Market Outlook | March 1, 2010

“Many people despise wealth, but few know how to give it away.” Francois de La Rochefoucauld (1613 - 1680)

Lack of Rhythm

Coming into the year, there were growing expectations of a recovering economy, but the pace of improving conditions is being questioned. A strong February stock performance showcased a solid recovery, which appears to make up January’s losses. This is visible in the neutral results of broad indexes in which the S&P is down 1% year-to-date. This is yet another view, describing the lack of major movements while setting the stage for a suspenseful spring. Clearly, the consequences of European credit concerns dominate headlines by triggering fear-like responses, especially for banks with risky asset exposure.

US credit crisis of mid 2007 serves as the roots of recent trouble in Europe. Therefore, one should not be surprised to see discussion and implementation of reforms in financial services. For example, new short-selling rules were enforced last week. Now, this will take time to materialize as facilitators implement and adjust for these changes. On the other hand, several pundits keep featuring worrisome big picture issues, which make long-term investors wary to commit capital and exercise patience.

Moreover, technical indicators are not showcasing opportunistic extremes, which suggest increasing market sensitively in response to event reactions. In short, identifying the natural market rhythm is less evident at this junction. Now, money managers might have to understand headline interpretations while attempting to guess sustainable results. This is a challenge indeed. For traders, this means to expect plenty of news material related to credit and sovereign crisis. Knowing how to respond will be vital.

Evaluating New Trends

Only few months ago, the Dollar began to recover from extreme lows. Similarly, within the same timeframe, Gold prices peaked along with global equities. This pause is not only attributed to structural concerns of financial systems but a bubble-like behavior in emerging markets. As a result, the multi-week correction is highlighted by risk aversion and sell-off in the Euro. The nature of these pullbacks is broad based and finding distinct ideas on a relative basis, stock specific companies with less currency, and commodity exposure is worth examining. That said, investor willingness to own shares for an extended period remains part of the ongoing puzzle.

On the bright side, Volatility Index (VIX) has calmed down despite sharp turbulences in 2010. The Volatility Index is slightly below where we started the year. Of course, this is temporary, and shift in sentiment is a wildcard that’s unpredictable. However, interest rate sensitive themes and material based groups remain vulnerable from the current sell-off. In turn, this favors innovative companies as investor demand shifts away from previous leaders, such as resource and some emerging markets. If this holds, then money managers will begin to wonder a potential inflow into US currency and capital markets.

Article Quotes:

“The existence of this long-term trend makes recent developments all the more interesting. Since the recent lows in early February, equity markets around the world have all recovered to some degree. However, unlike prior rebounds, emerging markets have been underperforming. In fact, while the major US averages (S&P 500, DJIA and Nasdaq) closed above their 50-day averages on Friday, all four BRIC countries (Brazil, Russia, India, and China) had yet to achieve that milestone. Whether or not this trend fizzles out or is an early warning sign for the global economy is debatable, but in either case, emerging market investors would be wise to be on alert.” (Bespoke February 22, 2010)

“Everywhere you look, the quantity of information in the world is soaring. According to one estimate, mankind created 150 exabytes (billion gigabytes) of data in 2005. This year, it will create 1,200 exabytes. Merely keeping up with this flood, and storing the bits that might be useful, is difficult enough. Analyzing it, to spot patterns and extract useful information, is harder still. Even so, the data deluge is already starting to transform business, government, science, and everyday life). It has great potential for good—as long as consumers, companies and governments make the right choices about when to restrict the flow of data and when to encourage it.” (The Economist, February 25th 2010)


Levels:

S&P 500 [1104.49] is recovering from February 5th lows of 1044 and beginning to stall at current range.

Crude [$79.66] is facing heavy resistance at $80. In upcoming weeks, investor will examine the willingness of buyers. Remains highly correlated to equity markets in the recent run-up.

Gold [$1108.25] has yet to establish a defined trend following a December 2009 peak. It’s now trading in-line with its 50 day moving average of $1108.

DXY– US Dollar Index [80.36] is in a three month uptrend and nearing an inflection point yet again at 80. It’s poised for minor pullbacks, but the recovery appears intact.

US 10 Year Treasury Yields [3.61%], which is further confirmation that current trend favors rates between 3.60% and 3.80%. The last 50 days of trading showcase an average of 3.70%, which is a midpoint level of a multi-month trend.

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