Market Thoughts – January 12, 2009

S&P 500 890.35 -4.45% 
NASDAQ 1,571.59 -3.71% 
Russell 2000 481.30 -4.85% 
MSCI Emerging Markets 24.89 -2.73%

Mixed View :

The first full week of 2009, reminded participants that positive trend indicators are temporary. In fact, a state of confusion floods this market where no-trend might be the new trend. This picture is painted in the pattern of broad indexes. For example, the S&P 500 remains in a trading range between 800-1000. In other words, it is a sideway pattern lacking major assurance. Perhaps, patience is greatly required for those investors eager to take directional bets. At the same time, Long-term investors continue to adjust to this environment. In forming an investment thesis there are increasing factors to digest.  Mainly, reactions to Fed's policy, economic outlook and pending stimulus package. Now, volatility increased last week by 9.26% reflecting further uncertainty. After a 50% fall from multi-year highs, the VIX (Volatility index) is poised to make a short-term run.

Overall economic and earnings outlook reinforce weakness. That said, the surprise factor appear less than previous months. At the same time, credit markets appear to briefly stabilize. The TED Spread, a barometer for credit risk declined from 4.65% to 1.25% in the past few months. Similarly, the number of stocks making new lows declined signaling a positive technical outlook. Of course, in both cases these results are based on retracement from historic levels.  Now, balancing  these data points presents select short-lived opportunities. As we complete a seasonally favorable period, markets will face several tests in weeks ahead. Momentum signals argue for pullbacks from current levels. Perhaps, this makes sense, given the 20+% increase for stocks since November lows. In addition, not manycompelling reasons for skeptical buyers. Nonetheless, the faith in a major market bounce depends on confidence and a series of catalysts.

Sector/ Groups:

Healthcare and technology are seeing inflow versus financials and energy. Market cycles suggest that previous leaders can consolidate for an extended period. In looking ahead, the combination of improvement in credit markets and cheap valuations create opportunities in select areas. These theme are visible in Biotech where M&A deals are tempting for larger companies.  

Biotech: BLUD (Immucor), GENZ (Genzyme), and CELG (Celgene).

Technology:  Speculative Small Cap Ideas:

ASEI ( American Science and Engineering) : Provider of scanning, inspection and X-ray equipment mainly for government securities. Positive stock  momentum especially in the past six months. Pullbacks in the near-term around $70 offer favorable entry points.

SXE (Stanley, Inc) : Shares have stabilized near $30. Company benefits from defense and technology spending. Sustainable fundamentals given the macro climate and relative strength.

NCIT (NCI Inc): Recently made new 52 week highs showcasing . Revenue and EPS growth justify the positive stock performance. At these levels, one can expect sell-offs. Importantly, companies organic growth creates value for longer-term holders.

 

MACRO LEVELS:

Crude [$40.83] Extended in the near-term after reaching $50.47 on January 6^th.  Based on recent trading pattern, increasing odds for the index  to trade between $36-$48.

Gold [$847.25] Pausing at 200 day moving average of 855.23. Long-term outlook suggests a downtrend and pullbacks in the near-term.

US 10 Year Yield [2.39%]  An early bottom forming in yields. Attempting to stay above 2.20% and a potential retest of 2008 lows of 2.03%.

DXY – US Dollar Index [ 82.66] Re-acceleration to a positive trend that started in March 2008. Holding around 80, this serves as a key base in the current cycle.

S&P 500: [890.35] 3+ month trading range stands in between 800-1000. Currently trading at mid pointlevels, in which the 50 day average stands at 888.75.

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 future investment performance of any securities or strategies discussed.