Market Thoughts | October 6, 2008
S&P 500 1099.23 -9.4%
NASDAQ 1947.39 -10.8%
Russell 2000 619.40 -12.1%
Emerging Markets 30.72 -15%
Sell-offs across the board despite politically driven announcements. Investor psychology is greatly consumed with "Fear". At this stage, there is an increasing fixation with indicators showcasing panic such as VIX (Volatility Index) and TED Spread. Clearly, both signal extreme bearish readings. Negative sentiment is understandable at this junction of this cycle. The weak economic and credit environment confirm this downtrend. Even the most optimistic investors, recognize that we are in a period of readjustment. A decline in (ISM) manufacturing index further reflects contraction in economic sectors.
As we begin the fourth quarter, commodities remain in a downtrend, labor markets seem vulnerable, and earnings can provide more clarity in investors' expectations. That said, bottom seekers are looking for a confirmation as odds increase for a sharp trading bounce. As for the longer-term outlook, more clues are desperately needed. Investors are confused, especially given recent disruption of market flow. In other words, the undefined regulatory landscape and pending elections force many participants to stay on the sidelines. In looking ahead, discussions of a Federal Reserve rate cuts should spark further discussions.
In March 2000, the S&P 500 topped at 1552. Similarly, last October the index peaked at 1576, just few points away from tech-bubble highs. Charts remind us, how the S&P 500 reached lows of 768 in October 2002 before a multi-year rally. Today, the index is 331 points removed from those market lows. In other words, there is room for further downside based on historical pattern. This decade's worth of run up in Credit, China and Crude is pulling back from excess levels.
Reconstruction in Financials continues to reshuffle ones valuations and expectations. Since the first short-sale ban in July, Large Cap financials have made a strong recovery. For example, XLF (Financial SPDR) has held above its annual lows of July 15th. Sector consolidations appears to favor Super Regional Banks. For example, JP Morgan (JPM), WFC (Wells Fargo) PNC (PNC Financials) and USB (US Bank) are trading near yearly highs.
Macro Indicators:
Crude [$93.88] Holding above annual lows of $90.80. Downtrend intact from mid-summer highs. Despite, near-term trading recovery technical outlook remains negative.
Gold [828] Following a sharp recovery in recent weeks, index failed at $900. Although, a flight to quality in the current crisis, there is less upside momentum at current levels. Visible consolidation between $800-550.
US 10 Year Yield [3.60%] Sideways pattern forming between 3.60-3.80%. So far this year, yields held above 3 key lows (Jan 25 -3.28%, March 21 3.30% and Sep 19- 3.24%). Perhaps, this signals potential rise in yields from a technical basis.
DXY – US Dollar [80.31] Strengthening momentum since March 2008 lows. Extended in the near-term. Early signs of a breakout with further evidence needed. Potential pullbacks around 50 day moving average of $76.
Stock Specific:
Financials: Long: BX (BlackStone Group) | Sell: COF (Capital One)
Commodity Related Shorts : TS (Tenaris SA): STLD (Steel Dynamics), SID (Companhia Siderurgica) and GGB (Gerdau S.A)
Healthcare: BLUD (Immucor), GENZ (Genzyme) and ILMN (Illumina Inc), and TECH (Techne)
Other Long Ideas: WMT (Wal-Mart), LUV (Southwest Airline) and WTR (Aqua America).
