Weekly Results:
S&P 500 1,213.27 -3.33%
NASDAQ 2,183.34 -3.98%
Russell 2000 704.79 -6.49%
MSCI Emerging Markets 35.49 -2.21%
Awkward times indeed!
Clearly, a bizarre period when investors eagerly awaited results of government decisions. Basically, policymakers continue to play a major role in market reaction.
Market tampering, increasing headline materials and political posturing contribute to edgy markets. For the most part, the last 18 months have demonstrated slower growth, decreasing investor confidence and a cycle peak. We've reached a point where panic and risk-aversion are dominant market themes. During an election year, political rifts can disrupt the general flow of markets, especially with changing regulations. In addition, restructuring of the financial sector seemed inevitable given the fundamental weakness. This unresolved matter greatly contributes to key investors sitting on the sidelines as risk-aversion. One can expect more unusual trading given the approaching religious holiday and quarter-end. Also, an eventful economic calendar this week, where many await for clues on the condition of labor markets.
Reaching stabilization remains unclear from a regulatory and policy viewpoint. Some argue that the natural process of a global slowdown is a force that corrects itself naturally. Taking a step back, participants are reminded that a year ago emerging markets peaked after a sharp upside moves. EEM (Emerging Markets Fund) is down 56% since last fall's peak. A reflection of retracement from overvalued themes related to Credit, Crude and China. Therefore, previous relationships and expectations have entered a readjustment period. This leaves few sectors attractive in terms of rotational beneficiaries. In other words, there are few ideas for those willing to chase positive momentum. That perhaps, explains the results of excess capital in the marketplace. Now, further decline in Financials can appeal to value buyers. Trust and confidence restoration is a pivotal step in reaching market bottoms. The Federal Reserve continues to inject liquidity into the system and for the most part has yet to create a bottom.
"Discount window borrowing (also known as primary credit to banks) increased $20.4 billion between September 3, 2008 and September 24, 2008). Funding through the Primary Dealer Credit Facility was up sharply during the past two weeks amounting to $105 billion." Paul L. Kasriel – Northern Trust.
Financials:
In one sense, this month has featured an unprecedented failure of financials. On the other hand, indexes have reached extreme bearish levels. This sets the stage for the next cycle. Perhaps, larger Banks are poised to benefit from a fundamental view. Interestingly, XLF( Amex Financials Index) has stayed above its annual lows. In fact, a sharp rally since July 15th lows which serves as a technical barometer. Given the volatile landscape, overall trend is too speculative especially given early headline reactions and pending mergers. Again, investor psychology should determine investor sentiment as managers reassess overall risk.
In terms of the credit crisis and intervention – here is one view.
"Instability is not necessarily harmful; indeed, if it were described as dynamic adjustment, it would sound positively benign. But carried to extremes, it can give rise to sudden reversals that may take on catastrophic proportions. That is particularly the case where credit is involved, because the liquidation of collateral can lead to sudden compression of market prices. The prevention of excessive instability is therefore a necessary condition for the smooth functioning of the market mechanism." George Soros -"The Alchemy of Finance (1987).
KEY MACRO LEVELS:
Crude [ $106.89] :Remains in a downtrend from its summer peak. Attempting to hold around $104-106 and below its 200 day moving average.
Gold [$902.00]: A sharp two week rally from annual lows of $740. After a 9 month decline, index is attempting to trade in a consolidating range.
US 10 Year Yield [3.85%]: Similar to Gold, an accelerated upside move in past few trading days. Trading in a multi-month range between 3.60%-4.00%.
US Dollar DXY [76.95] Following a summer rally, index is consolidated from overbought levels. Staying above it's 50 day moving average of 76.23.
S&P 500 [1213.17] Oversold in the near-term after testing July 15th lows of 1200. Next key resistance stands at 1300.
Themes & Ideas:
Larger Cap companies offering attractive entry point.
Consumer Related: WMT (Wal-Mart), HSY (Hershey), LUV (Southwest Airlines), and SBUX (Starbucks),
Innovative and neglected groups that present longer-term upside.
Technology/Media: GMKT (GMarket Inc), SAP (SAP AG) and INTU (Intuit).
Healthcare: BLUD (Immucor), GENZ (Genzyme) and ILMN (Illumina Inc), and TECH (Techne)
WTR (Aqua America): Attractive on a relative basis. A leading water utilities provider with solid fundamentals. Favorable entry point at current trading range between $15-17.
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The positions and strategies discussed on MarketTakers are offered for entertainment purposes only and are in no way intended to serve as personal investing advice. Readers should not make any investment decision without first conducting their own thorough due diligence. Readers should assume the editor holds a position in any securities discussed, recommended or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any way, considered liable for the futurinvestment performance of any securities or strategies discussed.
