Market Outlook| March 9, 2009

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Weekly Results:

S&P 500 683.38 -7.03%, DJIA 6,626.94 -6.2%, NASDAQ 1,293.85 -6.10%, Russell 2000 351.05 -9.76% and MSCI Emerging Markets 21.10 -1.31%

Gauging Fear:

Markets continue to test participants patience and remind speculators that downtrends require additional time. Clearly, the current dynamics  provoke further  impatience among value seekers and long-term buyers. Basically, skepticism is too high and serves as a driving force behind short-term holding periods. Therefore, a series of catalyst should determine the timing of a bottom. 

“At this juncture, short-term movements are almost impossible to predict, although the sell-off over the past few days - a capitulation in some respects - could nourish the long-awaited tradeable rally. Also, Lowry's 90% down-days, like we experienced on Monday and Thursday, are often followed by two- to seven-day bounces.” (Richard Russell (Dow Theory Letters).

Financial scoreboards and headlines paint a bearish tone. For example this year,  the Volatility Index (VIX) is up 23% and S&P 500 down 24%. A developing relationship that is  noticeable since summer of 2008.Broad markets have witnessed negative returns In the last 8 out of 9 weeks. This reflects weak economic numbers, bruised confidence and plenty of unknowns ahead . In addition, overall consensus appear to  focus on  worst case scenarios. Similarly, the  AAII Investor sentiment data reached  its lowest level since 1987. Some contrarians view this occurrence as a guide for a trend reversal.  On the other hand, bear markets present sharp rallies but those gains are not sustainable.

Rotation within a downturn:

Emerging markets have outperformed US broad indexes especially since October 2008,.  Last week the S&P 500 declined 7% versus a 1.3% fall in Emerging Market Index.Perhaps, this trend is closely linked with multi-month strength of basic materials.  In other words, commodity based sectors account for a significant portion of  emerging markets. Secondly, the Chinese stock market is up 14% year to date despite a sharp sell-off last year. At the same time, China’s manufacturing sector continues to grow. Finally, rate cuts by developing countries sever as a catalyst for fundamental improvement. That said, US equities continue  to underperform against global indexes, even in a period of risk aversion.  Now, risk levels of US equities seem mysterious as analysts decipher the beaten up fundamentals.  In upcoming weeks, the sustainability of emerging markets can determine if r capital will favor this segment. In other words,  investors look  to sort out new leaders and seek evidence of strength in emerging markets.

Macro Levels:

Crude ($45.52):  Trading at a higher end of a three month range.  Extended in the near-term. Key support of $40 which is closet to 50 day moving average.

Gold ($936): Consolidating between $900-950. A positive trend remains in place. Setting up for a short-term recovery especially with increasing concerns of paper assets.

DXY- US Dollar Index (88.51): Reaching a key junction after making annual highs of 89.62. On a relative basis strength is positive but poised for a near-term pause around 86.

US 10 Year Yields (2.87%) : Few points removed from multi-year highs of 3.04%. Poised for pullbacks around 2.60%.

 

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