Weekly Results:
S&P 500 -1.66%, NASDAQ -1.38% Russell 2000 686.18 -1.33% and MSCI Emerging Markets +.80%
Market Outlook – March 3, 2008
As we enter the first trading day of March, the macro environment appears like a continuation of second half 2007. Explosive rise in Commodity prices, new lows for US Dollar, and lack of stabilization in US markets. Once again, interest rate sensitive and commodity related groups continue to dominate investor focus. The unraveling of fundamental weakness is even keeping the biggest optimists away from buying at near-term lows. Clearly, the on-going sell-offs are contributing towards higher volatility. Last week, VIX (Volatility Index) increased 10% and VXY (G7 currency volatility) rose 11.52%. Not surprising to see lingering fear as "unexpected risks" is not fully flushed out of Financials. Plus interventions by policymakers of key global markets result in more uncertainty.
As most participants reduce overall risk appetite there are opportunities in neglected themes. In the weeks ahead, Federal Reserve decisions and economic data are key near-term market drivers. Additional downside move (S&P 500 1270 and lower) in stocks can create better odds to purchase. As macro concerns settle down then new trends can emerge creating stock specific bargains. Rotational themes become attractive, as investors realize that performance chasing (i.e. Energy and Emerging Markets) results in less than favorable odds. At this point, just like the summer months, most investors are not convinced of a pending trend shift. It is worth watching the effects of credit concerns into the behavior of Emerging Markets. This can provide clues for an inflection point in global cycles.
Market timing becomes even more challenging in periods of immeasurable risks, unclear trends and irrational behavior. Generally these factors create less interest in equities for passive participants. As seen in the past few weeks there is a herd-like tendency to chase performance. Ideas with long-term sustainability and attractive risk/reward are favorable. In other words, identifying only cheap valuations may not be enough. At the same time, picking only sectors and groups might not create desired returns given the risk in the marketplace. Interestingly, these are times where strength in solid fundamentals can be rewarding. Nonetheless, for aggressive participants the next few weeks can open doors for entry points in Developed Markets, Innovation themes, Large Cap Growth and Cash rich companies. That said, on a stock by stock basis there are select areas worth a closer look.
Stock Specific Ideas:
Food:
HSY (Hershey Co.): Deeply oversold after peaking in 2005. Currently holding above long-term support of $35 and recently showing signs of bottoming at the $33- 37 range. Part of the decline includes its high exposure to US markets. Nearly, 80% of its sales are from US consumers. That said, current expansion to global markets, attractive valuation and new management can create a catalyst for an upside move.
Technology:
CSCO (Cisco): Price declines offer entry points as stock stabilizes around $24. Along with solid fundamentals, expansion through acquisitions create positive long-term outlook.
JNPR (Juniper Networks): Positive relative strength in the past few months. Improving revenue and growing demand of on-line videos bodes well for stock performance. Buy point near $25 and promising long-term outlook.
Chemicals:
DD (DuPont): Attracting buyers near $44, this serves as key support level. Company benefits in growth in agriculture needs, as well as a move towards recyclable packing. Provides an exposure in sales growth from Developed markets.
MACRO LEVELS:
Crude: Overbought in the near-term after reaching all-time highs on February 28, 2008 at $102.70. The commodity is up nearly 50% since lows set on summer of 2007.
Natural Gas: Long-term trend is positive. Strong move in the past 3+ months. Next key level is near $10, reached in the first quarter of 2006.
Gold: Similar to Crude, Gold is up almost up 50% since summer 2007 lows. Despite long-term uptrend, the recent upside move is reaching speculative levels.
US 10 Year Yield: Weakness continues after reaching 3.95% on February 20, 2008. Approaching annual lows at 3.28%.
US Dollar (DXY): Reached all-time lows, yet again, last week at $73.56. Currency index is down nearly 40% after peaking in July 2001.
S&P 500: Multi-week consolidation continues between 1300-1400. Once again, major support resides near annual lows of 1270.
EEM (MSCI Emerging Markets): Attempting to stabilize after peaking in November 2008. Consolidation phase continues as near-term momentum remains extended. Major support level around $128 reached in summer lows.
