Market Outlook | March 8, 2010

“There is no security on this earth; there is only opportunity.” General Douglas MacArthur (1880 - 1964)

Slowly Marching

The last three weeks have tested the patience of both optimists and skeptics. Simply, the current environment appears dull, given a much anticipated inflection point in stocks, commodities, and interest rates. For example, S&P 500 Index, Crude, and US 10 Year Yields all bottomed on February 5, 2010. These are all interconnected and highly watched indeed. Thus far, there are no major surprises in economic data, headline interpretations, and technical signals. However, this sideways pattern should not be alarming after a weak January and strong February. That said, this neutral behavior may drive managers and investors to seek concentrated and narrow based ideas. At the same time, interest rates levels continue to encourage more risk taking in global assets. Meanwhile, risk appetite is moderately increasing as hinted by weekly inflow in junk bonds and recent issuance of corporate bonds.

Short-Term View

Most broad indexes have been up 5-8 days in a row, as a continuation of market strength since March 2009 lows. Some near-term indicators were suggesting that financial markets were extended even by mid-week. Friday’s action confirmed overall buyer strength. Importantly, resilience of the Nasdaq Index showcases strength in technology and healthcare based themes. Perhaps, this is another hint of a leadership groups based on innovation that present sustainability. Similarly, Small Cap Index was nearly up 6 % for the week. From a psychological view, the S&P 500 is positive so far this year, which can entice some optimism. An explosive upside bias remains in place since the lows of March 6, 2009. However, the looming short-term pullbacks ignite further tests of buyer conviction. Several periods of inevitable sell-offs have taught us not to lose track of attractive opportunities based on minor macro worries.

Tricky Sentiment

The resilience in global stock prices and steady recoveries would imply improving investor sentiment. Positive economic conditions and rising interest rates were expected by many pundits at the start of the year. On the other hand, the fear of asset bubbles is a reoccurring theme among those arguing for a sharp sell-off. Clearly, the credit crisis in Europe and explosive real estate market in China are on the radar of worrisome issues. The surprise element rests on the decisions and messages of policymakers that can influence the mindset of participants. Investors might choose to shorten the overall holding period in big picture ideas. In upcoming weeks, it enables one to examine a handful of specific ideas that are worth accumulating on weakness.


Article Quotes:

"Federal Reserve Bank of Richmond President Jeffrey Lacker said the central bank is 'being made a scapegoat' to satisfy anger over bailouts as Congress seeks to limit its consumer-protection and bank-supervision powers. 'People are mad at us,' Lacker said... 'I can understand the ire after what happened in 2008. It was so unexpected, and it seemed to overstep boundaries that everyone thought we were going to obey.' Lacker said he wouldn't 'second guess' moves by Federal Reserve Chairman Ben S. Bernanke to backstop non-bank financial institutions... He said proposals to curtail the Fed's supervision authority would weaken its ability to lend to banks." (Bloomberg, March 1, 2010)

“Signs of exuberance are everywhere. An investor in Shanghai recently bought 54 apartments in a single day; a villa sold for $30 million last year; and in December a consortium of developers paid more than $3.5 billion for a huge tract of land in Guangzhou, one of the highest prices paid for any property, anywhere. In the city of Tianjin, in north China, developers have created a $3 billion ‘floating city,’ a series of islands built on a natural reservoir, featuring villas, shopping malls, a water amusement park and what they say will be the world’s largest indoor ski resort.” (New York Times, March 4th 2010)

Levels:

S&P 500 [1138.70] is showcasing a steady recovery while maintaining its uptrend. Few points removed from annual highs of 1150.

Crude [$81.50] recent recovery mirrors stocks as the commodity bottomed on February 5th. It is nearing key ranges between $82.00 and $83.95.

Gold [$1135.00] is establishing a 3 month pause within a defined range 1050-1150. Catalyst needed for a trend shift.

DXY– US Dollar Index [80.42] has had prices sitting slightly above 80, which remain above its 50- and 200-day averages.

US 10 Year Treasury Yields [3.68%] is mostly sideways in the past few weeks. Rates are holding steady at about 3.60%, which has been consistent so far this year.
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.