Market Outlook | April 4, 2011

“Facts do not cease to exist because they are ignored.” - Aldous Huxley (1894 - 1963)

Understanding the Cycle

Following the late winter breather, we’re nearing the same dilemma as witnessed in mid February. Investors were faced with the question of whether to jump on the existing trend or to be wary of trending patterns. Similarly, the interest rate conditions are lingering with moderate suspense. Meanwhile, overall economic improvement is somewhat evident when presented through government reports. Now, the broad indexes are re-drumming to an upbeat tune. As a result, complacency is in full gear after a short-lived hiccup. The Volatility Index (VIX) spiked to 31 on March 16th and now stands at 17.40. That sends a loud message as to how fear vanished at a rapid pace. Basically, the less than 4-week correction period was much needed.

This can hint at scarcity of quality, investable ideas as managers seem to redeploy capital to known themes in liquid asset classes, such as stocks. A reversion to a herd-like mentality is seen as most managers don’t look to fight the trend. In hammering this point home, we can see how “safety” is easily translated to chasing winners, such as Gold and Oil. Simply, this argument is rationalized by a quick glance at charts, a browse of headlines, or even a read through of a long-term strategy from a research house. Once again, doubting the actual substance of the fundamentals and duration are bluntly deemphasized during trending markets. Interestingly, the Russell 2000 Index is near its 2007 all-time highs, which can paint misleading optimism. Of course, let us not forget that the third year of a presidential cycle is generally known to produce favorable returns for buyers. This is mostly due to a biased maneuvering towards political points being in full gear. However, this ‘maneuvering’ may be difficult this year when the market is already operating through a few injections as the existing wounds attempt to heal. For now, the stock market performance can be manipulated as a selling point to drive in more capital info.

Tracking Clues

To differentiate oneself, a participant is forced to find a disconnect between consensus thoughts and actual results from market performance and investor rationalization. In other words, the discrepancy in varying views can create an illusion that can last for a while. Some can suggest that managing one’s timing and conviction levels is a market filled with mixed feelings. These days, pundits are not fully ignoring the glaring concerns of economic sustainability and unclear growth drivers. In a media driven world, the management of public relation plays an even bigger role in directional pattern. For this evidence, we don’t need to go further than the Federal Reserve’s announcement of a press conference on a quarterly basis. This further emphasizes the short-term nature of markets, especially with enhanced technology and abundance of hedging tools currently offered for investors. Finally, skeptics point out that these frequent press conferences are a way to artificially cheerlead gloomy facts. In due time, the truth with unravel.

Article Quotes:

“Whether Beijing succeeds or not in reining in informal fund flows is important, since the fate of these restrictions provides clues to the future direction of China’s economy. If credit growth became too great, China would face more inflation in the short term and possible excess capacity in the longer term. That could lead to a resumption of the profitless growth that China is trying to leave behind. If inflation remained high, social unrest would become increasingly likely. If, conversely, China slammed the monetary brakes on too hard, it would have a big contractionary impact both at home and abroad, given that Chinese imports have become an important source of global growth. Monetary policy matters more in China than it does in most developed markets, because the ability to allocate capital remains largely the preserve of the state. It is where financial power and political power intersect.” (Financial Times, March 31, 2011)


“We then turn to our main investigation of what happens to the portfolio of men and women, respectively, after moving together or apart. We find that women who get married on average choose to hold a higher fraction of financial wealth in stocks after the marriage, compared to those women who do not get married. After divorce, women on average reduce the fraction held in stocks, compared to women who do not get divorced. For men, it is the other way around: single men reduce the fraction of wealth in stocks after they get married, whereas they increase this fraction after divorce. Hence, marriage acts as a financial risk-reducer for men, whereas it acts as financial risk-increaser for women.” (Christiansen, Joensen and Rangvidz, September 1, 2010)

Levels:

S&P 500 Index [1332.41] – Revisiting February highs as 1340 presents a retest of strength and positive momentum.

Crude [$107.94] – Early confirmation of strength above $105, showcasing further traction with buyers.

Gold [$1418.00] – Interestingly, another struggle at 1420 range, which suggests a positive long-term but shaky near-term confidence.

DXY – US Dollar Index [75.83] – Noticeable decline for the quarter. It remains at a fragile range.

US 10 Year Treasury Yields [3.44%] – Closing in line with the 50-day moving average of 3.44%. Currently, trading in line with the four-month pattern.

Please note: There will be no weekly Market Takers next week due to travel schedule.

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