Market Outlook | April 6, 2009

http://markettakers.blogspot.com/                                    

Psychological puzzle:

A Psychological puzzle as  investors' fear appears to evaporate at least temporarily.  Usually, most investor seek dramatic indicators for a turnaround. Nonetheless, price action suggests that key participants are willing to speculate in aggressive areas. In fact, riskier assets have risen sharply especially in retail, technology and commodity based groups. Now, the sensible question calls for one to measure risk/reward opportunity of adding long positions. The current move in US equities presents a uniform upside participation in various stocks which implies favorable odds for a bullish run.  In addition, stock market behavior generally looks ahead of weak economic data. Headline economic numbers reiterated weakness. That said, select economic areas are showing slight improvements such as manufacturing and construction. Most financial headlines focused on G20 meeting, Federal reserve actions,  role of US Dollar and changes in accounting standards. These factors have yet to showcase clarity in overall fundamental picture. Basically, more follow-through is required to reach a defined trend that goes beyond speculative behavior.

Bear market optimism :

Price behavior alone does not tell the full story. At this juncture of a sharp rally, participants attempt to weigh mixed headlines and cycle behaviors.

A quick reminder:

“ There were six bear-market rallies during that stretch, with returns of more than 20%, each one fueling a sense of renewed optimism. Yet each counter-trend rally ultimately fizzled-out and unraveled, before market indexes skidded to new lows.” Richard Russell (Dow Theory Letters).

Pattern reminders:

Recent history reminds us that the previous bull cycle started in March which marked a bottom. In fact, on March 12, 2003 the S&P bottomed at 788. Amazingly, that behavior compares to this year’s lows of 666 reached on March 9th. Perhaps a coincidence or a seasonal matter. Nonetheless, a striking parallel even for the casual observers. Similarly, a long-term chart showcases 800 level as a key technical point for S&P 500. The “800 level” marked the tech bullish run of 1997 and trigged the recent bullish run led by China, Credit and Crude in 2003. 

Message from Emerging Markets:

In these early stages, global equities are pointing to growing optimism. Inflow into emerging markets increased by $1 billion and Asian countries issued debt totaling above $176.3 billion. In other words, select data points confirm increasing confidence.

"Emerging-market governments and companies borrowed more in international bond markets this week than at any time in the past two years” (Bloomberg, Laura Cochrane)

Strength in global equities closely coincided with weakness in US Dollar. Gains in Canadian and Australian Dollar are noticeable. Again, this fits the theme and movement towards risky assets which is reflected in stocks of related to materials. Currency and commodity indicators sever as a barometer for risk appetite. EEM (Emerging Market Fund) demonstrates a bottoming process that began six month ago after holding above $20. IMF decisions severed as an upside catalyst to an index that continues to maintain  relative strength. Interestingly, in the past 6 months the VIX (Volatility Index) has declined by 55% which reiterates the point that investors are overcoming irrational worries. Perhaps, the next major concern can focus on  investor complacency rather than fear.

Macro Levels:

S&P 500 [842.50] Extreme lows in early March triggered an early recovery phase. Holding above 800 (near 50 day moving average of 790) can encourage a bullish bias. 

Crude [$52.51] Bottomed three times around $32-35 range and stabilizing at current levels. Interestingly, heavy resistance at $60.

Gold [ $905] Approaching multi –year highs of $1011 reached in late March 2008. Nearing overbought conditions and few points removed from previous highs of $989 from earlier this year. Investors attentively await further confirmation.

DXY – US Dollar [84.16] Annual trend remains positive. A range-like behavior forming between 82-86 in the past six months. This suggests a near-term pause in US Dollar appreciation.

US 10 Year Yield [2.88%] Demonstrating strength above 2.60%. Solid uptrend forming since  lows of 2.03%. Despite a 14 basis points weekly increase, uptrend in yields is set to pause. This week, the Federal Reserve plan to purchase additional debt.

Long Speculative Ideas:

CREE (Cree Inc): Demonstrating relative strength since August 2008. Poised for an upside run based on strong fundamentals. Price declines can offer buying opportunity between $24-26 range.

NLY (Annaly Capital Management) :  Despite recent dividend cut the company offers promising entry point given changes in financials. Core earnings remain solid given investment in government guaranteed securities. A test of major support at $12, presents an entry point especially for longer-term participants.

YGE (Yingli Green Energy): After underperforming broad equity markets, the stock is attempting to bottom. Early stages of recovery with next key technical point at $8.83 (200 day moving average). Presents exposure to emerging markets and growth in alternative energy. Recent improvements in financial access along with support from Chinese government generates promising outlook.

Dear Readers:

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 Publish Postway, considered liable for the future investment performance of any securities or strategies discussed.