Market Outlook | April 12, 2010

“It has been said that man is a rational animal. All my life, I have been searching for evidence which could support this.” Bertrand Russell (1872 - 1970)

It seems like the market offers two major entry points per calendar year. In turn, that points to a strong possibility of major pullbacks that are overdue to materialize, following an explosive run. So many wonder if much discussed pullbacks from this current rally will take place in the near-term. At this point, some ponder if that sell-off would occur either in the spring or summer of 2010. However, improving economic conditions and stabilizing fundamentals continue to paint positive headlines.

At the start of the second quarter, we’ve marched upwards, keeping this bullish uptrend. For days, the argument of low volume has failed to translate into lower prices. Even low volatility, for that matter, has yet to reverse, while panic is not visible. In short, risk tolerance by global investors is spreading from corporate bonds, commodities, and broad equities. Interlinked markets are maintaining a synchronized upward movement in which markets have not witnessed a correction greater than 1% in over 42 days (Bespoke Investments, April 6 2010). Interestingly, credit markets remain healthy and continue to appeal towards investor demand. This is surprising to some who forecasted a fearful outlook, mainly based on increasing debt.

Classical view points to some conditions of the market that are being extended. Yet, we’re at the early stages of a recovery into a new cycle. For example, some technical indicators and valuations tools are cautioning, and they suggest a downturn bet. Ignoring this ongoing strength has been costly, even for short-term traders. That said, the confidence of those betting against the market is waning. At the same time, defensively positioned portfolios are noticing that their strategy minimized their upside potential in the past year. Therefore, a psychological view can entice participants to deploy more capital. Generally, this euphoric response can create additional buyers, based on performance chasing.

This week’s showcase earnings can provide some guidance on investor attitude. Perhaps, the shift towards bonds can present outflow from equity markets. Secondly, debt issuance continues to present a noteworthy trend. Finally, characteristics of those participating in these markets are slowly shifting as well. That said, adjusting analysis to a new climate takes some time and is less noticeable at this junction. Meanwhile, deciphering political policies and international posturing remains an ongoing challenge.



Article Quotes:

“Notably, even at the March 2009 lows, the implied total return barely crossed 10%, suggesting that stocks were modestly undervalued at that point, but nowhere near the level of valuation observed at major long-term buying opportunities, such as 1950, 1974, and 1982. This is not intended to excuse what, in hindsight, has been my awful underestimation of the extent to which investors would abandon their aversion to risk - in hopes that credit difficulties have been solved and that record profit margins will be recovered and sustained into the indefinite future. It's just that current market levels now rely on those hopes to be validated.” (John P. Hussman, April 5, 2010)


"’China's foreign exchange reserves face a “triple whammy” as a decline in the U.S. dollar and Treasuries and possible inflation in the longer run erode the value of its savings,’ said Yu Yongding, a former adviser to the People's Bank of China... 'There is no question whatsoever that the U.S. dollar will go south in the long run,' he wrote. 'Unless the U.S. economy improves its trade balance, the dollar will fall. But the U.S. cannot improve its trade balance unless the dollar falls.'" (Bloomberg, April 6, 2010)



Levels:

S&P 500 [1194.37] is making new annual highs, and it is up nearly 15% since February 5th lows. Positive momentum remains in place.

Crude [$84.92] is marking a new uptrend level after breaking above $82. Solid recovery continues to appease buyers.

Gold [$1152.50] is in a recovering pattern, developing as the commodity attempts to reaccelerate towards 52-week highs.

DXY– US Dollar Index [81.09] has strength, seen in first quarter, is now pausing. The index peaked on March 25, 2010. However, trend is intact and staying above 80.50.

US 10 Year Treasury Yields [3.88%] is retracing the past few days after hitting a much anticipated 4%.



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