Market Outlook | June 15, 2009

Weekly Result:

S&P 500 946.21 +.65%
DJIA 8,799.26 +.41%
NASDAQ 1,858.80 +.51%
Russell 2000 526.83 -.67%
MSCI Emerging Markets 33.85 +.75%

A Quick Overview:

Based on recent performance, one can conclude that sentiment is optimistic. On the other hand, credit and economic concerns lack clarity. Clearly, lots of events headlines and data points. Yet, stabilization is the key takeaway across financial markets. Investors are gaining confidence in buying Commodities and Emerging Markets. Perhaps these sectors are less affected by the credit crisis. Secondly, a cycle view reminds us that the multi-year shift favors non-interest related areas. Thirdly, on a relative basis commodity and developing markets face less uncertainties from policymakers. In fact, Emerging Market funds attracted nearly $30 billion so far this year. Meanwhile, speculating on upcoming Federal Reserve decisions may not present actionable ideas. Overall, investors are willing to take risk in momentum plays rather than wait for credit improvements in developed countries.

“S&P 500 Index has not posted a daily rise or fall of 1% or more since June 4, the longest stretch in 14 months. Since September 15, 2008, when Lehman Brothers filed the largest ever US bankruptcy, 131 out of the 188 trading days have had moves of 1% or more.” (Bloomberg June 12)

Looking Ahead:

Generally, too much comfort leads to complacency. Eventually, this opens up the possibility of sharp and surprising reversals. That said, confidence is visible in the behavior of key indicators. Since November 2008, volatility has declined by nearly 65% as measured by the VIX . This reflects less turbulent movements and a move away from fear. In fact, Volatility and Gold indexes are only few points above June 2008 levels. Basically, a roller coaster ride from panic to rally. Maybe, a new “normal” is being redefined. On the other hand, Equities and Crude are well below summer 2008 ranges. Perhaps, this explains the strong run. In other words, Equities and Crude are playing catch up towards stability. Psychologically, investors analyzing these barometers can sense that markets are not too bearish. Currently, the year to date returns on broad US indices are positive (S&P +4.8%, Nasdaq +17.9% and Russell 2000 5.5%).

“Although Federal Reserve credit creation has soared in the past year, private financial sector credit creation has plunged. Before one gets too worked up about Treasury borrowing and Fed credit creation, one has to take into consideration how much private nonfinancial sector borrowing and private financial sector credit creation have slowed." Paul Kasriel (Northern Trust)

Levels:

S&P 500 [946.21] Forming a narrow range between 930-950 in the past 10 days. Overall positive trend continues to hold.

Crude [72.04$] Regaining multi-year momentum. Breaking above $60 trigged additional buy signals.

Gold [$937.25] Struggling to hold above $960 this year. A break below $850 can create additional selling pressure.

DXY – US Dollar [80.14] Slightly holding above annual lows. Sitting at a key support level $80. Too early to declare a trend reversal.

US 10 Year Treasury Yield [3.78%] Early indication of of peaking after bottoming in mid December 2008. Few points removed from annual highs of 4%.

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