Market Outlook | November 9, 2009

Weekly Results:

S&P 500 1,069.30 [+3.20%], DJIA 10,023.42 [+3.20%], NASDAQ 2,112.44 [+3.29%], Russell 2000 580.35 [+3.12%], and MSCI Emerging Markets 39.48 [+3.39%]

Digesting labor market results and stock market behavior can be two spate issues. Momentum is a powerful force that’s pointing to further upside moves.

Once again, we learned that sell-offs failed to reach more than 10%. Again, this is visible in the S&P 500, where the recent correction equaled around 6%. Ironically, those waiting for significant corrections might need markets to move much higher. Basically, an inevitable two week correction took place, forcing investors to reassess. This is poised to play out with a few weeks removed from year-end. The weakening labor market is not much of a surprise, heading into last Friday. Job numbers continue to be an established trend, given a 22 month contraction. In fact, some have pointed out that employment data is a lagging indicator, and macroeconomic aspects support those points. In looking ahead, a favorable cycle is forming in innovation themes despite a weak credit setting and lack of lending. Technology and biotech stand to benefit from increasing merger and acquisitions. Improvement in credit conditions, combined with increased IT spending, create opportunities in US technology.

Skepticism resurfaces, at times, among observers that state overbought technicals and pricy valuations. For money managers this might not be actionable until sentiment turns negative. Also, a shock in macroeconomic expectation can serve as a catalyst to trend reversals. At this stage, observers would be fighting the trend in making this assumption. Simply, the dominating theme is a movement towards risky assets such as emerging markets and commodities. This is evident, based on low rates and messaging from Federal Reserve. Thus, performance seekers are less hesitant to take an opposite view. In other words, many are not willing to risk profits earned since March lows.

Momentum is a factor that drives and attracts participants. Gold is picking up buyers, and previous performance is creating more believers in an already decade long-run up. For investors, Gold’s strength is hard to ignore, especially after a 333% appreciation since July 1999. Short term hurdles will struggle to deter those waiting for exposure. At the same time, paper assets, measured by the financial sector and US dollar, remain relatively weak. Simple, relative performance charts paint this picture. Global investors have accepted this fact, based on sector rotation data. The faith of paper assets will be mostly determined by policymakers and central banks. Until then, point sentiment and psychology is bound to flock towards outperformers from this year’s rally.

Article Quotes:

• “The Fed's balance sheet is bloated, but liquidity injections into the banking system have still failed to trigger a self-feeding expansion in money and credit. The monetary base has expanded by $788 billion in the past year, while outstanding bank loans have contracted by $638 billion. Meanwhile, actual inflation and inflation expectations remain tame.” (BCA Research, November 6, 2009)

• “Insiders sold $6.2 billion worth of shares in August, the most since May 2008, while insider buying has been under $1 billion for seven straight months for the first time since 2005, according to a report by research firm TrimTabs. Because insiders cannot trade around earnings season, insider volume at $3.6 billion in October was about half that in August, but the actions of executives at many companies that have reported suggest selling will pick up.” (Reuters, November 6, 2009)

Levels:

S&P 500 [1069.30] Trading within a range between 1040-1080. A sideway pattern that began in mid September. Longer-term outlook maintains its uptrend bias.

Crude [$77.43] Continues to pause after reaching annual highs of $82. Trend points to a positive movement with buy interest around $72 and $74. Upcoming sell-offs can paint a better read on buyer conviction.

Gold [$1096] Has a solid breakout that reconfirms a bullish trend. Short-term traders might shy away from accumulating at these elevated levels. Investors seek to gain confirmation on Gold price’s ability to stay above $1100.

DXY– US Dollar Index [75.79] Has recent strength in the US dollar, lacking further evidence of a turnaround. Having said that, a bottoming process is beginning to convince some investors on a potential of a trend shift.

US 10 Year Treasury Yields [3.49%] No major changes have occurred week after week. There has been a lack of major fluctuation in nearly five months.

Dear Readers:

The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.

Weekly Results:

S&P 500 1,036.19 -4.02%

DJIA 9,712.73 -2.60%

NASDAQ 2,045.11 -5.08%

Russell 2000 562.77 -6.34%

MSCI Emerging Markets 38.19 -6.40%

“If two men agree on everything, you may be sure that one of them is doing the thinking.” Lyndon B. Johnson (1908 - 1973)

Early hints:

There are plenty variables to watch in upcoming weeks and few things to digest from recent developments.

Dollar and volatility index (VIX) bottomed together on October 21, 2009, which marked a turning point that triggered recent sell-offs. On that date, the VIX contracts expired for October and jumped from 14 month lows. On the other hand, October 21st witnessed a short-term peak of 1101.36 in the S&P 500 Index. Uniformly, these signals showcased the feelings of participants towards a turbulent November. Similarly, these actions also matched technical signals of increased odds of pullbacks. In other words, buyers are waiting for better pricing and timing to reconsider purchase. Meanwhile, sellers are aggressively taking a cautious stance, based on early evidence of cycle declines. The early part of earnings season provided upside surprises. Perhaps that created great expectations, while raising the bar too high. Therefore, the stage was set for disappointments after a solid 7 month run.

From a global point of view, the recovery in the dollar is a key macro trigger that has been long awaited by financial markets. Similarly, the comfort level is being tested for those betting on higher commodities and lower dollar. Economic data and Fed actions can create further reasons for trend disruption. Heading into this week, short-term trading is subject to emotionally driven responses, which can be costly from a trading perspective. Importantly, fear appears to become the dominant market theme. Therefore, the power of perception can’t be underestimated, and it can quickly turn into reality. That said, the prudent move is to minimize risk and observe as events unfold at the start of the month.

Assembling the parts

Again, investors are adjusting from one extreme of bullishness to panic mode, continuing into a “stabilization” cycle. The big picture suggests that pending retracements are expected. Clearly, confidence is fragile, and the management of the financial system will face further scrutiny. For commodity holders, multi-year trends of Gold and Crude are not yet broken. Of course, fear will increase, given the psychology of markets. Generally, extremes offer opportunities, such as shorting in 2007 and going long in March 2009. However, many will attempt to identify if the recent recovery can be labeled extreme as well. Also, with the S&P up 14.7% year-to-date and with 42 trading dates left in 2009, managers might strongly consider taking profit to lock-in gains.

Weakening Financials:

More convincing is needed for suspicious observers, given the lack of credit extension and weaker consumer spending. Unlike the rest of the broad markets, Homebuilders peaked on September 17, 2009. Similarly, commercial real estate deterioration is evident, and few banks continue to file for bankruptcy.

Specific Ideas:

Worth a look are select opportunities in healthcare, technology, and infrastructure related and smaller companies with promising growth:

INSU (Insituform Technologies): This company might not offer the best entry point, but it may be an appealing company in small cap for longer-term investors. It’s an infrastructure play, offering exposure to Sewer Rehabilitation. Profitability increased in global projects as net revenue rose 14% from previous quarter. Long-term tecnhincals show favorable odds for a sustainable recovery.

BKE (Buckle Inc): Stock is trading at compelling levels for value seekers, despite a weak consumer and spending cycle. It’s a casual retailer, showing fundamental strength. Currently, it’s among the heavily shorted stock in the S&P 600 Index. It offers a contrarian bet, especially with growing pessimism.

Previous Ideas: ASEI (American Science and Eng), SXE (Stanley Inc), and RVBD (Riverbed Technology).

Article Quotes:

• "The percentage of US companies beating earnings estimates currently stands at 74%, but below, we highlight how this 'beat' rate has changed throughout earnings season. As shown in the charts below, as earnings season has progressed, the percentage of companies beating estimates has declined, while the percentage of companies missing estimates has increased.” - (Bespoke, October 29, 2009)

• "Capmark Financial Group Inc., the lender that filed for bankruptcy this week, was making billions of dollars in property loans just as investor Sam Zell was exiting the U.S. office market in early 2007. In 2006 and 2007, Capmark originated $60 billion in commercial mortgage loans, most for office buildings, according to the Oct. 25 bankruptcy filing. While Capmark was lending, Zell was selling Equity Office Properties Trust at the top of the market for $39 billion, including debt." – (Bloomberg, October 27, 2009)

Levels:

S&P 500 [1036.19] Few points above October 2nd lows of 1019. Short-term indicators suggest oversold conditions, as the index retraced 6%.

Crude [$77.00] Minor consolidation from October 21st highs of $80. The commodity continues to maintain its upside momentum.

Gold [$1040] Strength remains intact. Forming a trading range between 1020-1040.

DXY– US Dollar Index [76.34] Bouncing back from annual lows. Last week, index surpassed its 20 day moving average. At early stages of a much anticipated trend reversal.

US 10 Year Treasury Yields [3.48%] No significant changes. Rates are struggling to hold above 3.50%, which suggest the lack of structural changes.

Dear Readers:

The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.

Market Outlook | October 26, 2009

markettakers.blogsopt.com

“Believe those who are seeking the truth. Doubt those who find it.” - Andre Gide (1869 - 1951)

Balancing Act:

Global assets continue to climb higher as participants show willingness for risk acceptance, yet money managers are faced with balancing long-term recovery with shorter-term declines. Now, observers will glare and focus at last Wednesday’s highs of 1101 in S&P 500. For some, this is a compelling and early indicator for sell-offs. However, worrying and betting on the collapse of markets has been costly. Recent S&P 500 pullbacks include a 7% decline from June 11 to June 23. This was followed by a 5.57% retracement from September 23 to October. Again, broad market indexes have yet to correct 10%, which reinforces an upside buying bias. In both cases, simple indicators implied overbought conditions. At the same time, some pundits pointed out increased odds of heavy selling pressure, yet the markets have worked their strength. Perhaps, it is tempting for most to call market tops, but the evidence is not that clear. Now, as a potential retracement looms upon us, investors are forced to weigh and make a decision.

Monitoring Themes:

The key theme this year is increased risk-appetite that favors commodity based themes, globally. Of course, this partially coincides with the dollar weakness and lower yields. Strength in Crude and Gold define a positive momentum and matches stock direction as well. Money market funds have declined by $458 billion, and this displays additional evidence that favors riskier assets (Invesco Co). At this stage, decisions by policymakers remain unclear, despite increasing headline exposure. Generally, there are concerns of the unknown in the political climate, especially with growing government interventions. However, a simple glance of charts remind us of a steady, multi-month rise. In looking ahead, the Federal Reserve actions, along with business related policies, are factors to consider for a trend shift. Also, active participants will examine the magnitude of increase in volatility as an early clue for a market pause.

In terms of stocks, overall healthy earnings are leading to increased upside expectations. Technology reinforces overall strength by gains in Microsoft and Amazon. This partially explains the relative outperformance of Large Cap Growth last week. Interestingly, some companies witnessed solid revenues, but stock price declined in value due to profit taking. Therefore, differentiating between long-term investment and stock specific reasons is critical. In other words, buyers are likely to seek better pricing for re-entry, given extended markets. Plus, as the month draws to a conclusion, additional clues need to materialize before major commitments are fully reflected.

Issues related to credit markets are still worrisome, especially with looming bankruptcies. Similar to 2007, the catalyst for market downturn resides in financials. Also, the Federal Reserve holdings of mortgage backed securities exceeded treasuries. This unsolved matter seems to create a higher risk for opportunists. Importantly, there is hesitancy in Financials, which makes investors relatively underperform. However, other sectors present better opportunities, especially if the macro climate continues to offer lower yields and declining dollar.

Article Quotes:

“Asia's rich are again favoring the leveraged investments that backfired on them during last year's market turmoil,’ according to the head of DBS Group Holdings Ltd.'s wealth management unit. 'Investors have short memories,' Amy Yip, who oversaw Hong Kong's $245 billion foreign-reserves fund before joining Southeast Asia's biggest bank in 2006, said... 'Many of the Asian clients are back in the very aggressive leveraged posture that they had adopted in the fall of 2008.' Rich investors in Asia are borrowing more to fuel returns, spurred by record-low interest rates and a stock market recovery.” (Bloomberg, October 22, 2009)

“The fact that so many of the sectors are trading in neutral trending modes, reflects the fact that we are in a multiday trading range. I thought Friday's early action was noteworthy, in that the market could not work higher on positive earnings news and housing data. I also thought it was noteworthy that the selling on Friday could not take out the Thursday lows.” (TraderFeed, October 25, 2009)

Levels:

S&P 500 [1079.60] Trading few points away from annual highs. The index would need to rally 46% to climb back to 2007 highs. In the near-term, consolidation forming between 1050-1100.

Crude [$80.50] Stabilizing around $80, while confirming an uptrend. At this range, Crude is 36% removed from its 200 day moving average. This is explained by the strong run up that began on September 25.

Gold [$1061.75] Closed the week at all-time highs. Solid uptrend this month after breaking a key $1000 mark. Buying frenzy is building as the commodity benefits from a shift away from fragile financials.

DXY– US Dollar Index [75.49] Negative sentiment continues to establish the downtrend. Approaching annual lows reached this March at $70.69.

US 10 Year Treasury Yields [3.48%] Sideway pattern for the past 5 months. Yields are slightly above their 50 day moving average of 3.39%. No signs of a trend shift at this point.

Dear Readers:

The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough, due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.

Market Outlook | October 19, 2009

Macro Perspective:

Given the sharp declines of 2008 and corresponding recoveries this year, investors are left with fuzzy data points in making historical comparisons. Also, following an outlier year, it is difficult to analyze trends and gauge expectations. This is a key lesson learned by many, especially in drawing market conclusions. Sharp peaks and quick rallies are evident in stocks, commodities, yields, and currency. Basically, this sums up the reshaping of financial markets, and it stresses the importance of staying flexible in eventful markets. On a calendar basis, a quick glance reminds us that the S&P 500 is up 20% year-to-date. For longer-term participants, that’s a fruitful reward compared with previous years. Importantly, this signals a natural recovery and sets the stage for a new cycle. On the other hand, pure fundamentalists point out that these markets are disconnected from their fundamentals.

Days Ahead: Micro Expectations

At this point, public companies are meeting or exceeding analyst’s expectations. In fact, 85% of companies have beaten expectations, according to Bespoke Investment. This showcases increasing optimism, as some managers continue to raise guidance. Of course, majority of quarterly earnings are ahead of us, and they will catch the attention of many observers. Perhaps, this contributes to a near-term pause within a defined uptrend. Earnings are usually a game of expectations, and there is always room for disappointment. Also, options expired last week as investors shift to fundamental focus. Any disappointment is bound to create a sensitive response in investor sentiment. However, the buying momentum is a strong force, especially as buyers reconfirm an appetite for risky assets. In addition, few indicators are suggesting the end of recession. For example, FOMC minutes and Philly Fed report data confirm economic improvement. The accumulation of these factors points to a positive building momentum.

Actionable Thoughts:

A growing skepticism continues to plague credit markets. Weakness in commercial real estate, small bank failures, and growing foreclosures contribute to lack of confidence. Similarly, funding for venture capital is relatively low, and banks are not lending as desired. Therefore, financial sectors remain vulnerable and require additional time. This is part of the acceleration in commodities and confirming its multi-year leadership.

Despite headline worries, inflation is not a concern, at least not in the short-term. Similarly, as expected by many, interest rates have not risen. As usual, eliminating noise is crucial in generating ideas and building an investment thesis. It’s hard to point out a consensus view, but most would agree that markets have stabilized and are far removed from major extremes. That said, finding specific fundamental and sector growth can be highly rewarding in the upcoming cycles.

Stock Specific Ideas:

ASEI (American Science and Eng.): Stock is maintaining its strength above $60. A developer and provider of innovative X-ray detection solutions is set to benefit from increased deals, especially in developing markets. This bodes well for future revenue growth. Pending declines in the stock price offer an entry point as investors seek innovative based companies.

SXE (Stanley Inc): Recent deals with Intel and government agencies showcase upside strength. The company is exposure for a positive, technology business. Additionally, technicals suggest that attractive risk/reward is around $26.

RVBD (Riverbed Technology): Set to benefit from an increase in IT infrastructure spending by private and public sectors. The stock price is significantly removed from the all-time highs that were reached in October 2007. It is a small cap stock that gains from demand in defense related applications. Since last fall, continued uptrend attracts momentum chasers, seeking to bet on bullish markets.

Article Quotes:

· “The dollar’s correction is not just natural; it is helpful. It will lower the risk of deflation in the US and facilitate the correction of the global “imbalances” that helped cause the crisis….Finally, what can replace the dollar? Unless and until China removes exchange controls and develops deep and liquid financial markets – probably a generation away – the euro is the dollar’s only serious competitor. At present, 65 percent of the world’s reserves are in dollars and 25 percent in euros. Yes, there could be some shift. But it is likely to be slow. The eurozone also has high fiscal deficits and debts. The dollar will exist 30 years from now; the euro’s fate is less certain.” (Martin Wolf, Financial Times- October 13, 2009)

· "The volume of delinquent commercial mortgages jumped sevenfold last month as borrowers who got loans with lax terms faiedl to make debt payments amid sinking real estate values, according to Credit Suisse Group AG. In September, installments on $22.4 billion of mortgages were at least 60 days late, up from $3.2 billion a year earlier... The delinquency rate rose 33 bps to 3.34%..." (Bloomberg – October 12, 2009)

Levels:

S&P 500 [1087.68] Index is slowly climbing back and restoring losses from the 2008 collapse. Index is approaching 1100 where long-term buyers would look to accumulate.
Crude [$78.53] Solid uptrend remains in place. Next key point is around $90, which serves as a midpoint between July 2008 highs and December 2008 lows.

Gold [$1047.50] The commodity is up 50% since the lows of October 2008. A breakout above $1000 convinces more buyers to step in. Plus, the decade long commodity uptrend is powerful to ignore.

DXY– US Dollar Index [76.45] Peaked on March 4, 2009, at a period where investors shifted towards risky assets and spurred a market recovery. Now, a roundtrip to levels was reached in the early part of last fall and marking annual returns.

US 10 Year Treasury Yields [3.41%] No major changes in the past few months. It’s establishing a defined range between 3.42% and 3.18%.

Dear Readers:

The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough, due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.