Weekly Results:
S&P 500 879.73 +.42%
NASDAQ 1,540.72 +2.08%
Russell 2000 468.43 +1.59%
MSCI Emerging Markets 24.42 +11.28%
Relatively a calmer week given turbulent reactions in recent months. With few days left in 2008, participants are digesting the historical results of capital destruction while bracing for a changing and unknown landscape. For the most part, risk-aversion has been a popularapproach. That's understandable, especially following a cycle top highlighted by mismanaged risks and increasing interventions. At this point, the challenge is identifying how much of the bad news is reflected in sentiment data. Again investors are accustomed to facts relating to weak economic outlook, less consumer spending and bruised global confidence. Financials continue to struggle and have not recovered as expected by many optimist. Similarly, dislocation in credit markets is extending to municipal bonds. Yet another reminder of investor anxiety. Nonetheless, examining positive symptoms is more vital now than in other periods.
Now, there are early signals of a bottoming process, which are visible in few areas. Observers wonder if October set the lows for recent sell-offs. For example, October 24th marked Gold's lowest point. Similarly, on the same day the VIX (volatility index). saw its annual highs. Correspondingly, late November witnessed spike lows in S&P 500 and a top in the US dollar. Clearly, these hints alone might not be enough to encourage managers to increase overall risk appetite. Nonetheless, these macro patterns spur thoughts and increase perceived convictions. In addition, these Technical's can impact investor psychology and willingness to participate.
Perspective on a bottoming process:
· "Based on the outperformance of emerging-market stocks and the sharp recovery of commodity-related groups, it would appear that investors are becoming less risk averse. Another example is the outperformance of small caps since the November 20 lows." (Bespoke Investments – December 8).
· "On top of everything else, Lowry's Selling Pressure Index dropped substantially yesterday [Wednesday] and is now in a definite declining trend. At the same time, Lowry's Buying Power Index is trending higher. Thus, the odds are saying that the trend of the stock market is turning up." (Richard Russell-Dow Theory Letters- December 2008)
· "Companies in the S&P 500 Index are marking down assets at the fastest rate in six years, leaving operating profits 46% higher than net income in the third quarter, a level last seen in 2003 when the previous bull market began. The ballooning gap between net income net income and operating profit suggests companies are getting rid of their weakest businesses, setting the stage for a recovery in stocks next year." (http://hedgefundmgr.bl
The Week Ahead:
In looking ahead, the action of the Federal Reserve will be highly monitored, but might not surprise. In addition, option expatriation can create trading noise forcing participants to throw in the towel for 2008. For active participants, the direction of volatility should influence overall behavior.
On a sector basis, Biotech is relatively attractive as shown by its strength versus the broad markets. For long-term investors this cycle shift creates fundamental entry points. Factors for an upward bias include, M&A activity, promising innovations and spending cycle.
Macro Levels:
Crude [46.28] : After setting annual lows of 40.50 on December 5, there are signs of a recovery. The 200 day moving average is too far removed at $104. A sharp rally to $60 can present short term opportunity. Yet, this does not negate the established downtrend of commodity related themes.
Gold [826.50] A 16% rally since October lows after an extreme oversold readings. Currently heavy resistance ahead around $860-880 range.
US 10 Year Yield [2.57%] Flirting with all-time lows around 2.50%. Forming new trading range developing between 2.45 and 3%.
US Dollar DXY [83.64%] Pausing after a 6 + month run and extended in the near-term. Trend remains positive above 80.
S&P 500 [879.73] A key test around the 900 range which is near the 50 day moving average of 909.80. Secondly, index is poised for sideway trading within 800-1000.
