Market Outlook | September 20, 2010

“Patience is the best remedy for every trouble”. Titus Maccius Plautus

Even when stock markets showcase some glimpse of hope, the rush to Gold continues as the commodity closed the week at new all-time highs. In fact, any words of optimism or intra-day market strength cannot live up to the multi-decade, and well documented uptrend in Gold. That’s a prevailing theme in the past eight years as the idea dominates mainstream acceptance and shapes the consensus mindset. Of course, several factors contribute to Gold’s appreciation. However, in recent weeks, its relative attractiveness is visible and serves as an example that shows the power of momentum.

The S&P 500 index is barely positive for the year. This is mostly driven by the sharp recovery following some ease from escalated pessimism. In fact, investor sentiment points to some signs of confidence restoration. According to AAII, US small investor sentiment reached the highest optimistic reading for 2010. This mildly coincides with tamed volatility of the past five months.

However, global stock indexes appear extended and poised for some short-term declines. For example, the Turkish Index (TUR) is up nearly 39 % since February 2010.Similarly, South Africa (EZA), South Korea (EWY) and India (INP) have showcased leadership especially after stabilizing in late summer. These are themes worth tracking as these moves serve as a clue for the next multi-year cycle. In other words, investors will be tested on their overall willingness to stick with these themes especially during periods of sudden macro shift. At the same time, would investors add more capital into emerging themes and pull away from US stocks? That’s a reoccurring question facing investment managers planning for 2-3 years.

The highly anticipated Federal Reserve meeting takes place this week and it may cause some near-term reaction. Yet, many wonder if economic data or rate outlook lead to surprises. In addition, investors are deciding between placing bets ahead of mid-term elections or waiting for political results. At this point, the technicals confirm improvement in markets but warn of minor pullbacks. When examining the collective behavior, the market feel appears neutral but risk-takers are pleased to see rewards in niche ideas found in less obvious areas. Even in US markets, stock specific calls across various groups are proving to be fruitful. For example, DTV (Direct TV), SWKS (Skyworks), and AMZN (Amazon.com) have rewarded brave risk takers who purchased shares during summer lows.

Article Quotes:

"China will introduce credit-default swaps by year-end, allowing banks to hedge risk while restricting the contracts to avoid pitfalls the U.S. credit markets experienced over the last several years, according to an official with a state-backed Chinese financial association. China will limit the amount of leverage used in credit swaps and won't permit the contracts to be written on high-risk assets such as subprime mortgages, Shi Wenchao, secretary general of the National Association of Financial Market Institutional Investors, told reporters..." (Bloomberg, September 14, 2010)

“The politics of currency intervention are actually quite simple. Japan’s economy is dominated by large manufacturers that export lots of goods to Americans. The problem is that Americans can’t really afford to buy in the quantities that they did just a few years ago. So, instead of looking for new customers with more money to spend, either in their own country or in other productive economies, Japanese manufacturers use their political clout to lobby their government to bailout their traditional U.S. customers. …. In short, pushing up the dollar allows Japanese exporters to postpone a necessary, but costly, restructuring.” (Euro Pacific Capital, September 17, 2010)

Levels:

S&P 500 Index [1125.59] –Attempting to hold above 1120, which has not been sustainable for the most part of 2010. Odd makers observing those previous patterns wonder if a peak is a possibility.

Crude [$73.66] – Since October 2009, crude has remained in a tight range between $70-80. Clearly, this signals a consolidation phase following an explosive decade. In other words, momentum seekers might begin to seek explosive runs in other areas.

Gold [$1274] – Slowly but clearly, making all-time highs. Positive momentum remains intact as the index is over 9% above its 200 day moving average.

DXY– US Dollar Index [81.39] – Stands 15% higher than lows set in March 2008. Yet it feels like we’ve been in a similar range for several years. The 15 month moving average stands near 80.

US 10 Year Treasury Yields [2.73%] – Early form of stability in yields following the summer lows on August 25, 2010. Now, it’s flirting few points below its 50 day moving average of 2.78%.

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