Market Outlook | February 1, 2010

A perspective:

It’s nearly a year since the markets bounced back following the recent crisis. Plenty wonder, if the fruitful returns last year were a result of economic improvement, low interest policies or simply a usual cycle move. Perhaps, we can conclude that all three factors played a role in the recovery that began last spring. Now, the sustainability of that run is being challenged.

So far, the current pullback seems like a normal pause. That said, in upcoming weeks optimists will be tested in their willingness to purchase assets at a discounted prices. For example, Gold has dropped more than 11% since early December and Nasdaq is 8% cheaper than three weeks ago. In days ahead, investors will get a better gauge of buyer conviction as markets approach key technical levels, await earning announcements and ponder monthly economic data. Meanwhile, bubble-like behavior persists in assets such as China, Commodities and Credit related themes. In other words, previous worries triggered in 2007 continue to resurface as a catalyst for panic selling. However, believers of a new market recovery can plan for opportunistic entry points in months ahead. However, patience might be greatly required in trendless markets, in which investors become more comfortable between stock market behavior and economic conditions.

The debate noise:

Outside of the general business uncertainties there are growing confusions that extend beyond portfolio management. Highly debated and ongoing topics include bailout versus free markets, packaged products versus traditional assets and low interest rate polices versus less interference. The core theme of these debates revolves around the idea and degree of human involvement. Of course, this raises a whole list of sensitive topics beyond the scope of markets. However, these events are difficult to speculate for investors attempting to manage their market exposure. Despite these debates, money managers have to focus on finding growth driven companies that can outperform in this new cycle.

Understanding corrections:

This recent sell-off is hardly a surprise when taking a look at three significant corrections since the lows of March 2009. In all three cases, the S&P 500 failed to correct more than 10% and maintained its uptrend despite the wall of headline worries. Once again, we’re witnessing a selling pressure that’s nearly 7% off the previous top. This can be a reminder for investors not to make a conclusive evidence of a topping market. Let’s also remember that the reward was great for those owning stocks despite several downside moves. Similarly, some argued that buy and hold approach was dead but a strong trend conviction produced multi-month gains last year. At least, we’ve learned many times that surprises are part of the game.


Key S&P 500corrections since March 2009
• [-9.09%] June 11, 2009 – July 8, 2009
• [-5.57%] September 23, 2009- October 2, 2009
• [-6.54%] October 21, 2009- November 2, 2009

Article Quotes:

“Policy makers are addressing the bubbles of 2009. Since the collapse of Lehman Brothers Holdings Inc. in September 2008, the Group of 20 nations has spent more than $2.2 trillion trying to restore growth. Efforts are afoot to take back some of the fiscal and monetary stimulus, and that’s healthy. China, where banks have begun restricting new loans, is responding to a push by regulators to contain credit after a surge in lending. Investors such as Mark Mobius, chairman of Templeton Asset Management Ltd. in Singapore, have a point when they argue that such steps may benefit China’s economy. At a minimum, they will reduce overheating risks and make markets more stable.” (William Pesek. Bloomberg, January 29, 2009)

“The last time the Chinese authorities attempted to deflate an asset price bubble was in January 2007. At that time interest rates were raised, bank reserve requirements increased, and important officials spoke openly about the need to quell speculation. Several commentators anticipated an imminent collapse of the Chinese stock market, which had doubled over the previous year. The outcome was rather different. Over the following months the Shanghai Composite entered a period of exponential growth. The market finally peaked in October 2007 after five rate hikes and 13 increases in bank reserve requirements since the beginning of the year. Experience suggests that recent tightening in Beijing is unlikely to mark the immediate demise of the frenzied Chinese real estate boom. Nevertheless, it brings that end one step closer. (Edward Chancellor. Financial Times, January 31, 2009)”

Levels:

S&P 500 [1073.87] nearly a 7% correction from January 19th 2009 highs. Charts suggest a completion of the first wave of sell-offs as the index fell below 1080.

Crude [$72.89] is narrowly trading between $70-80 in the past 4 months. Like October, the commodity peaked at $80 and its 200 day moving average stands at near $70.

Gold [1078.50] is pausing after a strong reacceleration in mid 2009. Currently, investors are watching if price can stay around 1100. Meanwhile, key moving averages stand near key support of $980

DXY– US Dollar Index [79.46] continues to rise and is up over 7% after bottoming three month ago. Further confirmation is needed to solidify a strengthening dollar.

US 10 Year Treasury Yields [3.58%] Consolidating between 3.55-3.60% as the 50 day moving average stands at 3.37%

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