Market Outlook | June 21, 2010

“Always listen to experts. They'll tell you what can't be done and why. Then do it.” Robert Heinlein (1907 - 1988)

Nearly two weeks ago, equity markets seemed overly cheap, and a short-term recovery was to be expected. Now a minor bounce back doesn’t entirely resolve the ongoing puzzle as options expired and month-end is few days away. In these lackluster days, participants are questioning the market’s ability to attract long-term investors. Therefore, managers will look to weigh the potential of a sustainable rally, particularly, if fundamentals confirm a positive message. Importantly, even a casual observer notices the growing hesitation in financial systems, especially with chatter of various regulations. In fact, the view that government injection contributes to further risk taking and increase in confidence remains mysterious at this point.

Digesting economic and macro data serves more as a distraction than a helpful, timely guide. Interestingly, other topics requiring further deciphering include the cause of a recent trading glitch, credit crisis, and increasing government spending. That said, there is a danger in assuming that recent events are fully understood and grasped by most participants. Also, key drivers of fear are based on extensive regulations. These apprehensions are not quite justified in one assuming that it might dampen business activities or expecting that new policies will avoid further crisis. Both of these popular views are too uncontrollable, and perhaps convenient, for political headlines, rather than a prudent market strategy.

Another perspective suggests taking an imaginative short-term view. Innovation groups offer opportunities in biotech, technology, and other emerging groups. Bargains are found and made worthwhile for multi-month selections. Meanwhile, energy news flow might have created worries in a sector that outperformed for over a decade. On the other hand, Gold’s strength reconfirms the defensive posture of global investors. At the same time, the past few days are witnessing volatility declining as the VIX (Volatility Index) declines significantly below spring highs of 48.20. A possible rotation out of Gold and further calming in volatility should catch the eyes of active traders in upcoming trading days.

Levels:

S&P 500 [1117.51] is indicating, that around 1060, investors have shown interest in buying. This is based on market recovery from lows in February and May 2010. However, around 1120, doubts remain, which suggest that buyers are seeking more convincing factors.

Crude [$77.18] is trading in a narrow range, right around its 200-day moving average. The commodity appears trendless, more than usual, in the near-term.

Gold [$1256] re-accelerated and finished the week at annual highs. Positive momentum is intact, given that Gold is up over 90% since August 2007.

DXY– US Dollar Index [85.69] is nearing 86-89 points, which are levels last seen in late 2008 and early 2009. Interestingly, at that time, the index failed to sustain its relative strength.


US 10 Year Treasury Yields’ [3.21%] 20-day moving average showcases that rates have at the current range for several weeks.

Article Quotes:

"From Shanghai to Singapore, policy makers are struggling in their efforts to curb property bubbles that threaten to derail the world's fastest growing region. In China, home prices are surging at a record pace even after authorities set price ceilings, demanded higher deposits, and limited second-home purchases. In Hong Kong... a site auctioned on June 8 fetched the most since the market peak of 1997. It's a similar story in Singapore and Taiwan as prices defy cooling measures. 'Governments allow the property bubble to get so big and then try to use administrative measures to keep out speculators,' said Andy Xie, former Morgan Stanley chief economist for Asia-Pacific... 'It creates the risk of a very hard landing. The right thing to do is raise interest rates.'" (Bloomberg, June 17, 2010)

The parallels with Europe are unfair, though only up to a point. American state and local debt last year was $2.4 trillion, about 16% of gdp. But most of that debt is issued by local governments or state agencies and has specific assets or fees, such as road tolls, earmarked for paying it back. Even in the weakest states, debt that needs to be paid out of general tax revenue was under 5% of GDP last year. Greece’s was 115%. The numbers for deficits show an even greater contrast. California’s deficit, assuming the state fails to close it, would equal only 1% of its GDP, compared with 14% for Greece and 9% for Portugal last year. (Economist June 17, 2010)






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