Market Outlook | February 22, 2010

“Do not anticipate trouble or worry about what may never happen. Keep in the sunlight.” Benjamin Franklin (1706 - 1790)

Stabilizing

A sluggish start to 2010 might explain profit taking and early jitters but not necessarily a downtrend. The S&P 500 has yet to correct 10%, while economic numbers are set to improve in this period of stabilization. Last week presented a holiday shortened week as well as option expiration. The S&P 500 is trading near its midpoint range, between the highs of October 2007 (1576) and the lows of March 2008 (666). To be exact, the midpoint level is 1121; that’s just 12 points removed from S&P 500 Index as of Friday’s close. In other words, a 42% rise from current levels would be required to get back to last decade’s highs. This simple math provides a perspective that markets are trading closer to neutral and not at extremes. This sentiment matches the decisions by policymakers and anticipated earnings improvement. Interestingly, the last 10 days have witnessed a nearly 9% rise in the Russell Small Cap Index. This sharp upside is visible in commodity related indexes and stocks as buyer bias followed up a weak January.

Sideway patterns may continue in stocks and, in turn, force investors to actively monitor short-term patterns. At least in US, finding long-term investments with sustainable growth require some patience. In addition, more precision is required in selecting the right companies. Now, the ability to pick quality stocks, while navigating through a fuzzy broad market outlook, is the challenge ahead for 10 months. Investors eagerly await data points to determine the next leadership groups. However, only seeking for a defined uptrend might not be sufficient to outpace competing managers. Plus, investors have witnessed rollercoaster’s in the past 3 years, which explains growing skepticism, along with requests for higher transparency. This can further delay the recovery process.

In Upcoming Days

The hike in discount rates by the Federal Reserve should not be a surprise as participants look to digest the awkward timing of the announcement. Perhaps, the move by the central banks suggests that policies implemented for crisis management of the previous years are moving back to normal levels. Others anticipate these hikes will trigger the start of a rising rate policy. In both cases, it’s too early to assume and conclude. In upcoming days, interpretation of this announcement should play out in stocks and commodities. Meanwhile, Europe attempts to resolve various debt concerns, and China hopes to cool the ongoing bubble. Basically, the results of the credit crisis are lingering and reforms will continue to be discussed. Therefore, participants have to track pending reforms, while not losing sight of emerging ideas in a new cycle.

Article Quotes:

“Some Chinese economists worry out loud that China’s massive stimulus-spending might have bought the country only a temporary reprieve. Bubbles, they fret, are forming in property markets, inflationary pressure is building up, and reforms needed to promote sustained growth (including measures to promote urbanization) are not being carried out fast enough. Occasionally, even the government’s worst nightmare is mooted as a possibility: stagflation. A combination of fast-rising prices and low growth might indeed be enough to send protesters on to the streets.” (The Economist, February 18, 2010)

“True, monetary union came before political union. But it did not come with a promise that there would never be such a union. Quite to the contrary: the founding fathers wanted the euro primarily as a step towards political union, knowing little of the overriding technical arguments in its favour. Those who argued against it then, on the grounds that “there can that there could be no monetary union without political union”, are precisely those who should welcome political union now that it finally knocks at the door claiming its rights.” (Financial Times, February 18, 2010)

Levels:

S&P 500 [1109.17] is facing early resistance as the index closed near its 50-day average of 1109. Most likely index continues to trade in the range of 1080-1120.

Crude [$79.81] had a 15% rally since February 5th demonstrates the sharpness of this recent recovery.

Gold [1112.75] continues its multi-week decline after peaking in early December 2009. Recent pattern points to a settling process taking place.

DXY– US Dollar Index [80.93] had another strong week, making new annual highs. The Dollar is reverting back to levels seen in early and mid 2009 levels.

US 10 Year Treasury Yields [3.77%] is stabilizing between 3.60% and 3.80%. Observers await the possible retest of 3.90 at the end of last year.



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