Market Outlook and Ideas | July 27, 2009

Weekly Results:

S&P 500 979.26 +4.13% DJIA 9,093.24 +4.0% NASDAQ 1,965.96 +4.21% Russell 2000 548.46 +5.63% and MSCI Emerging Markets 35.11 +5.25%

“There are things known and there are things unknown, and in between are the doors of perception” Aldous Huxley (English Novelist and Critic, 1894-1963)

Perception indeed! Perhaps it only takes few upside moves and less bad news, to stir up positive sentiment. With the S&P sporting an 8% return for 2009, one must wonder if performance chasers are tempted to step in. That said, further evidence of a turnaround is not confirmed especially to issues relating to credit conditions. Similarly, technicals suggest overbought conditions following several consecutive up days for Nasdaq.

In the past few weeks, investors appear fatigued by ongoing headline worries, gloom scenarios and mixed economic data. Ignited by the March 2009 lows, market momentum is building positively. Eventually, this created an increased risk appetite. Now, gauging investor sentiment remains tricky. Meanwhile, extreme fear is not a factor but some investors remain skeptical. Complacency might be more of a concern given sharp rallies. Importantly, policymakers are hinting at improvements given stimulus injections that should materialize. Yet, GDP and labor data will be closely monitored in the upcoming week.

Additionally, shorter-term and, fast pace trading continue to drive market activity. Nonetheless, innovative themes such as Technology may invite value investors with longer-horizon. As usual, earnings results, legislative climate and comments by the Federal Reserve can dictate ongoing trends. Overall, perception is sending a powerful message especially when market behavior is responsive to policymakers goals.

New Leadership:

Biotech is attractive for two reasons. First, several pending M&A deals as the group offers a relatively attractive upside potential. Secondly, sector is gaining from increasing financing from venture capital investors. Recently, Biotechlongly related companies raised $1.5 billion in the second quarter according to National Venture Capital Association. This showcases, optimism and a cycle shift that favors stocks in Healthcare.

Banks and Energy?

Semiconductors and Biotech’s are trading at annual highs along with broad indexes. That’s not the case for Energy and Financials. For example, Oil Service Index (OSX) is 8.2% below annual highs reached on June 11^th. Similarly, the Bank Index (BKX) is 7% removed from May highs. Therefore, the strength of this momentum is questionable for some areas despite strength in Crude futures and broad indexes.

Actionable Long Ideas:

• CWT (California Water): The company benefits from high water demand given increasing population. Secondly, the stock offers attractive dividends for yield seekers. Finally, the company benefits from infrastructure and stimulus spending. Combining these factors present promising potential despite near-term pullbacks. Note: Earnings are scheduled for this Wednesday.
• MATK (Martek Biosciences): Martek, a producer of infant formula, dietary supplement and novel food is set to benefit from recent approval of its products by the European Union. Stock is 68% below its all-time highs reached in 2004. This offers an entry point given attractive pricing and improving fundamentals.
• RFMD (RF Micro): Stock continues to climb out of deeply oversold levels. Recent earnings surprised analyst expectations due to increase in quarterly revenue. The company continues to enter new markets, restructure its business model and leads its group in a favorable semiconductor cycle. Valuations appear sustainable despite recent appreciation.

Last Week’s Ideas:

Long CREE (Cree Inc), LLTC (Linear Technology) and ONXX (Onxx Pharmaceutical).

Levels:

S&P 500 [979.26] Breaking out to new range above 950. Index is showcasing strength and stands 12% above its 200 day moving average.

Crude [$68.05] Strong support around $60. Positive pattern as it approaches annual highs of $73.38.

Gold [$951.50] Further sideways movement within an established range. Attempting to reach and break above 980.

DXY – US Dollar [78.75] Clear downtrend forming below 80. No signs of trend reversal at this point.

US 10 Year Treasury Yield [3.65%] Recovering from recent lows of 3.25% in mid July. Trading a narrow range between 3.40-3.80%.

Article quotes:

"'It's important that the Fed be independent on monetary policy, but I worry about what independence might mean in other contexts,' Poole [former Fed President] 'The Fed, it seems to me, has stretched beyond reason its authority to make loans to the private sector, such as the MBS (mortgage-backed securities) purchase program, the lending on commercial paper from large corporations, the bailouts.' “(Bloomberg, July 22, 2009)

Global equities as measured by the MSCI World Index rose 46% from a more than 13-year low in March. Since then, money-market fund holdings sank 6.6% through March 15 from near a 20-year high, data compiled by Bloomberg show. ( Bespoke, July 20, 2009.)

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