Weekly Results:
S&P 500 +4.3%
DJIA +4.3%
NASDAQ +4.9%
MSCI Emerging Markets +2.8%
Trading Behavior:
Confusion is the dominant theme for long-term investors especially in the past few weeks. In these uncertain times, near-term trading and intra-day money management seems to play a bigger role in market behavior. In other words, its been a difficult period to make profitable trades while being a trend-follower. At the same time, understanding short-term swings can enhance entry points and minimize loss potential. Clearly, the charts of broad indexes display an undefined trend. So far in 2008, S&P 500 has traded in a tight range between 1300-1400.
As earnings season is upon us, stock specific news creates pronounced moves and headline materials. Also, bad news is translated to higher than expected outcome. And good news is neglected because of the cycle downturn. Given the credit crisis, assessing risk/reward on a particular trade has forced many to think more on a short term basis. That said, participants overall actions create a neutral result. Therefore, additional catalysts are needed especially at the conclusion of earnings season.
"What we are seeing is that markets are closing near their day's highs or lows more frequently than we would expect by chance. This may reflect a bandwagon effect, in which traders and investors observe market movements during the day and don't want to miss out on them. This would lead them to buy rising markets and sell falling ones, creating late-day strength or weakness". (4-18-2008. Brett Steenbarger : http://traderfeed.blogspot.com/).
Macro Factors:
Risk-aversion is another aspect contributing to short-term trading and trend less markets. Despite trading recoveries, investors are hesitant to take on bigger bets. Bearish sentiment increased by 30 % last week despite a 4.8% increase in Small Cap index. Once again, vulnerable areas in the marketplace are areas related to credit risk and emerging markets. On the other hand, the safer bet is to stay in commodities. Performance chasing is an ongoing phenomenon, as Crude continues to gain upwards. In looking ahead, an increasing herd-like behavior has its consequences. Interestingly since March 17th Gold has declined nearly 11% to $908.75 after making new highs. Although too early to call, the risk/reward at these levels is not as attractive as few years ago. Nonetheless, momentum chasers are bound to dive-in and create a speculative environment.
Innovative Themes:
Recent company reports have generated optimism in Technology. A sector poised for new cycle leadership. S&P Information Technology Index broke out of a recent base between 340-360. Collectively, the index is up nearly 13% after making annual lows in January 2008. This reflects a positive trend in larger cap technology and a transition to innovation based themes. Similarly, the Biotech Index (BTK) is up nearly 15% since March 17th. Of course, stock selection is critical, but stocks showcase an early transition in the upcoming cycle.
Stock Specific Ideas:
Technology:
CREE (Cree Inc): Products in light efficiency bodes well for Cree in the long-term. Innovative products and high consumer demand create a bullish bias. Finally, the technical picture suggests attractive entry point between $28-30.
Healthcare:
GENZ (Genzyme): Positive momentum and relative strength. Add on weakness closer to $72 which is a near-term support. Overall fundamental are promising with next key resistance at annual highs of $82.
Chemicals:
DD (Dupont): Exposure in agriculture and global expansion are leading to favorable results. Despite near-term overbought levels, investors seeking sustainable run can enter on pending declines. From a macro perspective agriculture related areas are in higher demand. In addition, stock price has been neglected in the previous bullish cycle (2003-2007).
Consumer Staples:
WMT (Wal-Mart): Relative strength remains strong versus US markets and Consumer Discretionary. Despite a 36% appreciation since September 2007, there is an additional long-term value. Expansion into international markets creates more growth opportunity. In addition, stock is 27% removed from all-time highs of 1999 which sets the next key major resistance level. Near-time declines can offer buying opportunity.
