Market Outlook | March 15, 2010

“Any genuine philosophy leads to action and from action back again to wonder, to enduring fact of mystery. “ - Henry Miller (1891 - 1980)

Current Landscape

This has been another positive week that increases the difficulty of reaching a comfort level regarding recent market trends. As for the current mindset, even pessimists would have to accept the market strength with the S&P 500 breaking out near annual highs. As for sentiment, it feels like majority money managers would have liked to bet against this price appreciation, but the resilience is casting doubts in conviction levels of those maintaining a negative outlook. Also, sharp decline in volatility levels are puzzling, along with low volume levels, which questions the willingness of participants to add more risky assets. Basically, this run-up continues to reinforce itself of an ongoing positive momentum, despite fuzzy fundamental picture. From a cycle viewpoint, the March 2009 bottoming process should not be taking lightly, and last week marked a one year anniversary to this bullish run.

Anticipations and Clues

In the short-term, lows established on February 5, 2010, symbolized an early restoration of confidence. There is plenty of headline buzz over regulatory changes in derivative markets and financial regulations in US and Europe. However, data on interest rate policies and confirmation of an economic recovery are poised to cause sensitive responses. This week offers a meeting by the Federal Reserve, along with key economic results, which can lead to eventful reactions. At least, investors can gain better clues given key inflection points.

There are similarities when comparing current conditions with January 2010 sell-offs. For example, the S&P 500 Index was 3.41% above its 50-day moving average when the market peaked on January 19, 2010. Heading into Monday, currently S&P 500 is 3.37% higher than its 50-day moving average. This points to a similar set-up when applying simple math. Combining investor psychology along with policy approaches begins to increase odds for spring surprises.

Changing Dynamics

Asset managers are trying to gain a better gauge on risk and other financial theories post 2008. We’re in a period of the skepticism of investors as managers scramble to understand risk assessment while adjusting to a changing landscape. Investor comfort level for committing risky capital is unclear and partially explained by synchronized movement across financial markets. In other words, strong correlation among asset classes presents a challenge in mapping out a long-term plan. Basically, interest rates, stocks, and commodities have mostly risen and declined in tandem since 2008. Perhaps, one key mystery is the possibility of dispersion, leading to less synchronized patter. Nonetheless, stock picking and theme based investing generally provide opportunities. However, finding those selective ideas without a clear macro picture presents another layer of difficulty. Therefore, patience is required more than usual.

Article Quotes:

"The inventory-sales ratio of the business sector was down one notch to 1.25 in January; the record low for this ratio is 1.24 set in 2005. As the economy gathers momentum, inventories are projected to make a sizable contribution to real GDP, which could be in the first-half of 2010 or later in the year. The timing is unclear, but it is nearly certain that an inventory accumulation led spike in real GDP is in store for 2010." (Northern Trust, March 12, 2010)

"The percentage of stocks in the S&P 500 currently trades above their 50-day moving averages stands at 78%. As shown in the chart below, this is getting up to the top end of the range the indicator has seen during the bull market. It still has a little bit farther to go before it reaches extreme overbought territory….On a sector basis, Financials currently has the highest reading at 94%. This level is at the top of its range over the last year, and it's the most overbought of any sector.” ( Bespoke, March 11, 2010)

Levels:

S&P 500 [1149.99] is climbing back to January 2010 highs while holding above 1140. It appears due for a pause, but momentum is positive.

Crude [$81.24] is struggling to hold above $82. A glance back showcases that those current levels were previously critical turning points in October and January.

Gold [$1106.25] is trading in a tight range between 1080 and 1120, which confirms the neutrality of investor reaction.

DXY– US Dollar Index [79.83] is pausing, following a multi-week upside trend. Index is slightly below a key technical range of 80.

US 10 Year Treasury Yields [3.70%] has had no significant directional changes since the start of the year. The last 6 trading days witnessed rise in rates from 3.58%.

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