Weekly Results :

S&P 500 1,260.68 +1.71%
NASDAQ 2,282.78 +1.95%
Russell 2000 693.08 +2.69%
MSCI Emerging Markets 129.33 -.46%


Plenty to digest in an eventful mid-summer week. Numerous events caused reactions but yet some confusion remains.


Market Cycles and Politics as usual:

Heading into last week, broad indexes were deeply oversold as fear gauges escalated to extreme levels. Intervention by policymakers launched a sharp recovery from annual lows. This resulted in a sense of relief and optimism. Two major catalysts included the rescue of Fannie and Freddie, and a new SEC rule for short-selling. Perhaps this reminds observers, that Cycles and Politics play a key role in market psychology. In the past 1+ year Energy and Financials have been the two extremes in this market; currently both are nearing an inflection point. These changing dynamics can determine overall market sentiment, regardless, additional confirmation is needed.

Cycles :

From a cycle view, odds for a trend reversal present an appealing argument. After losing more than half its value since February 2007, the Bank index(BKX) lead the market higher last week. Conversely , Crude dropped more than 10% as it closed below $130 . Clearly, for investors these events trigger questions about sustainability. Now money managers have to consider readjusting portfolios for the second half. In the past few quarters , bottom seekers in Financials have guessed incorrectly and calling tops on Crude has been a costly bet. In the weeks ahead, earnings can dictate the potential of an upside surprise given the existing bearish expectations. Volatility is declining significantly, and Larger cap is at a favorable point of the cycle. That said, it makes sense for investors to expect new areas of leadership and ongoing sector rotation. Technicals are set up for mean reversion at least in the near-term. On the other hand, fundamental improvement is not evident but odds look favorable for an upward bias.

Politics:

Interestingly, the long awaited trend shift (from higher oil/ lower stock market) is catching the attention of lawmakers, the Federal Reserve and regulators. In an election year, a weak stock market and weakening economy can increase the need for action. The same way speculators are blamed for bidding oil prices higher, now short-sellers of Financials appear to be the next targets. Of course, policymakers and traders think differently and have different objectives. That being said, investors cannot ignore the impact of an election season and pending policies.


Portfolio Management :

Pending decline in commodities can attract capital into innovative areas. Results of changing dynamics, present entry points in themes that have underperformed in the past few years. Those areas include, Technology , Healthcare, Large Cap Growth, media and telecom. Given mixed earning data, a stock specific approach can be more rewarding at this point. As for emerging markets and commodities, further weakness can offer shorting opportunity. Finally, the fundamentals of non-large cap banks remain susceptible despite bail out efforts.



MACRO LEVELS:

Crude[128.88]: After making new highs in the past 3 weeks, index failed to reach record highs of $147.27. Braking below $130, has set off a near-term downtrend.

US 10 Year Yield [4.08%]: Trading above 3.80% for over four months. Attempting to stabilize near 4% level. Next key upside level is at annual highs near 4.27% last month.

US Dollar – DXY [72.18]: Showcasing signs of bottoming since March lows. No major confirmation of a turnaround and remains in a tight trading range.

Gold [959.75]: Uptrend intact. Recent rally from May lows are approaching all-time highs of $1011. Poised for near-term correction as it is 16% removed from its 200 day moving average.

S&P 500 [1260.68]: Bounced sharply from annual lows of 1200. Oversold in the near-term. Next key level is 1300 followed by 50 day moving average of 1337.

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