Weekly Results:

S&P 500 929.23 +5.89%

DJIA 8,574.65 +4.41%

NASDAQ 1,739.0 +1.15%

Russell 2000 511.82 +5.10%

MSCI Emerging Markets 31.30 +7.94%



Simply, an euphoric market reaction where surprises in expectation carry a heavier weight than headline concerns. Economic and corporate data alone does not fully reflect sentiment among participants. The market reminds us that unfathomable rewards are available during periods of panic. Yet, another twist and turn awaits when focus shifts away from headline worries. Although, policymakers are credited for market stabilization, another bubble might be forming given the increased supply of government securities. At this point, monitoring those dynamics can provide a better read on upcoming sentiment.

The performance of an equally weighted S&P 500 index reflects additional strength than visible in regular charts. In fact, on a relative strength basis, a bottoming process began to develop in late November. Similarly, US 10 year Treasury Yields and Crude are nearing annual highs which affirms a recovery process from previously dislocated financial markets. Clearly, 2008 presented a historic like sell-offs and panic driven responses. Now, a restoration process is in full gear especially with improving credit conditions.

Further demand for risky assets?

A similar messages are transmitted in equity, currency and fixed income markets. Investors continue to place their chips towards riskier assets. Clearly, greater willingness for risk and a rotation out of safe havens. For example, rise in US treasury partially signals less demand for government secured instruments. Also, Gold’s decline in the first quarter showcases less interest for exposure in a safer asset. From a currency standpoint, declining dollar is inversely correlated to equity markets.

S&P [929.23] Approaching a key target near 200 day moving average (954.80). New trading range forming between 840-980 range.

Crude [$58.63] Trading near annual highs which stands at $58.75. Since March 2009, Oil is outperforming Gold while lagging behind stock market returns.

Gold [ $907] Attempting to reaccelerate at current levels. Early indication of basing at $880 following multi-week declines from annual highs.

US 10 Year Yield [3.29%] A 5+ month upside move in yields. Major resistance at 3.50% which is near the average trading lever for 2008.

DXY – US Dollar Index [ 82.52] An 8% decline since March 4 highs. Index continues to underperform while making new annual lows.

Landscape and investor minds:

Now, investors are forced to either believe in the recent trend or take the opposite side of this optimism. In many ways, an inflection point is long awaited. Yet, timing is tricky and emotional. Some are frustrated after waiting for pullbacks to accumulate at cheaper prices. On the other hand, short players are not sensing adverse moves in momentum especially when gauging psychology. Picking themes in risky sectors has certainly been profitable. Based on current levels, aggressively buying here may not fit the optimal risk/reward set up. At this stage, this trade feels less appealing and more of the “herd like” approach.

Long-term investors are digesting the fundamental climate while estimating true strength of this market. Fear driven observers remain skeptical. Nonetheless, there are enough speculators seeking opportunities while cautiously awaiting the faith of volatility. In reality, not many participants are confident in understanding government intervention, reasons behind cycle breakdown and the lag effect of policies. Finally, taking a neutral stance is an option as well.