Weekly Results:
S&P 500 -.4%, NASDAQ unch, Russell 2000 +.4% and MSCI Emerging Markets -2.0%
VIX (Volatility Index) +13.3%, Put/Call Ratio +12.9% and (VXY) Currency Volatility +12.2%
Historic, emotional and intriguing times indeed!
Solvency and liquidity are key factors in the ongoing credit crisis. These concerns play an important role across banks, hedge funds, auction markets, and real estate, eventually impacting US consumers. The desperate need for intervention and capital injection further illustrates the deterioration of Financial Services. Headline news such as Bear Sterns need for capital, illustrate the severity of the crisis. Over the weekend, the Federal Reserve was forced to lower the discount rate to 3.25% and JP Morgan acquired Bear Stearns.
The past 9+ months have been profitable for investors betting against Financials while additional opportunities lie ahead. In other words, Financials are still vulnerable, as the XLF (Amex Financials Index) is 29% removed from all-time lows set in 2002. At the same time, depressed investor confidence continues to disrupt financial systems. In terms of commodities, new psychological milestones as Crude trades above $100 and Gold broke through $1000. These results are a further reflection of a global trend of declining paper assets and surging hard assets. Again, this is a powerful and noticeable inverse relationship that continues to reach new extremes.
A week that witnessed explosive upside move in volatility, sharp sell-offs and breach of key technical levels. The volatility index rose 13% in anticipation of further market turbulence ahead. At the same time, most participants await more actions from the Federal Reserve in the holiday-shortened week. The big picture outlook reminds us that a cycle decline is in fully in place. That said, markets remain in "fear" mode as sentiment data showcases high anxiety levels. This is a period where financial professionals scramble for answers while aggressive traders seek out extraordinary risk/reward levels. Of course, for active investors this downtrend presents select buying opportunities. On a positive note, the S&P 500 is slightly holding above annual lows of 1270. Nonetheless, when panic selling takes place market timing is even more difficult.
Generally, turmoil breeds opportunity especially in areas with less exposure to interest rates and commodities. Previous winners in the last cycle (2003-2007) were driven by themes related to Credit, China and Crude. In addition, weakness in emerging markets can trigger a rotation into undervalued US stocks. Meanwhile, commodities are going up, but are too speculative for efficient risk management. Long-term cycle favors cash rich and innovative companies with solid fundamentals as attractive. Now, traders can view recent interventions as a catalyst for a market rally. At this point, investors can seek early signs of a bottoming process in quality areas especially in Technology and Healthcare. On a stock specific basis, few ideas are worth a look in the weeks ahead.
Stock Specific:
Staples:
HSY (Hershey Co): Attempting to stabilize between $34-38. On a technical basis, stock is making new highs after hitting annual lows of $33. Valuations are appealing as demand for specialty chocolate continue to rise.
MO (Altria Group): Add on weakness as stock approaches major support at $70. Appealing dividends, strength in profit margins and upside potential are positive factors for purchase.
Technology:
AMAT (Applied Materials): Recovering from oversold levels. Fundamentals are promising from solar panel exposure. Accumulate at current levels near $20.
ORCL (Oracle): Holding above key long-term support at $19. Setting up for a recovery as revenue growth and M&A opportunities look attractive.
