Market Outlook | September 7, 2010

“Live each season as it passes; breathe the air, drink the drink, taste the fruit, and resign yourself to the influences of each.” - Henry David Thoreau

Spring’s Fall

Like most Americans, this writer, as well, took a break from market action in the last two weeks of August leading up to Labor Day. Upon returning, one notices how big picture themes reaffirm ongoing themes. To start, there is a great emphasis placed on the mid-spring 2010 trend break, which triggered lower global investor confidence. Simply, the noise surrounding government lawsuits and financial regulations began the sell-off - not to mention, the panic-like response to credit conditions of select European markets. The attention and mild obsession of these events turned to political drama, which occupied more attention than the actual pursuit of growth and innovative opportunities. The rest is explained by lackluster volume and a significant decline in volatility as a sign of most participants’ willingness to await the next chapter.

Interestingly, financial markets, combined with participant emotions, set the tone within a particular season. In other words, seasonal factors should not be easily dismissed when it comes to investor mindset. For instance, the late April 2010 peak showcased downtrend in US stocks and further declines in interest rates. In the meantime, Gold’s 78% rise, since winter 2008, is relatively noticeable and demonstrates the comfort of investors for the commodity in nearly all seasons. Meanwhile, the glaring message pointed to a shift away from risk taking and a general need of “confidence restoration”. At least that's a simple overview and a quick summary of the current barometer.

Autumn’s Hope

A dose of optimism emerged last week with a recovery in equity markets along with stabilization of interest rates. Maybe some of the price appreciation in stocks can be explained by the appeal of the S&P 500 Index being at a 1040 range. Importantly, heading into the fall, a change in sentiment sets up an opportunity to make big cycle bets, especially for those daring optimists. Maybe this mild recovery revolves around the potential of a market shake up as result of elections. Yet, veterans know too well that investment views should be expressed way ahead of a much anticipated event. Some influencers of financial services maintain a strong view that argues against excess regulation with the goal of not deflating sentiment. True or not, mere perception will have a lot to say in the weeks ahead. A few points higher in broad indexes can spark additional momentum. Plus, labor data, combined with increased shipping activity, can stir some early confirmation. Importantly, money managers are challenged in finding differentiated ideas while adjusting for surprise elements.

Article Quotes:

“The S&P 500 is up a little more than 5% over the last 3 days… Unsurprisingly, the sectors that were down the most during the pullback are up the most during the rally. Industrials, Financials, and Technology got hit the hardest in the back half of August, and they have bounced quite a bit this week. Consumer Discretionary is the one sector that outperformed (slightly) during the pullback and is also outperforming over the last three days. The defensives -- Consumer Staples, Utilities, and Telecom -- all held up well as the market fell in August, but they're only up modestly on the bounce.” (Bespoke, September 3, 2010)

“Perhaps the explanation is found in currency movements. One effect of the euro-area crisis was to push the euro down against the dollar in the early months of this year—helping German firms but harming American exporters. Much of Germany’s second-quarter GDP growth came from trade, even as a wider trade gap sapped America’s economy. A weak pound could also explain Britain’s renewed economic strength, much as a surge in the yen has increased worries about Japan. On August 30th Japan’s central bank said it would offer banks ¥10 trillion ($118 billion) of six-month secured loans at its benchmark interest rate of 0.1%, on top of the ¥20 trillion of three-month loans it had already pledged.” (Economist, September 2, 2010)

Levels:

S&P 500 Index [1104.51] – For the fifth time this year, the index has recovered when reaching at, near, or below 1040. Yet, twice this summer, overcoming the hurdle of 1120 has a challenge request to ask buyers. Now, with a breath of fresh air, the optimistic quest might have reignited at the August 27th lows of 1039.

Crude [$74.60] – Attempting to recover from summer lows. Next upside level stands near $78 range as the 200-day moving average stands at $77.51. Range bound over the past 12 months showcases the neutral stage of the multi-year cycle.

Gold [$1240.50] – In the near-term, Gold price’s ability to climb back to annual highs 1261, will be closely watched by participants. The commodity is up 25.36% since lows of September 2009.

DXY– US Dollar Index [83.10] – Within the longer-term downtrend, a bottoming process is forming between $81-83. Once again, the 15-month moving average is near 80, which suggests that despite all recovery hopes and downside moves, the last few years have yet to see a dramatic shift.

US 10 Year Treasury Yields [2.69%] – The last time yields reached below 2.50% was around late 2008. Once again, at these levels, investors continue to wonder if this marks the lows.



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