Weekly Results :
S&P 500 +1.1%, NASDAQ -0.2%, Russell 2000 +0.3% and MSCI Emerging Markets -5.2%
Market Thoughts – 3/24/2008
As spring is upon us, there are signs of market optimism, declining commodity prices and pending results from Federal Reserve intervention. Last week was action packed, despite a holiday shortened week. Once again, global markets are reaching key inflection points. Investors look to seek relief from on-going credit risk as other trends attempt to reverse. Interestingly commodities and US dollar displayed signs of mean reversion. After several years of reaching extremes, this trend (higher crude/lower dollar) is facing critical tests. Generally, as a trader it is dangerous to declare "bottoms" and to call "tops". In fact, the past few years, investors have witnessed that going against exiting trends is rather costly. Nonetheless, there are various themes developing which offer attractive entry points to select areas especially in the US equity markets. Perhaps an early signal of a cycle shift into developed markets, recovering dollar and further declines in emerging markets.
From a macro view point, commodities pulled backed from elevated levels. For example, here are results from last week; Crude -6%, Natural Gas -11.5%, Base Material -10.3% and Agriculture -16.1%. Once again, Crude remains too speculative and long term cycle suggest a pause. In addition, the message from the Federal Reserve hinted that commodities are poised to stabilize. Clearly, all these factors sparked a sell-off in an overbought area. In addition, stocks tied to this area are bound to face further pressure. The performances of most emerging markets are strongly tied to commodity prices. In addition, the past 5+ years created a bull market leading to underperformance in US markets. At this junction, the speculative nature of global investors has created a "bubble-like" atmosphere. International Indexes reflect the on-going declines in emerging markets since the fall of 2007. Since October 31, 2007 the EEM (MSCI Emerging Markets Index) is down over 30%. Again, a risk-averse environment and growing uncertainty has contributed to weakness in emerging markets. "Asia, excluding Japan, funds were hit hardest, posting outflows of $1.2 billion for the week" (Economic Times).
Since the summer months, credit deterioration in Financials was a dominant market force. Clearly, weakness in housing, slowing economy and investor anxiety became apparent to mainstream observers. Regardless of uncertainty and growing volatility, the S&P 500, held above annual lows of 1256 and January lows of 1270.A positive sign that coincides with Federal Reserve policy to create more liquidity. Although the Financial troubles will take time to recover, other areas of the market are poised for an upside move. In other words, a broad market recovery is possible given the oversold technicals. In terms of portfolio management, long-term investors can begin to buy quality ideas for a sustainable upside move. Meanwhile, near-term traders can take aggressive bets on these attractive risk/reward levels.
Long ideas in US Equities:
- Healthcare : GENZ (Genzyme)
- Technology: CSCO (Cisco Systems), ORCL (Oracle), AMAT (Applied Materials) and CREE (Cree Inc.)
- Consumer Staples: HSY (Hershey Co), MO (Altria Group Inc.)
- Media/Telecom: DTV (Direct TV)
