Market Outlook | March 22, 2010

“An optimist is the human personification of spring.” - Susan J. Bissonette

The official start of spring brings a glimpse of hope for sustainable recovery. For attentive financial followers, it’s hardly rosy some days when viewing updates on regulatory debates, European credit status, or worries of inflation. That said, a glance of the scoreboard tells us of stocks holding their gains with relatively low volatility and no alarming calls for the panic button, at least for the past week. In fact, optimism is visible as investors pulled $61.1 billion out of money markets, according to EPFR. That’s a symbol of optimism, which echoes a low interest rate policy by the Federal Reserve. Simply, the message is translated to support ongoing cycle recovery. In the weeks ahead, we’ll gain a better read on investor risk tolerance.

The inverse relationship between Gold and Dollar is closely monitored by pundits. Mainly, this is an accepted tool for gauging sentiment towards investor demands for risky assets. Importantly, it’s on the radar of observers, seeking hints across financial markets. The last few months witnessed a rise in US Dollar, which generally suggests a rotation towards safer instruments. However, both indicators are not currently pointing to a dramatic trend shift.

Another perspective shows outperformance of S&P 500 Index over Gold since March 2009. Possibly, this recovery cycle points to favorable returns in equities as commodities cool off from their previous decade run up. Similarly, the related groups of Steel and Oil Services led weekly declines. This corresponds with a sluggish, six-month performance by major commodities, which have few wondering on changing dynamics. Perhaps, it’s too premature to call tops on Gold and Crude prices, but it’s definitely worth watching.

Liquidity remains in high demand, especially in a period where most scramble to find preventative methods towards another crisis. Of course, it makes sense given key lessons learned in 2008. However, dwelling on past findings should not blur one’s drive to search potential opportunities. Some fundamental studies argue that stock multiples are too high and majority chart observers point to extended levels. However, financial markets have a tendency to surprise, and keeping an open mind might provide a prudent approach.

Article Quotes:

“I liken it to the cardiovascular system. In an economy, the central bank is the heart, money is the lifeblood, and financial markets are the arteries and capillaries that provide critical sustenance to the muscles that are the makers of goods and services and the creators of employment. A properly functioning cardiovascular system fosters healthy growth; if that system fails, the body breaks down and the muscles atrophy.” (Federal Reserve of Dallas, March 3, 2010)

“The first worry for China is that lending won't come down fast enough. Banks have made commitments to finance projects and cannot easily back out; besides, money may leak into bubbly real estate projects via channels that circumvent the banking system. Moreover, even if lending is reined in, the banks may do so inefficiently: China sets monetary policy by targeting the quantity of loans rather than their price, so powerful state-owned enterprises are liable to get capital while more productive private firms are starved of it.” (Washington Post, March 19, 2010)

Levels:

S&P 500 [1159.90] is closing near annual highs, confirming the established uptrend since March 2008. The index showcases strength and a re-acceleration that began in early February.

Crude [$80.68] had a retest of previous highs, which is a key hurdle for crude prices. Once again, crude prices are decelerating from $82 range, which suggests a weakening momentum.

Gold [$1105.50] maintains a sideway pattern. There is not much to surmise from chart patterns, except to conclude that investors appear to await impactful news material to cause a reaction.

DXY– US Dollar Index [80.22] is providing clues of reacceleration despite the multi-week neutral behavior. The follow through of last week’s strong finish will be highly anticipated.

US 10 Year Treasury Yields [3.68%] is staying above 3.60%, which serves as a key near-term level.

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