In fact, investors rushed to buy as the stock fits the "green technology" theme.
PAYX (Paychex): Deeply oversold in the near-term. Following a 7+ year of price consolidation, stock is attempting to recover.
Healthcare:
BLUD (Immucore): Longer-term chart pattern is attractive. Fundamentals overall are positive more detail in earnings this week. Nonetheless, outside of major surprises stock is appealing at current levels. $32-30.
TECH (Techne): Solid 6+ month relative performance for the maker and manufacture of biotechnology products. Recent buybacks are driving stock price higher and company is relatively cash rich. That bodes well in the current environment.
PPDI (Pharmaceutical product): Strong relative performance versus the broad market in the fourth quarter of 2007. Revenues are increasing and stock price is consolidating between $40-42 ranges. That should set up attractive entry point.
Macro Review:
Crude: Uptrend in tact. Intra-day high of 100 (January 3rd) remains next key resistance level. Index is becoming overbought in the near-term.
Gold: Making new highs following 2+ month consolidation. Explosive upside move since mid 2007.
US 10 Year Yields: Down over 28% since June 2007. Nearing lows from November at 3.79%. No evidence of a turnaround at this point.
S&P 500: Consolidating in a tight range (1540-1400), further illustrating a pause. From a short-term perspective, index is approaching oversold levels near 1400 followed by 1370. Expect aggressive short-term traders to place long bets at these levels.
EEM (MSCI Emerging Markets): Attempting to bottom from recent declines. Currently in the process of a 4+ month of sideway trading. Look for a key inflection points between $136-144.
