Market Outlook | December 14, 2009

“Win or lose, everybody gets what they want out of the market. Some people seem to like to lose, so they win by losing money.” Ed Seykota

Glancing at the current annual performance of 22.5 % in the S&P 500 provokes mixed thoughts for 2010. This seems to be an impressive run or an inevitable recovery, following the 2008 collapse. Of course, repeating this type performance at a similar pace appears a bit ambitious. In some cases, investors are compelled to conclude that the months ahead come down to specific asset selection. From a big picture view, optimists eagerly await reentry points for investments related to commodities and emerging markets. Now, there are some concerns of early cooling for decade-old themes, which might overheat for the years ahead. However, the existing cycle suggests that this run has not yet reached its completion. The belief of this direction resides in a delicate policy implementation, early macroeconomic reactions, and the faith of participants. In any case, staying flexible on one’s market view is vital in the next few weeks. Again, managers are closely evaluating the improving economic conditions and its overall impact on interest rates. This long awaited answer paints the longer-term outlook and provides some guidance for investor behavior.

In the past few weeks, declining crude prices have triggered temporary changes to the ongoing trend. Again, much attention has focused on Gold’s outperformance. However, Crude has quietly taken a downturn, which begs a few questions. A peak in Crude prices materialized on October 21, 2009, at $82 a barrel. Interestingly, that’s around the same time that the Gold demand reached explosive levels. Assessing market developments can be dangerous when volume is dwindling and when markets are trading in a tight range. Similarly, the recovery in the US Dollar might be simply seasonal, as seen in previous years. In other words, investors have witnessed a late year currency appreciation in previous years. These developments serve as an early hint of trend reversal and will require further action from central banks. Policymakers have plenty to resolve in regards to the condition of global economies and the need for further fueling.

Sentiment readings are not providing a unanimous market read. However, financials remain a puzzle, because the fundamentals are not quite crisp. This is primarily due to increasing defaults. Recently, the credit related areas continue to underperform, while failing to stir up momentum buyers. In fact, Goldman Sachs has underperformed since the March rally, despite the perception of being a quality bank. Clearly, if risk-appetite begins to slow, then broad markets become more susceptible, especially with Financials making up 14% of the S&P 500 index. In other words, the sector behavior can weigh heavily on the performance of broad market indexes. Finally, volatility appears to be bottoming in the last 60 days. This indicates that there is a strong possibility of turbulence that may start in 2010. In addition, a significant pause is needed to reshuffle new themes and leaders.


Article Quotes:

“China issued policies to curb speculation in the nation's property market, after home prices rose at the fastest pace in more than a year. The government will impose a sales tax on homes sold within five years of their purchase, increasing the time period covered by the charge from two years, according to a statement posted on the website of the State Council, the nation's cabinet. A record $1.3 trillion of bank lending that helped revive Chinese economic growth to 8.9% in the third quarter has also fueled concerns of a bubble in the nation's property market.” (Bloomberg, December 9, 2009)

“Switzerland, Luxembourg, Ireland, and Hong Kong will all be quietly celebrating as they look forward to welcoming a second influx of bankers and financial institutions, after the first wave of tax exiles from London sent by Mr. Darling’s previous Budgets and mini-Budgets. Many British voters will, of course, be delighted about this relocation of greedy casino-bankers — almost as delighted, in fact, as the burghers of Zurich will be to receive them.” (The Times, December 11, 2009)


Levels:

S&P 500 [1106.41], in the last 15 trading days, is trading in a narrow range between 1090 and 1110. Along with low volume, this is a defined range, heading into year-end.

Crude [69.87] had a noticeable downtrend in Crude prices, as it failed to hold above $75 a barrel. This marks a 14% decline since peaking on November 10, 2009.

Gold [$1124] remains in a consolidation mode in the current near-term correction of 7.30%. Looking ahead, 1100 marks the next key support level. Upcoming behavior at current levels is worth watching as a barometer for additional buyers.

DXY– US Dollar Index [76.56] had an eye grabbing reversal building in the past few days. Although, recent years have told this story before and have had early winter recoveries. However, this sets the stage of a sharp rally, given the magnitude of oversold levels.

US 10 Year Treasury Yields [3.54%] have shown further evidence of strength, especially above 3.20%, for nearly a 3-month period. This is a psychological level that mostly explains the current pause. Now, 3.80% is a closely watched level for those taking an upward bias in rates.

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