Market Outlook | May 17, 2010

“Cynicism is an unpleasant way of saying the truth.”- Lillian Hellman (1905 - 1984)

Emotionally Charged

Gold’s recent strength provides a perspective across various markets. The three forces benefiting Gold prices include declinig Euro, an inverse play on paper assets, and acceleration of an ongoing multi-year momentum. These are highly documented explanations that resurface in periods of credit worries and imbalances in currency markets. In addition, some argue that Gold serves as a hedge against inflation. All in all, these reasons have succeeded in justifying Gold prices. Yet, late performance chasing comes with the risk of overpaying for defensive positioning, especially when the idea becomes accepted as a consensus view.

Recently, there were a few reminders of taking caution on consensus view. Investors learned that betting against the Dollar and hoping for rising rates did not play out as planned. Similarly, pessimists learned the hard way that stocks recovered fast and for an extended period as seen from spring 2009 to spring 2010. So, in the quest for the next trend, observers will have to grasp the rhythm and mellowing out of recent fallouts. In other words, it’s vital to avoid tempting offers that have accumulated popular acceptance. The past few weeks have produced major stories, ranging from pending legal threats, bailout packages, and a short-lived market glitch. Basically, this presents a more sensitive and jittery marketplace. That said, naturally broad indexes were reaching extended levels since early April 2010.

Unlike Gold prices, commodities, overall, have headed lower in a uniform pattern as a response to the current macro-based events. Interest rates have remained lower than yearly highs. And volatility has spiked up from neglected levels during the run-up. Looking at the above points, the first reminder is not to overreact or make conclusive statements on current trends. Election years find a way to add to financial worries. That's in addition to general market correction, regulatory changes, and regional risks. There is plenty to resolve this fall. Until then, it’s common for participants to stay hesitant and less willing to take on big bets.

Looking Ahead

At this junction, mapping out a 5- to 10-year investment plan might seem merely impossible as the short-term variables easily cloud one’s vision. However, consumer-based ideas in Emerging markets are worth a closer look. At the same time, innovative-based groups in developed markets can muster a sustainable cycle. Thus, as the day to day excitement lessens, it offers investors early chances to seek opportune entry points.

Article Quotes:

“Asian growth will still be good news for U.S. companies. The silicon chips in an Indonesian family's new computer may well come from a U.S. plant. U.S. management and engineering companies may well oversee some of the billions of dollars expected to be spent on roads, airports, and shipping terminals in the region. Rising incomes will mean more sales of U.S. or European branded goods, a bigger audience for Hollywood movies, and more demand for management and other services. But the competition on all fronts is only getting more intense.” (Washington Post, May 14, 2010)

“In the past few days we have heard repeatedly that our politicians are risking the country’s credit rating or threatening sterling or facing retribution in the bond markets. Political leaders have been forced to make decisions of immense historic importance within days, or even hours, to satisfy arbitrary deadlines laid down by supposedly implacable financial markets. Any political action that a media commentator or a business leader happens to disagree with is attacked for undermining business and consumer confidence. Like Greek oracles, who claimed to hear voices from Olympus, financial analysts hold forth on television, invoking market confidence, and insisting that no sacrifice is too great or too painful to propitiate this new god.” (Times of London, May 12, 2010)



Levels:

S&P 500 [1135] is nearly at the halfway point between the 50- and 200-day moving average. Basically, that signals a return to normalcy, following the first wave of spring sell-off.

Crude [$71.61] is flirting with previous bounce points around $72. At or below current levels, the index was recovered in December 2009 and February 2010. Chart patterns suggest further retest of those levels is underway.

Gold [$1236.50] is making new highs yet again, as a defensive play and a break out. The commodity is up nearly 17% from lows reached on February 5, 2010.

DXY– US Dollar Index [86.09] is making new highs after an explosive multi-week run. Based on the acceleration, participants rushed to the Dollar on a sudden response. The Dollar Index is becoming extended in the near-term as a natural breather awaits.

US 10 Year Treasury Yields [3.45%] is showing early signs of bottoming around a 3.40% range. Yet, the next upside hurdle is around 3.60%.



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