Market Outlook | February 28, 2011

“The truth is incontrovertible, malice may attack it, ignorance may deride it, but in the end; there it is.” - Winston Churchill

For longer-term investors, the action last week might not create enough unease to change course in 2011 plans. The consensus view mostly indicates strength in company earnings, favorable presidential cycle data, and increased merger and acquisitions. These highly polished and occasionally motivational points have some merits. In fact, these are key selling points as to why participants bought into this concept, especially towards the end of last summer. In other words, the upside market momentum is driven on the notion of an inevitable cycle recovery. This thought propelled the stock markets to rise at a significant pace in the last few months.

In the short-term, there are plenty of excuses and reasons to lean towards risk aversion. For one thing, European concerns have been in place, and further turbulence is hardly a surprise. Secondly, resurfacing inflation worries plague emerging markets as currently discussed in Asian economies. Meanwhile, US stock market offers a less timely entry point as a mere breather is much needed. Interestingly, some quarterly earnings results may reflect the upbeat rhythm painted by general market feel. However, on a relative basis, US markets are attractive and may lure in foreign capital. That said, managing surprises and expectation is the challenge ahead for investment decision makers.

At this junction, most technical observers are hesitant to declare the last few days as "the top.” As usual, it is well known that it takes few catalysts to shake the smooth sailing markets. Veteran observers are keenly aware that downside moves can be short lived sell-offs occurring at a rapid pace. For the day-to-day trader, it feels like every hour is filled with some highly charged headline material. Topics such as government shutdown, developing unrest, and Wal-Mart’s declining US sales spark enough volatility to create trading opportunities. The skill is in isolating noise from early signs of a sustainable decline for a frontline participant.

Within this fear-driven period, the attention seems too diverted away from the next big issues linked to interest rates and currencies. When the near-term dust settles, mapping out interest rate matters among central bankers can shape a better grasp of risk. Of course, the reactionary pattern in commodity prices should be factored in the Federal Reserves’ evaluation. Beyond the explosive run in Crude, there are other overlooked and existing hints of vulnerability. These cumbersome clues might be difficult to shake off as we all eagerly wait.

Article Quotes:

“The period between the War of 1812 and the Civil War is commonly called the “free banking era.” It is also called the era of “wildcat banks” because many banks were poorly capitalized, poorly if not fraudulently managed, and prone to failure. Conventional wisdom says that this era demonstrates conclusively the need for strict government regulation of money and banking. Like other free-market institutions, free banking rests on the sanctity of property rights, with no government involvement other than prosecution of theft or fraud. But there was substantial government involvement all along, so the “free banking” label is only accurate in relative terms.” (The Freeman Ideas on Liberty, March edition 2011)


“China is seeking to avoid a repeat of its last banking crisis, when the government spent more than $650 billion over a decade to bail out banks after years of state-directed lending. Concerns that a deterioration of lenders’ asset quality could derail the world’s fastest-growing major economy surfaced after credit expansion surged to a record 96 percent in 2009, prompting the banking regulator to tighten capital rules.” (Bloomberg, February 21, 2011)

Levels:

S&P 500 Index [1319.88] – Despite a weekly decline, the index is holding above 1300 and trading near its 15-day moving average of 1323.69.

Crude [$97.88] – A noticeable and well-noted explosive run. The peak of $103.41 on February 24, 2010, marks a multi-month top. Revisiting this range can trigger ongoing debates and speculation.

Gold [$1402.50] – Since November 2010, the commodity has failed at 1400. Yet again, this level is being tested and short-term history would suggest further pause ahead. The week ahead can provide a better clue on buyer’s interest.

DXY – US Dollar Index [77.27] – Relatively quiet and trading slightly below its 50-day moving average of 78.92. Basically, it has been mostly quiet since the peak in late 2010.

US 10 Year Treasury Yields [3.41%] – Establishing a near-term downtrend pattern since February 9, 2011. A dominate theme recently showcases a pattern between 3.30-3.50%. A trading range within these points suggests a normalization process at least in the short-term.


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