Market Outlook | April 19, 2010

“Most of the change we think we see in life is due to truths being in and out of favor.” Robert Frost (1874 - 1963)

A Pause:

As seen for several weeks and even heading into last week, markets were reaching extended levels, not to mention option expiration, which leads to unusual behavior while adding to volatility. However, leading up to last week, low volume was a profound and worrisome message to optimists. Similarly, contrarian indicators signaled early warnings. As usual, the surprising element is not necessarily the downtrend. Rather, it is the form in which a unanimous message sparks a trend shift. In other words, the takeaway is translated as bad news, causing a sensitive response. In addition, it serves as a gut check for those who were too comfortable in the calm nature of this recent uptrend. Clearly, the top news on Friday became a convincing force not only for a down day, but also for the the first negative weekly finish in 10 weeks. As for legal and policymaker decisions ahead, there are plenty of unknowns. At least, the start of earnings season will confirm or contest the justification of previous rallies. And the Federal Reserve’s message will be closely watched to determine risk tolerance and more definition on the cycle recovery.

Macro Themes:

Recently, there are three themes that gained popularity in the past few months, which include higher interest rates, declining Euros, and buying Crude-related groups. From a big picture standpoint, these views appear like a consensus view, but they mainly demonstrated an increased acceptance of risk. These movements were in synch as many awaited the validity of these thoughts. Given the potential change in mood, these three areas are worth watching closely.

Cycle Perspective:

The strength of innovative themes is being highlighted in this cycle. For example, Semiconductors continue to recover and showcase fundamental strength. Interestingly, Semiconductor Index bottomed on November 21 2008, which was ahead by over three months before broad market lows established in March 2009. In addition, this index is still far removed from its 2000 highs, which hints further upside potential. Therefore, even in the context of the current run-up, it is hard to deem the group as extended, especially given a decade-old sideways movement. Keeping this frame of mind, the cycle perspective points to relative attractiveness towards technology based themes, as seen in recent market leadership as well.


Article Quotes:

"’Chinese investment in Australian farms increased 10-fold in the past six months,’ real estate agents said, as Australia relaxed rules governing residential property purchasing, and buyers see opportunities in agriculture. ‘They are interested in large scale cattle farms; they are cashed up and see a financial opportunity here in a secure investment environment,’ said Geoff Hickson, real estate manager at Landmark Operations, Ltd. ‘There has been a big increase from Chinese buyers in the past six months. It has grown 10-fold.” (Bloomberg, April 15, 2010)

“In 1933, the newly-inaugurated FDR recognized that he inherited a populace, enraged by the effects of reckless greed in the financial markets. The Pecora commission, which began the year before FDR assumed office, not only aimed to unearth the causes of the 1929 market crash, but also rightly skewered the bankers for running what many considered to be a rigged game. It resulted in the political defenestration of several well-known Wall Streeters. The new President wasted no time in stating to the public whose side he was on. What few realized at the time is that FDR’s populist rhetoric set off a wave of anti-Wall Street sentiment that far outlasted Pecora.” (Financial Times, April 13, 2010)
Levels:

S&P 500 [1192.13] witnessed a sharp reversal after a multi-week positive movement. Long-term trend is intact but vulnerable in the near-term.

Crude [$83.24] is pausing in the last two weeks, after hitting annual highs, which showcased a consolidation phase. High odds of those prices stabilize between $80 and $82.

Gold [$1151.50] is up nearly 10% since lows on February 5, 2010, and now shows early signs of stalling. Interestingly, Gold showed signs of weakness before equity market reversal.

DXY– US Dollar Index [80.24] is declining since the start of the second quarter. However, there has been no evidence of a major breakdown at this stage. A familiar range, near 80, for index, signals average behavior.

US 10 Year Treasury Yields [3.76%] once again struggling to stay above 4% as investors reexamine their long-term outlook.

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