Market Outlook | March 29, 2010

“It is always easier to believe than to deny. Our minds are naturally affirmative.” - John Burroughs (1837 - 1921)

Reflective Questions

Looking back to the start of the first quarter, the age-old market illustrated a classic debate for investors. At that time, one faced two extreme alternatives: whether to either sell all winners as a panic-like response or to buy on weakness to take advantage of cheaper prices. Some market wisdom reminds us that the reasonable answer resides somewhere in between those extremes. One approach is to buy quality stocks while selling vulnerable groups. Perhaps, that decision would’ve kept some satisfied the past few months. Of course, not many strategies outperformed ‘buy and hold’ since March 2009. Ironically, that was a period where most marketers concluded that long-term investment was officially “dead”. At this point, replicating last year’s upward pattern might seem a bit ambitious, especially at this junction.

New Quarter, Old Issues

Now, similar conditions are revisited here, a few months later, with shaky European credit status, growing worries of extended broad indexes, and a sharper rise in volatility from very low ranges. Perhaps, this is a repeat of early winter jitters, highlighted by uncertain fundamental and earnings outlook. All that said, risk appetite is increasing and assets held in money market dwindle, while aggressive areas, such as junk bonds, continue to see inflows. Also, those severely worried about credit conditions should not forget that Homebuilders index peaked in 2005 (well before market peak), banks topped on February 2007, and, for a while, credit crisis is being addressed and reassessed. In other words, these fears are not breaking news. In fact, overall, actual resolutions are unknown even with on-going deliberation, political posturing, and heavily documented financial crisis. Maybe these matters are not for investors to solve and even difficult for policymakers. Through these generational extremes, global investors seem to favor US markets for its liquid capital markets, highly demanded currency, and relative attractiveness, especially in fragile economic conditions.

Perspective

From US perspective, the S&P 500 is up 4.6% and the Dollar index has risen by 4.8% year-to-date. Therefore, both showcase a positive trend, despite the misconception of an inverse relationship between a country’s currency and its stock market. Similarly, US 10 Year Treasury has climbed higher, as well, along with Crude prices. On the other hand, the Gold frenzy has not lived up to the hype, as prices stayed in a range for the most part of the first quarter. In connecting the macro dots, this confirms investor’s willingness to take on further risk. Interestingly, this is one year after the market bottom, confidence restoration, and the entrance to a new cycle.

Through this thought process, one should examine the outlook for the rest of the year. For example, consumer and financials groups offered the highest risk/reward at the height of worries. Those gutsy bets have paid off for some on a selective basis. However, too much optimism, especially in analyst outlook, makes contrarian pundits a bit weary, as in, complacency might be a concern. Yet, this uptrend has faced various challenges. Sharp declines in the days ahead would not surprise many either. For example, some signs of vulnerability are visible in emerging markets and Commodity Index (RJ CRB), in which both failed to make new highs this year. Perhaps, those ideas were well served last decade. Finally, the profitability of short-term declines versus long-term rewards is the better decision making question.

Article Quotes:

“Some finance scholars and a few practitioners are moving away from a mechanical approach, derived from Newtonian physics, to a more organic one, based on biological observations. Attention is shifting, in recognition that economic systems, based on human interactions, can become more complex and unpredictable than planets or toasters. Financial theorists are turning to organic biological models, to help monitor the global economy and regulate key institutions that may be too big or interconnected to fail. Vivid metaphors serve to describe the phenomena.” (FundStradegy, March 22, 2010)

“The historically low level of inventories, relative to sales, suggests that companies need to restock. However, this figure alone can't provide a definitive signal, because there has been a secular decline in the inventory/sales ratio for the past 20 years, due to various technological and management innovations. It is the extraordinarily low inventory-sales ratio combined with other data that indicates to me that the strong inventory building process, already evident in the fourth-quarter GDP data for 2009, may sustain itself during the next few quarters, providing a major boost to employment. (Minyanville, March 26, 2010)

Levels:

S&P 500 [1166.59] reached new annual highs last week, yet again. For the past 8 trading days, index has held above 1160 majority of the time.

Crude [$80.00]closed exactly at a critical level of $80. There is heavy resistance around $83. That marks a significant, near-term hurdle for those seeking a breakout.

Gold [$1096.50] closed below its 50-day moving average of 1104, which matches the four month downtrend that began in early December 2009. Next important levels reside around 1045-1050 where investors will determine the faith of rising gold prices.

DXY– US Dollar Index [82.17], after completing a first wave of a multi-month recovery, is re-accelerating, especially since March 17, 2010. This is a confirmation of strength that’s emerging in the US Dollar.

US 10 Year Treasury Yields [3.84%] had a noticeable rise in the past 3 trading dates, lifting yields above 3.80%. This behavior attempts to retest recent highs of 3.90, reached on the last day of 2009. In addition, rates last hit the 4% mark in mid 2009.

Dear Readers:

The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.