Weekly Results:

S&P 500 1,036.19 -4.02%

DJIA 9,712.73 -2.60%

NASDAQ 2,045.11 -5.08%

Russell 2000 562.77 -6.34%

MSCI Emerging Markets 38.19 -6.40%

“If two men agree on everything, you may be sure that one of them is doing the thinking.” Lyndon B. Johnson (1908 - 1973)

Early hints:

There are plenty variables to watch in upcoming weeks and few things to digest from recent developments.

Dollar and volatility index (VIX) bottomed together on October 21, 2009, which marked a turning point that triggered recent sell-offs. On that date, the VIX contracts expired for October and jumped from 14 month lows. On the other hand, October 21st witnessed a short-term peak of 1101.36 in the S&P 500 Index. Uniformly, these signals showcased the feelings of participants towards a turbulent November. Similarly, these actions also matched technical signals of increased odds of pullbacks. In other words, buyers are waiting for better pricing and timing to reconsider purchase. Meanwhile, sellers are aggressively taking a cautious stance, based on early evidence of cycle declines. The early part of earnings season provided upside surprises. Perhaps that created great expectations, while raising the bar too high. Therefore, the stage was set for disappointments after a solid 7 month run.

From a global point of view, the recovery in the dollar is a key macro trigger that has been long awaited by financial markets. Similarly, the comfort level is being tested for those betting on higher commodities and lower dollar. Economic data and Fed actions can create further reasons for trend disruption. Heading into this week, short-term trading is subject to emotionally driven responses, which can be costly from a trading perspective. Importantly, fear appears to become the dominant market theme. Therefore, the power of perception can’t be underestimated, and it can quickly turn into reality. That said, the prudent move is to minimize risk and observe as events unfold at the start of the month.

Assembling the parts

Again, investors are adjusting from one extreme of bullishness to panic mode, continuing into a “stabilization” cycle. The big picture suggests that pending retracements are expected. Clearly, confidence is fragile, and the management of the financial system will face further scrutiny. For commodity holders, multi-year trends of Gold and Crude are not yet broken. Of course, fear will increase, given the psychology of markets. Generally, extremes offer opportunities, such as shorting in 2007 and going long in March 2009. However, many will attempt to identify if the recent recovery can be labeled extreme as well. Also, with the S&P up 14.7% year-to-date and with 42 trading dates left in 2009, managers might strongly consider taking profit to lock-in gains.

Weakening Financials:

More convincing is needed for suspicious observers, given the lack of credit extension and weaker consumer spending. Unlike the rest of the broad markets, Homebuilders peaked on September 17, 2009. Similarly, commercial real estate deterioration is evident, and few banks continue to file for bankruptcy.

Specific Ideas:

Worth a look are select opportunities in healthcare, technology, and infrastructure related and smaller companies with promising growth:

INSU (Insituform Technologies): This company might not offer the best entry point, but it may be an appealing company in small cap for longer-term investors. It’s an infrastructure play, offering exposure to Sewer Rehabilitation. Profitability increased in global projects as net revenue rose 14% from previous quarter. Long-term tecnhincals show favorable odds for a sustainable recovery.

BKE (Buckle Inc): Stock is trading at compelling levels for value seekers, despite a weak consumer and spending cycle. It’s a casual retailer, showing fundamental strength. Currently, it’s among the heavily shorted stock in the S&P 600 Index. It offers a contrarian bet, especially with growing pessimism.

Previous Ideas: ASEI (American Science and Eng), SXE (Stanley Inc), and RVBD (Riverbed Technology).

Article Quotes:

• "The percentage of US companies beating earnings estimates currently stands at 74%, but below, we highlight how this 'beat' rate has changed throughout earnings season. As shown in the charts below, as earnings season has progressed, the percentage of companies beating estimates has declined, while the percentage of companies missing estimates has increased.” - (Bespoke, October 29, 2009)

• "Capmark Financial Group Inc., the lender that filed for bankruptcy this week, was making billions of dollars in property loans just as investor Sam Zell was exiting the U.S. office market in early 2007. In 2006 and 2007, Capmark originated $60 billion in commercial mortgage loans, most for office buildings, according to the Oct. 25 bankruptcy filing. While Capmark was lending, Zell was selling Equity Office Properties Trust at the top of the market for $39 billion, including debt." – (Bloomberg, October 27, 2009)

Levels:

S&P 500 [1036.19] Few points above October 2nd lows of 1019. Short-term indicators suggest oversold conditions, as the index retraced 6%.

Crude [$77.00] Minor consolidation from October 21st highs of $80. The commodity continues to maintain its upside momentum.

Gold [$1040] Strength remains intact. Forming a trading range between 1020-1040.

DXY– US Dollar Index [76.34] Bouncing back from annual lows. Last week, index surpassed its 20 day moving average. At early stages of a much anticipated trend reversal.

US 10 Year Treasury Yields [3.48%] No significant changes. Rates are struggling to hold above 3.50%, which suggest the lack of structural changes.

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 that 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.