Market Outlook | October 5, 2009

Weekly Results:

S&P 500 1,025.21 [-1.84%]
DJIA 9,487.67 [-1.84%]
NASDAQ 2,048.11 [-2.05%]
Russell 2000 580.20 [-3.13%]
MSCI Emerging Markets 38.00 [-.47%]



“In the future, instead of striving to be right at a high cost, it will be more appropriate to be flexible and plural at a lower cost. If you cannot accurately predict the future then you must flexibly be prepared to deal with various possible futures.” Edward de Bono


Adjusting to a new season

As we begin the fall and the start of the harvest season, key market indicators face several inflection points. A trending market that is pausing, following positive third quarter returns. The fruitful rewards of spring and summer have tempted investors to cash in the fall. Last week presented lots of data to digest, highlighted by economic data, which was mixed and, at times, fell short of investors’ expectations. Now, analysts attempt to discover if risk-aversion is in place after a negative weekly finish. For one thing, volatility is creeping higher, and anxiety is building ahead of earning season. At the same time, historians remind us of the fatal possibilities that have occurred in previous autumns.


Signals from Big Picture indicators

Since 2003, the US 10 year Treasury Yields has ranged between 3.50%-4.50%. Now, the break below 3.50% serves as a gauge of investor sentiment. In the past eight years, yields reached below 3.50% only once, which took place last year, during the height of the panic. That said, another breakdown near the 2% range creates sharp worries and reshapes the expectation landscape.

In terms of commodities, in the past two years, Gold has traded between $800-1000. Interestingly, Gold prices have yet to show strength above $1000 for a sustainable period. Similarly, Crude has struggled to move above $80. In both cases, this provides some clue towards investor’s views of multi-year trends. In the weeks ahead, much attention will focus on these behaviors, given the strong correlation between commodities and stocks. In addition, the last two weeks have witnessed a recovery in the Dollar and a peak in equities. This is appealing for short-term observers, based on a powerful inverse relationship between the Dollar and Stocks.


62 Trading days left in 2009

We’re entering a period where bargain hunters are finding less deals than desired. In other words, stocks are not as cheap as before, based on fundamentals. Also, technicians and odds makers point to further corrections rather than attractive buy points. This easily paints worrisome headlines and sets the stage for sensitive responses to economic news. Nonetheless, we’re marking over two years since the start of the credit crisis. Many of the downside surprises have been examined or considered by extreme scenarios.


Selecting Spots:

A market pause in the next 2-3 weeks enables investors to pick areas in innovative based themes. Potential mergers and acquisitions in technology point to a positive up cycle. Plus, growing IT spending and healthy balance sheets can provide the sector as a market leader. Importantly, company specific picks might be required, given the overall macro conditions.

Now, credit conditions remain uncertain and relatively weak. Specifically, commercial real estate is an area with deteriorating fundamentals. Again, the Federal Reserve reiterated the group vulnerability which is worth noting for financials. Interestingly, the Housing index (HGX) peaked earlier than the broad market did on September 17, 2009. Also, the group attracted fewer buyers relative to other sectors since the market bottom this year. Similarly, two mortgage REITS attracted less demand in their recent IPO. Perhaps, these markets, suggesting one more downside, should move to clear ongoing doubts in housing.

Article Quotes:

• “The best plan, he believed, was no plan. Better to approach an uncertain world with an open mind. ‘I know a lot of people have very strong and definite plans that they've worked out on all kinds of things,’ Singleton once remarked at a Teledyne annual meeting, ‘but we're subject to a tremendous number of outside influences and the vast majority of them cannot be predicted. So my idea is to stay flexible.’ Then how many influences, outside and inside, must bear on the U.S. economy? " ( Jim Grant, WSJ – September 19, 2009)

• “It is estimated that American households saw $14 trillion dissipate, largely from stock market losses and house price deterioration through the first quarter of 2009. This loss represents more than 20 percent of their net worth. About $2 trillion was recouped in the second quarter of 2009, primarily from market appreciation. And stock market and house price appreciation have added to these gains in the third quarter.” (Dennis P. Lockhart, Federal Reserve Bank of Atlanta 9-30-2009)


S&P 500 [1025.21] Index is slightly above 50 day average. Uptrend remains positive above 950.

Crude [$69.95] Continuation of a neutral pattern. In the near-term, charts suggest favorable odds for further pullbacks closer to $60 range.

Gold [$1003.50] Few points below annual highs of 1018.50. The commodity is up 15% since bottoming in early April 2009.

DXY– US Dollar Index [77.03] A very short-term look suggests a recovery in the Dollar since September 23, 2009. Perhaps, this is a key reversal point for an emerging trend.

US 10 Year Treasury Yields [3.22%] Trading at a mid point range between spring lows of 2.45% and summer highs of 4%. Perhaps, this explains the building tension of unknown trends.


Dear Readers:

The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions 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.