Market Notes | June 1, 2009

Weekly Results:
S&P 500 919.14 +3.47%
NASDAQ 1,774.33 +4.67%
Russell 2000 501.58 +4.23%
MSCI Emerging Markets 33.02 +4.44%

In the spring months, markets showcased some stability in a post panic period. Participants continue to witness the first recovery phase from dislocated ranges. This is visible in the behavior of Commodities, stocks and interest rates. Key indicators are recovering uniformly just like the synchronized declines of 2008. In the past three months, S&P 500 is up nearly 25% catching the attention of sideline investors. Since late December, Crude is up over 100 % and US 10 Year Treasury Yields rose nearly 84%. Interestingly, headline and legislative worries may not reflect sharp upside moves. So far this year, speculators have shown high tolerance for “risky” assets.

Levels:

S&P 500 [919.14] Intermediate-term improvement following March lows. Near-term pause developing between 880-920.

Crude [$66.31] Solid uptrend. Approaching next key resistance near $70 last reached in November. Positive momentum following a break above 200 day moving average.

Gold [ 975.50] Nearing a key psychological level at $1000. February highs of 989 is worth watching closely from a technical perspective.

DXY – US Dollar [80.43] Index is down over 11% after peaking in March 2009. Nearing key support around 80.

US 10 Year Treasury Yield [3.44 %] Multi-month rise is pausing. Lase few days, a sharp decline from highs of 3.74%. The sustainability of this trend will be tested in weeks ahead.

Meanwhile, investors weigh the creditability and sustainability of this inevitable bounce. Beyond performance, the long term outlook of credit conditions and government debt seem unresolved. In fact, charts suggest a pause in appreciation of risky assets and broad US indexes. Similarly, the downgrade of United Kingdom’s sovereign rating and GM’s bankruptcy can quickly change sentiment. Therefore, early summer sets the stage for possible sell-offs.

Commodities, Emerging Markets and Technology lead this current rally. Perhaps, leadership is shifting towards groups with less exposure to credit risk. On the other hand, interest rate sensitive themes such as Financials and Utilities are underperforming year to date. Once again, credit worries resurface. At this stage, taking speculative positions can be costly given increase in P/E ratio to 15.5 from 13.1. (Robert Shiller of Yale) Buying at current prices appears expensive especially for bargain hunters and value seekers. That said, momentum chasers and optimists face a decision between profit taking versus adding on pullbacks.

"Deleveraging means paying down debt instead of paying out dividends or buying in stock. Indeed, as the pick-up in equity financing indicates, it means issuing new shares. 'The growth rate in of earnings per share thus is likely to be worse than that indicated by profit margins alone,"(Smithers & Co)

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