Market Outlook | February 14, 2011

“Technology is similarly just a catalyst at times for fundamental forces already present.” - Scott Cook

Within the current uptrend, volatility has stayed low, as illustrated by various exchange data points. A reduction in turbulence might help long-term investors who occasionally look to make investment adjustments. However, the lower volatility is creating limited day-to-day opportunities for active traders. This impacts exchanges and money managers whose revenue is strongly tied to volatility based trading. Interestingly, policymakers are evaluating the expansion of derivative products, and the competition for exchange based products is heating up as well. These points above illustrate the significant influence of trading mechanics that lead to a changing market dynamic.

These days, one can track the profit’s key exchanges, since they became public a few years ago. Of course, the financial headlines this weekend highlight merger discussions, which can change overall trading behaviors while presenting further regulatory challenges. This recent trend is partially attributed to innovative electronic exchanges, which have reduced overall pricing and in turn increased competition. “Brokers who owned the NYSE 10 years ago earned 6.25 cents or more when buying and selling 100 shares. Now, the spread is a penny for the most heavily traded stocks” (Bloomberg, February 10, 2011). That said, money managers are reevaluating strategies in seeking yields and implementing growth driven models while attempting to establish expertise for the current landscape. In other words, advancement in technological and informational speed is forcing adjustments in traditional financial services. Perhaps, forward-looking managers will look to alternative assets classes or sharpening existing systems to create an edge.

Within the altering technical matters in place, much of the attention, as usual, is centered on the macro climate. Although, extraordinary behaviors are not too visible in Gold or Crude, as both key commodities are pausing. Similarly, long-term yields have somewhat stabilized despite the chatter of sudden spikes. Meanwhile, the Dollar is too quiet for now at this early junction of the year. This relative period of silence makes some nervous in anticipation of a trend shift. Pundits highlight the political instability that is brewing, while others emphasize higher food prices. Yet, the S&P 500 Index (up 5.7% year to date) paints a cheerful picture of corporate profit stability, improving economic growth, and reacceleration from the 2008 crisis. These optimistic arguments are as hard to deny as they are to accept, especially when digging deeper. Perhaps, this sets the stage for a gut check in early spring as various catalysts continue to build.


Article Quotes:

“The booming piracy industry is a neat metaphor for our globalised economy. Just about everything you need to know about how money is made and lost is encapsulated in the daily battles between cargo captains and the pirate skiffs in the Somali basin. For starters, know your customer. One of the keys to understanding the modern multinational is to realise it hates embarrassment. Bear in mind that when faced with any challenge, whether from a lobby group, government or nerdy teenager on Twitter, its instinctive response is to crumple. Then imagine what it will do when confronted with poor people with guns: give in without a fight. Sure enough, most shipping companies don’t even allow their guards to bear weapons. It is not the kind of thing Human Resources wants to get involved in. All the pirates have to do is take a ship, steer it to harbour, and then ask for a few million dollars for its return.” (Financial Times, February 10, 2011)

“The Federal Reserve has held short-term interest rates to nil. We have expanded our balance sheet to unprecedented levels, with the effect of holding down mortgage rates and the rate of interest paid on Treasuries and the myriad financial instruments that are priced off of Treasuries, including corporate debt. After much debate―which included strong concern expressed by one member with a formal vote and others, like me, who did not have voting rights in 2010―the FOMC collectively decided in November to temporarily undertake a program to purchase U.S. Treasuries that, when added to previous policy initiatives, roughly means we will be purchasing the equivalent of all newly issued Treasury debt through June. …The head of the European Central Bank, Jean-Claude Trichet, said it best recently while speaking in Germany: ‘Monetary policy responsibility cannot substitute for government irresponsibility’.” (Speech by Federal Reserve of Dallas, February 8, 2011)

Levels:

S&P 500 Index [1329.15] – Up nearly 28% since bottoming in August 27, 2010. Establishing multi-year highs as the ongoing uptrend is intact.

Crude [$85.58] – Momentum stalled at the $90 range and sparked a near-term decline. Odds for a bounce at current levels would seem favorable. A sharper drop below $85 can signal further selling, given the noteworthy decline this month.

Gold [$1364. 00] – Once again, 1350 is a key base in the recent consolidation. Most optimistic investors are looking at the current range as a reentry, with hopes of revisiting 1400.

DXY – US Dollar Index [78.46] – Not showcasing any significant directional move. Potentially, investors are waiting for further data and adjustment in Federal Reserve plan for the next key movement.

US 10 Year Treasury Yields [3.62%] – In a multi-month uptrend and early signs of pausing. The week ahead will demonstrate the sustainability of the 3.60% after economic and inflation related data.

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