Weekly Result:
S&P 500 +4.87%, NASDAQ +3.75%, Russell 2000 +6.1% and MSCI Emerging Markets +2.75%
After reaching extreme pessimistic levels, markets have rallied to tilt the imbalance towards investor sentiment. Noticeably, VIX (Volatility) Index declined by 17% while the Federal Reserve cut rates. Both contributed to a sharp recovery especially in beaten up groups such as Homebuilders, Financials and Retail. Generally, markets respond inversely to front page stories written by mainstream media. Not a scientific approach, but interesting to read the following titles: Road to Recession, Market Reckoning and Its Rough out There. At this point, effects of credit risk and economic concerns are well acknowledged. Perhaps, last week's performance is a sign of bottoming.
The S&P 500 index is down nearly 13% since October 2007. Broad markets peaked in mid 2007, which is almost 7 months ago. Some argue that a classic recession lasts ten months; therefore we are nearing a turnaround. Fear has led to a flight towards quality. Now that trend is becoming exhausted. For example, the bond market and the price of gold are reaching overbought levels. In other words, risk aversion is becoming a crowded trade.
Financials have led the recovery from deeply oversold levels. Catalyst for the sector include rate cuts, short covering and a technical bounce which have contributors to an upside move. Not surprising to see a violent upside given the heavy sell-offs. On January 22, 2007 the Bank Index (BKX) was 31% removed from its 200 day mva. That set the lowest point for the index after topping on February 2007. The gap has narrowed and the sector has roared back. As for improvement in overall fundamentals the future is unclear.
Stock Specific Ideas:
Staples:
WMT (Walmart): Strength continues as the stock maintains its uptrend. Add on pullbacks closer to $48.
Healthcare:
AFFX (Affymetrix): Sharp upward rally caused by dispute settlement versus rival disputes and improving revenue outlook. Attractive risk/reward at these oversold levels. Buy point between $20-25.
HUM (Humana): Provider of Medical benefits continues its positive momentum. Solid relative strength combined with persistent earnings growth demonstrates additional upside potential. Timely entry point at current trading range.
Technology
QCOM (Qualcomm Inc): Company is guiding higher revenue and bouncing from extreme lows. An early indication of a long-term recovery.
ORCL (Oracle): At a buy point around $20. Near-term oversold, as fundamentals remain positive.
CSCO (Cisco Systems): Deeply oversold especially since peaking in October 2007. Bottoming around $24. Earnings look promising after launching new product Nexus 7000.
Industrials:
LLL (L3 Communication): After bottoming around $105, setting up for an upside move. Sales and Revenues are expected to rise.
