Market Outlook| November 16, 2009

Weekly Results:
S&P 500 1,093.48 +2.26%
DJIA 10,270.47 +2.47%
NASDAQ 2,167.88 +2.62%
Russell 2000 586.28 +1.02%
MSCI Emerging Markets 40.85 +3.46%

“Mistrust the man who finds everything good, the man who finds everything evil, and still more the man who is indifferent to everything.” Johann K. Lavater

Good Stories vs. Solid Management

It appears that some observers cheer for one directional side, regardless of the calendar year or investment cycle. Perhaps. there is a bullish and bearish crowd that craves stories that support their views. Maybe, outspoken pundits present a thesis, rather than those seeking outperformance by participating in financial markets. However, an astute observer should grasp arguments from both views while staying informed. From a money management perspective, the above points are less relevant, especially since one-sided views lack flexibility. And active participants know too well that emotional responses are costly and that eliminating noise is a necessary exercise. That said, the critical questions reside in answering overall outlook for the first quarter of 2010.

Patiently Waiting

As the holiday season approaches, lofty investor expectations can create room for disappointments. However, Federal Reserve seems too encouraged on recent trends. On the other hand, political pressures are accumulating, regarding the near zero interest rate policies. This partially explains the non-trending behavior in interest rates and the ongoing strength in risky assets. Any changes of recent policies relating to interest rates, inflation, and US Dollar are expected to create significant mood changes to what appears to be a stabilizing market. Sideline observers are skeptical until policymakers restore trust with solid confirmation of existing mixed data points. At this point, investors can’t easily declare compliancy, even though the technical picture argues for cautiousness.

The trend shift toward optimism, established in the spring, simply showcased that risk taking has been rewarding. This enabled stock market indexes to normalize from abnormal lows. Of course, this cheerful response is not visible in some headlines, economic numbers, and sentiment studies. Mangers will have to distinguish cheerleading versus selective approaches in the weeks ahead. For some, selling now is difficult after enjoying favorable gains since March 2009. This is understandable for believers of a sustainable, multi-year cycle recovery. On that note, selling now appears too premature. At least, waiting to add to long positions is an option as well. Again, those in the sell camp have been whipped around and have been mostly wrong in the past six months. This is creating a growing hesitancy to bet against markets, and it may result in more sideway to up patterns. However, finding timely buy ideas seems limited. Meanwhile, adding to winners (such as materials, emerging markets, and small cap) seems a bit ambitious as well.

Clues

Volatility spiked few weeks ago, but it has quickly returned to calmer levels. It was an intriguing behavior that showcased early signs of fear. Yet, it was short-lived, as the volatility index retraced back to reasonable ranges. Earnings report continues to build optimism in core Large Cap areas. For example, Fed Ex signaled an optimistic forecast for holiday shipping. In fact, volume is projected to increase relative to 2008. Obviously, this was only an estimate, but the upbeat message signals some fundamental improvements in retail related areas. Perhaps, some economic data might underestimate innovation and entrepreneurship. As for financials, lagging indicators, such as foreclosure data, point to further deterioration. Importantly, sentiment in the sector is overly negative and can present surprises.

Article Quotes:

"Note the still widening spread between US 10-year yields over 2-year yields, otherwise known as the yield curve, on this historical. It is still rising, indicating to me that quantitative easing continues. The time to start thinking about closing long portfolios in anticipation of the next bear market, I suggest, will be when the yield curve next inverts by moving below zero. However, the lead was so early last time (early 2006) that some of us became complacent about it." (David Fuller Fullermoney, November 13, 2009)

“Despite deterioration in nonresidential construction, the housing sector appears to be stabilizing. With regard to wealth, after plunging 24 percent in inflation-adjusted terms from mid 2007 through the first quarter of this year, net worth across all American households rose slightly in the second quarter and will likely be found to have risen in the third. And, after surging to incredibly high levels, interest rate spreads have returned to near-normalcy in the commercial paper and mortgage markets and are returning to Earth in the bond market.” (Richard Fisher, November 10, 2009)

Levels:

S&P 500 [1093.48] Positive trend despite choppy trading pattern this fall. Expect back and forth swings between 1040-1100.

Crude [$76.35] Remains in a consolidation mode after retesting around $80. Short-term participants will closely watch the magnitude of pending sell-offs.

Gold [$1104] Trading near annual highs and continues to recovery sharply. Gold is up almost 20% since July 29th lows. Odds are increasing for minor pullbacks.

DXY– US Dollar Index [75.25] Once again, the index is trading closer to its annual lows. Few technical based observers mark 76 as a critical level.

US 10 Year Treasury Yields [3.42%] Closed few points removed from its 50 day moving average of 3.39%.Failing to surge past 3.57% and has held steady above 3.30%. Again, Fed policy or guidance can spark movements away from a narrow range.



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