Weekly Results:
S&P 500 940.55 +4.60%
NASDAQ 1,711.29 +3.75%
Russell 2000 526.43 +.76%
MSCI Emerging Markets 24.28 -1.53%
Markets attempt to restore natural trading flow after several weeks of disruptions and intervention. In the current readjustment period, investors struggle to look ahead given a lack of stability. Recently, the emotionally driven reactions have required near-term risk management due to high volatility. Of course, with pending elections and regulation reform, a new trend is yet to be defined. In this upcoming week, earnings can provide further company specific clarity. Also, economic data presents further examination on the condition of this cycle slowdown. As for the opportunists, stocks appear cheap and seasonally the fourth quarter offers a glimpse of hope. Nonetheless, more conviction and confidence is needed in the overall Financial system.
With the S&P 500 down 35% year–to–date, most valuations suggest a buy point especially given new October lows. "Almost $50 billion of that outflow came in the first 10 days of October" (TrimTabs). This extreme outflow away from stocks continues to be a significant trend. Similarly, money managers are reshuffling portfolio's following a weak third quarter. Therefore, the mechanical part of the market can signal unusual behaviors. Similarly, risk-aversion is a dominant theme this year, as investors rotated to money markets. So far this year, money markets have expanded by 16.5% or $405 billion (according to Invesco). On a similar note, EEM (Emerging Market Fund) is down nearly 60% in the past year. Again, lack of willingness to take risk is a reflection of investor panic. Following policymakers moves, investors will reassess their risk tolerance. In addition, Federal Reserve capital should slowly take effect. Meanwhile, credit crisis are not fully complete, but more patience is required.
Money Management:
Value seekers view pending declines as a buying opportunity. For example, the BKX (Bank Index) held above its annual lows of 46.52 set on July 15, 2008. Perhaps, this can indicate some bottoming process ahead. Technology and Healthcare offer few ideas given high odds of a mean-reversion rally. For the most part, managing entry points on a near-term basis is vital for months ahead. A few long ideas below.
Stock Specific Ideas:
Healthcare: ABT (Abbott Labs), GENZ (Genzyme),BLUD (Immucor) and TECH (Techne)
Technology: ATML (Atmel), FORM (Formfactor), ORCL (Oracle) and ATVI (Activision Blizzard).
Staples: WMT (WalMart) and HSY (Hershey Co)
KEY MACRO LEVELS:
Crude [$71.81]:Developing a new range between $68-80. After a 50% decline since summer highs, the commodity is nearing oversold levels. Interestingly, the long-term trend is positive above $60.
Gold [784.50]: Attempting to shake off declines since March 2008. Near-term declines visible with Gold trading below its 50 day moving average of $833.55
US 10 Year Yield [3.92%] : Trading closer to the higher end of 2008 range between 3.40-4%. Next resistance level is at annual highs of 4.27%.
US Dollar DXY [82.41]: Early signs of a recovery from multi-year declines. Since March 1985 the currency index has declined significantly. The current uptrend is driven by a 17% rise from all time lows reached in March 2008.
S&P 500 [940.55]: Potentially forming a range between $900-1000. From August 11 to October 10 the S&P 500 dropped 31%, and these sharp declines take time to unwind.
