“Cynicism is an unpleasant way of saying the truth.”- Lillian Hellman (1905 - 1984)
Emotionally Charged
Gold’s recent strength provides a perspective across various markets. The three forces benefiting Gold prices include declinig Euro, an inverse play on paper assets, and acceleration of an ongoing multi-year momentum. These are highly documented explanations that resurface in periods of credit worries and imbalances in currency markets. In addition, some argue that Gold serves as a hedge against inflation. All in all, these reasons have succeeded in justifying Gold prices. Yet, late performance chasing comes with the risk of overpaying for defensive positioning, especially when the idea becomes accepted as a consensus view.
Recently, there were a few reminders of taking caution on consensus view. Investors learned that betting against the Dollar and hoping for rising rates did not play out as planned. Similarly, pessimists learned the hard way that stocks recovered fast and for an extended period as seen from spring 2009 to spring 2010. So, in the quest for the next trend, observers will have to grasp the rhythm and mellowing out of recent fallouts. In other words, it’s vital to avoid tempting offers that have accumulated popular acceptance. The past few weeks have produced major stories, ranging from pending legal threats, bailout packages, and a short-lived market glitch. Basically, this presents a more sensitive and jittery marketplace. That said, naturally broad indexes were reaching extended levels since early April 2010.
Unlike Gold prices, commodities, overall, have headed lower in a uniform pattern as a response to the current macro-based events. Interest rates have remained lower than yearly highs. And volatility has spiked up from neglected levels during the run-up. Looking at the above points, the first reminder is not to overreact or make conclusive statements on current trends. Election years find a way to add to financial worries. That's in addition to general market correction, regulatory changes, and regional risks. There is plenty to resolve this fall. Until then, it’s common for participants to stay hesitant and less willing to take on big bets.
Looking Ahead
At this junction, mapping out a 5- to 10-year investment plan might seem merely impossible as the short-term variables easily cloud one’s vision. However, consumer-based ideas in Emerging markets are worth a closer look. At the same time, innovative-based groups in developed markets can muster a sustainable cycle. Thus, as the day to day excitement lessens, it offers investors early chances to seek opportune entry points.
Article Quotes:
“Asian growth will still be good news for U.S. companies. The silicon chips in an Indonesian family's new computer may well come from a U.S. plant. U.S. management and engineering companies may well oversee some of the billions of dollars expected to be spent on roads, airports, and shipping terminals in the region. Rising incomes will mean more sales of U.S. or European branded goods, a bigger audience for Hollywood movies, and more demand for management and other services. But the competition on all fronts is only getting more intense.” (Washington Post, May 14, 2010)
“In the past few days we have heard repeatedly that our politicians are risking the country’s credit rating or threatening sterling or facing retribution in the bond markets. Political leaders have been forced to make decisions of immense historic importance within days, or even hours, to satisfy arbitrary deadlines laid down by supposedly implacable financial markets. Any political action that a media commentator or a business leader happens to disagree with is attacked for undermining business and consumer confidence. Like Greek oracles, who claimed to hear voices from Olympus, financial analysts hold forth on television, invoking market confidence, and insisting that no sacrifice is too great or too painful to propitiate this new god.” (Times of London, May 12, 2010)
Levels:
S&P 500 [1135] is nearly at the halfway point between the 50- and 200-day moving average. Basically, that signals a return to normalcy, following the first wave of spring sell-off.
Crude [$71.61] is flirting with previous bounce points around $72. At or below current levels, the index was recovered in December 2009 and February 2010. Chart patterns suggest further retest of those levels is underway.
Gold [$1236.50] is making new highs yet again, as a defensive play and a break out. The commodity is up nearly 17% from lows reached on February 5, 2010.
DXY– US Dollar Index [86.09] is making new highs after an explosive multi-week run. Based on the acceleration, participants rushed to the Dollar on a sudden response. The Dollar Index is becoming extended in the near-term as a natural breather awaits.
US 10 Year Treasury Yields [3.45%] is showing early signs of bottoming around a 3.40% range. Yet, the next upside hurdle is around 3.60%.
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.
Sunday, May 16, 2010
Monday, May 10, 2010
Market Outlook | May 10, 2010
“In these matters, the only certainty is that nothing is certain.” -- Pliny the Elder (23 AD - 79 AD)
Theatrical Feel
In some ways, it felt like 2008 crisis again, at least for two key reasons. First, the crisis in Europe reflects worries that are driven by lack of confidence. Secondly, the action in the US markets showcased a historic day of a tremendous shock. Of course, this is all taking place in a period where the schedule for congress testimony features key players from the previous credit bubble as lawmakers consider some resolutions. For storytellers, it was rather an exciting time, while money managers face the issue of protecting capital, while calmly finding opportunities within the current chaotic landscape. An emotional response can dominate the market environment, especially in upcoming days as logic takes time to settle in.
A Step Back
From a clear-headed perspective, the S&P 500 Index reminded us that most investors were not comfortable above 1200. Previous peaks above 1200 in April, served as early clues for a much needed breather. When combining this mechanical observation with the headline concerns of Europe, the high volatility is partially explained. Not to mention, previous turbulence in the Volatility Index, especially in the past eight months, were setting up for a tipping point. In addition, minor worries regarding China that were resurfacing are creating further downside pressure. It wasn’t too long ago that skeptics questioned the lack of volume of this ongoing rally. As for interest rates in the US, near-term data argues for downside momentum, despite the consensus of rising rates. As global central banks readjust interest rates, some await results in political shake outs. Basically, sorting out a few macro issues, such as the stability of the Europe, can shape the new cycle. So far this year, the defensive investor reaction has greatly helped the US Dollar, mostly sparked by Euro weakness. Once again, there are too many macro issues lingering, for those seeking clarity, in search for the next mega trend.
Period of Adjustment
Few changing dynamics in the global marketplace are worth noting, especially in this new decade. These moving parts range from technological advancements in trading mechanics to pending financial reforms in an interconnected world. Globally, a new plan for Europe should slowly materialize. and currency markets most likely need to adjust to the needs of growing economies. At the same time, investors are eager to find out the verdict on the reacceleration of emerging markets; a theme that significantly outperformed last decade. Also, the characteristics and tolerance of market participants is changing as well. That said, investing is requiring severe patience and an open mindedness to navigate an emotionally charged market.
Article Quotes:
“In the mid-1990s, authorities in the fast-growing countries of East Asia explained that their success was due to "Asian values". The crisis of 1997-1998 changed that tune. Similarly, senior U.S. officials spoke confidently in 2006 as they basked in the glow of the "great moderation," as economists called the easing of business-cycle fluctuations over the prior two decades. Financial institutions were rock solid and not leveraged; we were told. Financial markets were resilient. And housing prices would never decline nationwide. Who would have listened 12 months ago to someone asserting that an E.U. member would teeter on default?” (Washington Post, May 9, 2010)
“These incidents demonstrate that our markets are dangerously unprotected against an electronic meltdown. We depend on slow-moving humans at our exchanges to monitor our markets and take actions, such as calling a trading halt when things go haywire. Our markets now react in milliseconds to events but are monitored by humans who respond in minutes. In the time it takes a human to respond to a problem, billions of dollars of damages can occur. It is extremely messy to unwind botched trades after they occur.” (Forbes, May 7, 2010)
Levels:
S&P 500 [1110] previously struggled to hold above 1200. Currently, it’s barely holding above its 200- day moving average of 1095. Near-term indicators suggest that the sell-off is reaching exhaustion at least from a mechanical perspective.
Crude [$75.11], similar to equity markets, had a sharp sell-off near the 200-day moving average. The commodity is back at familiar ranges between $74 and $78.
Gold [$1202.25] is strengthening from previous week as momentum remains positive. At the same time, new, annual highs and slowly approaching recent highs last reached on December 2, 2010.
DXY– US Dollar Index [84.45] had a sharp spike, driving the index to new, yearly highs. This is a reactionary move by investors to rotate towards a defensive currency. Near-term trend might be overdone at a first glance. However, the Dollar Index continues to maintain its strength since bottoming on November 25th.
US 10 Year Treasury Yields [3.42%], after hitting 4% in early April, yields have sharply fallen to 3.50% range.
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.
Theatrical Feel
In some ways, it felt like 2008 crisis again, at least for two key reasons. First, the crisis in Europe reflects worries that are driven by lack of confidence. Secondly, the action in the US markets showcased a historic day of a tremendous shock. Of course, this is all taking place in a period where the schedule for congress testimony features key players from the previous credit bubble as lawmakers consider some resolutions. For storytellers, it was rather an exciting time, while money managers face the issue of protecting capital, while calmly finding opportunities within the current chaotic landscape. An emotional response can dominate the market environment, especially in upcoming days as logic takes time to settle in.
A Step Back
From a clear-headed perspective, the S&P 500 Index reminded us that most investors were not comfortable above 1200. Previous peaks above 1200 in April, served as early clues for a much needed breather. When combining this mechanical observation with the headline concerns of Europe, the high volatility is partially explained. Not to mention, previous turbulence in the Volatility Index, especially in the past eight months, were setting up for a tipping point. In addition, minor worries regarding China that were resurfacing are creating further downside pressure. It wasn’t too long ago that skeptics questioned the lack of volume of this ongoing rally. As for interest rates in the US, near-term data argues for downside momentum, despite the consensus of rising rates. As global central banks readjust interest rates, some await results in political shake outs. Basically, sorting out a few macro issues, such as the stability of the Europe, can shape the new cycle. So far this year, the defensive investor reaction has greatly helped the US Dollar, mostly sparked by Euro weakness. Once again, there are too many macro issues lingering, for those seeking clarity, in search for the next mega trend.
Period of Adjustment
Few changing dynamics in the global marketplace are worth noting, especially in this new decade. These moving parts range from technological advancements in trading mechanics to pending financial reforms in an interconnected world. Globally, a new plan for Europe should slowly materialize. and currency markets most likely need to adjust to the needs of growing economies. At the same time, investors are eager to find out the verdict on the reacceleration of emerging markets; a theme that significantly outperformed last decade. Also, the characteristics and tolerance of market participants is changing as well. That said, investing is requiring severe patience and an open mindedness to navigate an emotionally charged market.
Article Quotes:
“In the mid-1990s, authorities in the fast-growing countries of East Asia explained that their success was due to "Asian values". The crisis of 1997-1998 changed that tune. Similarly, senior U.S. officials spoke confidently in 2006 as they basked in the glow of the "great moderation," as economists called the easing of business-cycle fluctuations over the prior two decades. Financial institutions were rock solid and not leveraged; we were told. Financial markets were resilient. And housing prices would never decline nationwide. Who would have listened 12 months ago to someone asserting that an E.U. member would teeter on default?” (Washington Post, May 9, 2010)
“These incidents demonstrate that our markets are dangerously unprotected against an electronic meltdown. We depend on slow-moving humans at our exchanges to monitor our markets and take actions, such as calling a trading halt when things go haywire. Our markets now react in milliseconds to events but are monitored by humans who respond in minutes. In the time it takes a human to respond to a problem, billions of dollars of damages can occur. It is extremely messy to unwind botched trades after they occur.” (Forbes, May 7, 2010)
Levels:
S&P 500 [1110] previously struggled to hold above 1200. Currently, it’s barely holding above its 200- day moving average of 1095. Near-term indicators suggest that the sell-off is reaching exhaustion at least from a mechanical perspective.
Crude [$75.11], similar to equity markets, had a sharp sell-off near the 200-day moving average. The commodity is back at familiar ranges between $74 and $78.
Gold [$1202.25] is strengthening from previous week as momentum remains positive. At the same time, new, annual highs and slowly approaching recent highs last reached on December 2, 2010.
DXY– US Dollar Index [84.45] had a sharp spike, driving the index to new, yearly highs. This is a reactionary move by investors to rotate towards a defensive currency. Near-term trend might be overdone at a first glance. However, the Dollar Index continues to maintain its strength since bottoming on November 25th.
US 10 Year Treasury Yields [3.42%], after hitting 4% in early April, yields have sharply fallen to 3.50% range.
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.
Monday, May 03, 2010
Market Outlook | May 3, 2010
“A good listener is not only popular everywhere, but, after a while, he gets to know something.” - Wilson Mizner (1876 - 1933)
General market feel and simple investor psychology favored increasing odds of a market correction. This inevitable retracement led to a -2.5% weekly decline for the S&P 500 Index. As to this awaited decline, it was only a question of when. Therefore, it was hardly a surprise last week to see a sharp fall, given the mixed messages of over a 1 year rally. Before recent trading days, it was becoming difficult to deny the uptrend smoothness of risky assets, especially global stock markets. Combining technicals along with human elements creates impactful responses. However, at this stage, one should be careful in claiming of a new trend or discovery.
In looking back, pundits will have to carefully navigate when analyzing stock price appreciation with improving economic numbers. In some cases, others might declare victory and conclude that we’re in a period in which stability is being restored. This is a tricky balance as usual. As the first trading day in May begins, one must wonder and revisit early year thoughts. Currency markets echo similar messages to stock in signaling a defensive posture; specifically, credit downgrades in Europe are partially causing relative weakness of the Euro and strengthening the US Dollar.
Short-lived spikes in volatility have silently hinted of a potential lack of stability. Just viewing historical charts doesn’t paint the picture of extreme worries. However, in the last 8 months, there have been five noteworthy spikes in the Volatility Index (VIX). Despite these clues of turbulence, risky assets in global markets continued to appreciate.
Listed below are percentage gains and periods in which the VIX index jumped from lows to new highs.
33.21% September 23, 2009 – October 2, 2009
58.80% October 21, 2009- November 2, 2009
66.13% January 11, 2010- January 22, 2010
38.61% February 2, 2010- February 5, 2010
52.33% April 12, 2010- April 27, 2010
Article Quotes:
“Higher rates in the United States would encourage investors to move assets into dollars to earn a better return, causing the euro to fall even more. A weaker euro would be good for Greece and European exporters in general by making their products less expensive in foreign markets. But the downside is that a weaker euro would increase the cost of oil and other commodities, which are usually priced in dollars. Higher energy costs would feed inflation, adding pressure on the central bank to raise rates.
For now, that risk seems to have eased after the Fed signaled Wednesday that it was in no hurry to raise rates.” (New York Times, April 30, 2010)
“The European Central Bank keeps the Continent's banking system functioning day by day through short-term loans to commercial banks. In these cases, the ECB usually accepts the banks' holdings of government bonds as collateral. Greek debt is now rated as junk by S&P: Under current ECB rules, Greek bonds can't be used as collateral by the ECB if Fitch Ratings and Moody's Investors Service (MCO) cut them to junk as well. The Frankfurt-based central bank may have to dilute its collateral rules to keep the Greek banks operating. The ECB's problem of securing solid collateral for its loans will expand greatly if Spain and Portugal lose their investment-grade status, too.” (Businessweek, April 29, 2010)
Levels:
S&P 500 [1186.69], in the last few weeks, witnessed the struggle to stay above 1210 and a clear sign of peaking. Next key levels will be eyed by investors around 1090, near the 200-day moving average.
Crude [$86.15] has had a choppy pattern, between the $82 and $86 range, as oil remains upward trending.
Gold [$1179.25] had a recent recovery and has produced by over an 11% gain since February 5, 2010.
DXY– US Dollar Index [81.86] is trading near ranges last seen at the end of March. Multi-month trend remains positive, and few points removed from annual highs.
US 10 Year Treasury Yields [3.65%], in April, showed a dramatic reversal for yields after peaking at 4%. Next key level is around 3.57%, where the current 200-day moving average stands.
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.
General market feel and simple investor psychology favored increasing odds of a market correction. This inevitable retracement led to a -2.5% weekly decline for the S&P 500 Index. As to this awaited decline, it was only a question of when. Therefore, it was hardly a surprise last week to see a sharp fall, given the mixed messages of over a 1 year rally. Before recent trading days, it was becoming difficult to deny the uptrend smoothness of risky assets, especially global stock markets. Combining technicals along with human elements creates impactful responses. However, at this stage, one should be careful in claiming of a new trend or discovery.
In looking back, pundits will have to carefully navigate when analyzing stock price appreciation with improving economic numbers. In some cases, others might declare victory and conclude that we’re in a period in which stability is being restored. This is a tricky balance as usual. As the first trading day in May begins, one must wonder and revisit early year thoughts. Currency markets echo similar messages to stock in signaling a defensive posture; specifically, credit downgrades in Europe are partially causing relative weakness of the Euro and strengthening the US Dollar.
Short-lived spikes in volatility have silently hinted of a potential lack of stability. Just viewing historical charts doesn’t paint the picture of extreme worries. However, in the last 8 months, there have been five noteworthy spikes in the Volatility Index (VIX). Despite these clues of turbulence, risky assets in global markets continued to appreciate.
Listed below are percentage gains and periods in which the VIX index jumped from lows to new highs.
33.21% September 23, 2009 – October 2, 2009
58.80% October 21, 2009- November 2, 2009
66.13% January 11, 2010- January 22, 2010
38.61% February 2, 2010- February 5, 2010
52.33% April 12, 2010- April 27, 2010
Article Quotes:
“Higher rates in the United States would encourage investors to move assets into dollars to earn a better return, causing the euro to fall even more. A weaker euro would be good for Greece and European exporters in general by making their products less expensive in foreign markets. But the downside is that a weaker euro would increase the cost of oil and other commodities, which are usually priced in dollars. Higher energy costs would feed inflation, adding pressure on the central bank to raise rates.
For now, that risk seems to have eased after the Fed signaled Wednesday that it was in no hurry to raise rates.” (New York Times, April 30, 2010)
“The European Central Bank keeps the Continent's banking system functioning day by day through short-term loans to commercial banks. In these cases, the ECB usually accepts the banks' holdings of government bonds as collateral. Greek debt is now rated as junk by S&P: Under current ECB rules, Greek bonds can't be used as collateral by the ECB if Fitch Ratings and Moody's Investors Service (MCO) cut them to junk as well. The Frankfurt-based central bank may have to dilute its collateral rules to keep the Greek banks operating. The ECB's problem of securing solid collateral for its loans will expand greatly if Spain and Portugal lose their investment-grade status, too.” (Businessweek, April 29, 2010)
Levels:
S&P 500 [1186.69], in the last few weeks, witnessed the struggle to stay above 1210 and a clear sign of peaking. Next key levels will be eyed by investors around 1090, near the 200-day moving average.
Crude [$86.15] has had a choppy pattern, between the $82 and $86 range, as oil remains upward trending.
Gold [$1179.25] had a recent recovery and has produced by over an 11% gain since February 5, 2010.
DXY– US Dollar Index [81.86] is trading near ranges last seen at the end of March. Multi-month trend remains positive, and few points removed from annual highs.
US 10 Year Treasury Yields [3.65%], in April, showed a dramatic reversal for yields after peaking at 4%. Next key level is around 3.57%, where the current 200-day moving average stands.
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.
Monday, April 26, 2010
Market Outlook | April 26, 2010
“Anyone who isn't confused really doesn't understand the situation.” - Edward R. Murrow (1908 - 1965)
After a brief breather, global markets restored their positive flow. Again, earnings occupy the minds of most financial professionals, while policymakers examine reforms as discussed for most of this year. However, observing broad index performance fails to trigger urgent worries or troublesome trends at first. Yet, the looming concerns of currency movements, European crisis management, and the potentially overheating Chinese economy are issues that are poised to spark sensitive responses. Also, investors will have to be cautious in isolating the credit problems of today versus future concerns. In a period of reflection and pending reforms, it is easy to confuse catalysts affecting investor psychology.
During the current rally, on certain occasions, investors showcased overconfidence by attaching one or two macro factors that served as key drivers. For example, much-awaited interest rate decisions have shaped forecasters’ market view. One thing that we've learned in the past three years is about the connectivity of macro movements. In fact, the synchronized movements of rates, commodities, and stocks are striking. Meanwhile, higher inflation worries have not lived up to expectations. Similarly, interest rates have not rocketed as pointed out by several pundits at the start of this year. Both rates and inflation might contribute to a surprise element that could force investors to readjust their thought process. At the same time, the recovery in the US Dollar is a quick reminder of a global perception of a safe asset. This is a noteworthy point in addressing the comfort level of participants and the relative attractiveness of US markets versus Euro region.
Momentum-driven stocks continue to lead, especially in consumer discretionary, industrials, and Financials. Perhaps, a speculative environment contributed to sectors with higher volatility. Other sectors are seeing a strong recovery as well. For example, CREE (Cree, Inc.) in technology and ISRG (Intuitive Surgical) in healthcare are showcasing fundamental strength in a favorable cycle recovery. The takeaway is an ongoing, investor appetite for solid growth stories, driven by strong, stock specific stories.
Article Quotes:
“It seems unwise for investors to celebrate variations of a few basis points in delinquency rates. It seems equally unwise to celebrate ‘favorable’ bank earnings reports that are exclusively driven by reduced loan loss provisions, particularly when the volume of impaired loans has not declined proportionately. Keep in mind that Enron and Worldcom were able to report outstanding earnings for a while by adjusting the manner by which revenues and expenses were accrued. I suspect that the U.S. banking system has become a similar breeding ground for innovative accounting.” (John P. Hussman, April 19, 2010)
“When the financial sector increases its net lending, aggregate demand (or total spending) tends to increase. This is because the financial sector, especially the banking sector, tends to create new credit rather than merely transferring purchasing power, which the nonfinancial sector does when its net lending increases. In order for the private financial sector to increase its net lending, it needs sufficient capital….. For the first time since the 1952 inception of this series, net lending by financial sector actually contracted in 2009. What is all the more noteworthy, total financial sector net lending contracted in 2009 despite a surge in net lending by the Federal Reserve.” (Paul L. Kasriel, April 16, 2010)
Levels:
S&P 500 [1217.28] had yet another week of new annual highs. Positive momentum continues as the index remains 5% above its 50-day moving average.
Crude [$85.12] is trading in a narrow range between $82 and $86. Mostly, maintaining a bullish uptrend, while retracing from annual highs from few weeks ago.
Gold [$1139.50] is down since last week’s finish. Importantly, the commodity remains removed from recent highs of 1212.50, reached in December 2009.
DXY– US Dollar Index [81.35], in the last 8 days witnessed a resurgence of strength in the dollar index. A multi-month outperformance versus the Euro continues to take place.
US 10 Year Treasury Yields [3.80%] is stabilizing around familiar territory, while trading slightly below 15- day moving average of 3.84%.
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.
After a brief breather, global markets restored their positive flow. Again, earnings occupy the minds of most financial professionals, while policymakers examine reforms as discussed for most of this year. However, observing broad index performance fails to trigger urgent worries or troublesome trends at first. Yet, the looming concerns of currency movements, European crisis management, and the potentially overheating Chinese economy are issues that are poised to spark sensitive responses. Also, investors will have to be cautious in isolating the credit problems of today versus future concerns. In a period of reflection and pending reforms, it is easy to confuse catalysts affecting investor psychology.
During the current rally, on certain occasions, investors showcased overconfidence by attaching one or two macro factors that served as key drivers. For example, much-awaited interest rate decisions have shaped forecasters’ market view. One thing that we've learned in the past three years is about the connectivity of macro movements. In fact, the synchronized movements of rates, commodities, and stocks are striking. Meanwhile, higher inflation worries have not lived up to expectations. Similarly, interest rates have not rocketed as pointed out by several pundits at the start of this year. Both rates and inflation might contribute to a surprise element that could force investors to readjust their thought process. At the same time, the recovery in the US Dollar is a quick reminder of a global perception of a safe asset. This is a noteworthy point in addressing the comfort level of participants and the relative attractiveness of US markets versus Euro region.
Momentum-driven stocks continue to lead, especially in consumer discretionary, industrials, and Financials. Perhaps, a speculative environment contributed to sectors with higher volatility. Other sectors are seeing a strong recovery as well. For example, CREE (Cree, Inc.) in technology and ISRG (Intuitive Surgical) in healthcare are showcasing fundamental strength in a favorable cycle recovery. The takeaway is an ongoing, investor appetite for solid growth stories, driven by strong, stock specific stories.
Article Quotes:
“It seems unwise for investors to celebrate variations of a few basis points in delinquency rates. It seems equally unwise to celebrate ‘favorable’ bank earnings reports that are exclusively driven by reduced loan loss provisions, particularly when the volume of impaired loans has not declined proportionately. Keep in mind that Enron and Worldcom were able to report outstanding earnings for a while by adjusting the manner by which revenues and expenses were accrued. I suspect that the U.S. banking system has become a similar breeding ground for innovative accounting.” (John P. Hussman, April 19, 2010)
“When the financial sector increases its net lending, aggregate demand (or total spending) tends to increase. This is because the financial sector, especially the banking sector, tends to create new credit rather than merely transferring purchasing power, which the nonfinancial sector does when its net lending increases. In order for the private financial sector to increase its net lending, it needs sufficient capital….. For the first time since the 1952 inception of this series, net lending by financial sector actually contracted in 2009. What is all the more noteworthy, total financial sector net lending contracted in 2009 despite a surge in net lending by the Federal Reserve.” (Paul L. Kasriel, April 16, 2010)
Levels:
S&P 500 [1217.28] had yet another week of new annual highs. Positive momentum continues as the index remains 5% above its 50-day moving average.
Crude [$85.12] is trading in a narrow range between $82 and $86. Mostly, maintaining a bullish uptrend, while retracing from annual highs from few weeks ago.
Gold [$1139.50] is down since last week’s finish. Importantly, the commodity remains removed from recent highs of 1212.50, reached in December 2009.
DXY– US Dollar Index [81.35], in the last 8 days witnessed a resurgence of strength in the dollar index. A multi-month outperformance versus the Euro continues to take place.
US 10 Year Treasury Yields [3.80%] is stabilizing around familiar territory, while trading slightly below 15- day moving average of 3.84%.
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.
Monday, April 19, 2010
Market Outlook | April 19, 2010
“Most of the change we think we see in life is due to truths being in and out of favor.” Robert Frost (1874 - 1963)
A Pause:
As seen for several weeks and even heading into last week, markets were reaching extended levels, not to mention option expiration, which leads to unusual behavior while adding to volatility. However, leading up to last week, low volume was a profound and worrisome message to optimists. Similarly, contrarian indicators signaled early warnings. As usual, the surprising element is not necessarily the downtrend. Rather, it is the form in which a unanimous message sparks a trend shift. In other words, the takeaway is translated as bad news, causing a sensitive response. In addition, it serves as a gut check for those who were too comfortable in the calm nature of this recent uptrend. Clearly, the top news on Friday became a convincing force not only for a down day, but also for the the first negative weekly finish in 10 weeks. As for legal and policymaker decisions ahead, there are plenty of unknowns. At least, the start of earnings season will confirm or contest the justification of previous rallies. And the Federal Reserve’s message will be closely watched to determine risk tolerance and more definition on the cycle recovery.
Macro Themes:
Recently, there are three themes that gained popularity in the past few months, which include higher interest rates, declining Euros, and buying Crude-related groups. From a big picture standpoint, these views appear like a consensus view, but they mainly demonstrated an increased acceptance of risk. These movements were in synch as many awaited the validity of these thoughts. Given the potential change in mood, these three areas are worth watching closely.
Cycle Perspective:
The strength of innovative themes is being highlighted in this cycle. For example, Semiconductors continue to recover and showcase fundamental strength. Interestingly, Semiconductor Index bottomed on November 21 2008, which was ahead by over three months before broad market lows established in March 2009. In addition, this index is still far removed from its 2000 highs, which hints further upside potential. Therefore, even in the context of the current run-up, it is hard to deem the group as extended, especially given a decade-old sideways movement. Keeping this frame of mind, the cycle perspective points to relative attractiveness towards technology based themes, as seen in recent market leadership as well.
Article Quotes:
"’Chinese investment in Australian farms increased 10-fold in the past six months,’ real estate agents said, as Australia relaxed rules governing residential property purchasing, and buyers see opportunities in agriculture. ‘They are interested in large scale cattle farms; they are cashed up and see a financial opportunity here in a secure investment environment,’ said Geoff Hickson, real estate manager at Landmark Operations, Ltd. ‘There has been a big increase from Chinese buyers in the past six months. It has grown 10-fold.” (Bloomberg, April 15, 2010)
“In 1933, the newly-inaugurated FDR recognized that he inherited a populace, enraged by the effects of reckless greed in the financial markets. The Pecora commission, which began the year before FDR assumed office, not only aimed to unearth the causes of the 1929 market crash, but also rightly skewered the bankers for running what many considered to be a rigged game. It resulted in the political defenestration of several well-known Wall Streeters. The new President wasted no time in stating to the public whose side he was on. What few realized at the time is that FDR’s populist rhetoric set off a wave of anti-Wall Street sentiment that far outlasted Pecora.” (Financial Times, April 13, 2010)
Levels:
S&P 500 [1192.13] witnessed a sharp reversal after a multi-week positive movement. Long-term trend is intact but vulnerable in the near-term.
Crude [$83.24] is pausing in the last two weeks, after hitting annual highs, which showcased a consolidation phase. High odds of those prices stabilize between $80 and $82.
Gold [$1151.50] is up nearly 10% since lows on February 5, 2010, and now shows early signs of stalling. Interestingly, Gold showed signs of weakness before equity market reversal.
DXY– US Dollar Index [80.24] is declining since the start of the second quarter. However, there has been no evidence of a major breakdown at this stage. A familiar range, near 80, for index, signals average behavior.
US 10 Year Treasury Yields [3.76%] once again struggling to stay above 4% as investors reexamine their long-term outlook.
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.
A Pause:
As seen for several weeks and even heading into last week, markets were reaching extended levels, not to mention option expiration, which leads to unusual behavior while adding to volatility. However, leading up to last week, low volume was a profound and worrisome message to optimists. Similarly, contrarian indicators signaled early warnings. As usual, the surprising element is not necessarily the downtrend. Rather, it is the form in which a unanimous message sparks a trend shift. In other words, the takeaway is translated as bad news, causing a sensitive response. In addition, it serves as a gut check for those who were too comfortable in the calm nature of this recent uptrend. Clearly, the top news on Friday became a convincing force not only for a down day, but also for the the first negative weekly finish in 10 weeks. As for legal and policymaker decisions ahead, there are plenty of unknowns. At least, the start of earnings season will confirm or contest the justification of previous rallies. And the Federal Reserve’s message will be closely watched to determine risk tolerance and more definition on the cycle recovery.
Macro Themes:
Recently, there are three themes that gained popularity in the past few months, which include higher interest rates, declining Euros, and buying Crude-related groups. From a big picture standpoint, these views appear like a consensus view, but they mainly demonstrated an increased acceptance of risk. These movements were in synch as many awaited the validity of these thoughts. Given the potential change in mood, these three areas are worth watching closely.
Cycle Perspective:
The strength of innovative themes is being highlighted in this cycle. For example, Semiconductors continue to recover and showcase fundamental strength. Interestingly, Semiconductor Index bottomed on November 21 2008, which was ahead by over three months before broad market lows established in March 2009. In addition, this index is still far removed from its 2000 highs, which hints further upside potential. Therefore, even in the context of the current run-up, it is hard to deem the group as extended, especially given a decade-old sideways movement. Keeping this frame of mind, the cycle perspective points to relative attractiveness towards technology based themes, as seen in recent market leadership as well.
Article Quotes:
"’Chinese investment in Australian farms increased 10-fold in the past six months,’ real estate agents said, as Australia relaxed rules governing residential property purchasing, and buyers see opportunities in agriculture. ‘They are interested in large scale cattle farms; they are cashed up and see a financial opportunity here in a secure investment environment,’ said Geoff Hickson, real estate manager at Landmark Operations, Ltd. ‘There has been a big increase from Chinese buyers in the past six months. It has grown 10-fold.” (Bloomberg, April 15, 2010)
“In 1933, the newly-inaugurated FDR recognized that he inherited a populace, enraged by the effects of reckless greed in the financial markets. The Pecora commission, which began the year before FDR assumed office, not only aimed to unearth the causes of the 1929 market crash, but also rightly skewered the bankers for running what many considered to be a rigged game. It resulted in the political defenestration of several well-known Wall Streeters. The new President wasted no time in stating to the public whose side he was on. What few realized at the time is that FDR’s populist rhetoric set off a wave of anti-Wall Street sentiment that far outlasted Pecora.” (Financial Times, April 13, 2010)
Levels:
S&P 500 [1192.13] witnessed a sharp reversal after a multi-week positive movement. Long-term trend is intact but vulnerable in the near-term.
Crude [$83.24] is pausing in the last two weeks, after hitting annual highs, which showcased a consolidation phase. High odds of those prices stabilize between $80 and $82.
Gold [$1151.50] is up nearly 10% since lows on February 5, 2010, and now shows early signs of stalling. Interestingly, Gold showed signs of weakness before equity market reversal.
DXY– US Dollar Index [80.24] is declining since the start of the second quarter. However, there has been no evidence of a major breakdown at this stage. A familiar range, near 80, for index, signals average behavior.
US 10 Year Treasury Yields [3.76%] once again struggling to stay above 4% as investors reexamine their long-term outlook.
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.
Monday, April 12, 2010
Market Outlook | April 12, 2010
“It has been said that man is a rational animal. All my life, I have been searching for evidence which could support this.” Bertrand Russell (1872 - 1970)
It seems like the market offers two major entry points per calendar year. In turn, that points to a strong possibility of major pullbacks that are overdue to materialize, following an explosive run. So many wonder if much discussed pullbacks from this current rally will take place in the near-term. At this point, some ponder if that sell-off would occur either in the spring or summer of 2010. However, improving economic conditions and stabilizing fundamentals continue to paint positive headlines.
At the start of the second quarter, we’ve marched upwards, keeping this bullish uptrend. For days, the argument of low volume has failed to translate into lower prices. Even low volatility, for that matter, has yet to reverse, while panic is not visible. In short, risk tolerance by global investors is spreading from corporate bonds, commodities, and broad equities. Interlinked markets are maintaining a synchronized upward movement in which markets have not witnessed a correction greater than 1% in over 42 days (Bespoke Investments, April 6 2010). Interestingly, credit markets remain healthy and continue to appeal towards investor demand. This is surprising to some who forecasted a fearful outlook, mainly based on increasing debt.
Classical view points to some conditions of the market that are being extended. Yet, we’re at the early stages of a recovery into a new cycle. For example, some technical indicators and valuations tools are cautioning, and they suggest a downturn bet. Ignoring this ongoing strength has been costly, even for short-term traders. That said, the confidence of those betting against the market is waning. At the same time, defensively positioned portfolios are noticing that their strategy minimized their upside potential in the past year. Therefore, a psychological view can entice participants to deploy more capital. Generally, this euphoric response can create additional buyers, based on performance chasing.
This week’s showcase earnings can provide some guidance on investor attitude. Perhaps, the shift towards bonds can present outflow from equity markets. Secondly, debt issuance continues to present a noteworthy trend. Finally, characteristics of those participating in these markets are slowly shifting as well. That said, adjusting analysis to a new climate takes some time and is less noticeable at this junction. Meanwhile, deciphering political policies and international posturing remains an ongoing challenge.
Article Quotes:
“Notably, even at the March 2009 lows, the implied total return barely crossed 10%, suggesting that stocks were modestly undervalued at that point, but nowhere near the level of valuation observed at major long-term buying opportunities, such as 1950, 1974, and 1982. This is not intended to excuse what, in hindsight, has been my awful underestimation of the extent to which investors would abandon their aversion to risk - in hopes that credit difficulties have been solved and that record profit margins will be recovered and sustained into the indefinite future. It's just that current market levels now rely on those hopes to be validated.” (John P. Hussman, April 5, 2010)
"’China's foreign exchange reserves face a “triple whammy” as a decline in the U.S. dollar and Treasuries and possible inflation in the longer run erode the value of its savings,’ said Yu Yongding, a former adviser to the People's Bank of China... 'There is no question whatsoever that the U.S. dollar will go south in the long run,' he wrote. 'Unless the U.S. economy improves its trade balance, the dollar will fall. But the U.S. cannot improve its trade balance unless the dollar falls.'" (Bloomberg, April 6, 2010)
Levels:
S&P 500 [1194.37] is making new annual highs, and it is up nearly 15% since February 5th lows. Positive momentum remains in place.
Crude [$84.92] is marking a new uptrend level after breaking above $82. Solid recovery continues to appease buyers.
Gold [$1152.50] is in a recovering pattern, developing as the commodity attempts to reaccelerate towards 52-week highs.
DXY– US Dollar Index [81.09] has strength, seen in first quarter, is now pausing. The index peaked on March 25, 2010. However, trend is intact and staying above 80.50.
US 10 Year Treasury Yields [3.88%] is retracing the past few days after hitting a much anticipated 4%.
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.
It seems like the market offers two major entry points per calendar year. In turn, that points to a strong possibility of major pullbacks that are overdue to materialize, following an explosive run. So many wonder if much discussed pullbacks from this current rally will take place in the near-term. At this point, some ponder if that sell-off would occur either in the spring or summer of 2010. However, improving economic conditions and stabilizing fundamentals continue to paint positive headlines.
At the start of the second quarter, we’ve marched upwards, keeping this bullish uptrend. For days, the argument of low volume has failed to translate into lower prices. Even low volatility, for that matter, has yet to reverse, while panic is not visible. In short, risk tolerance by global investors is spreading from corporate bonds, commodities, and broad equities. Interlinked markets are maintaining a synchronized upward movement in which markets have not witnessed a correction greater than 1% in over 42 days (Bespoke Investments, April 6 2010). Interestingly, credit markets remain healthy and continue to appeal towards investor demand. This is surprising to some who forecasted a fearful outlook, mainly based on increasing debt.
Classical view points to some conditions of the market that are being extended. Yet, we’re at the early stages of a recovery into a new cycle. For example, some technical indicators and valuations tools are cautioning, and they suggest a downturn bet. Ignoring this ongoing strength has been costly, even for short-term traders. That said, the confidence of those betting against the market is waning. At the same time, defensively positioned portfolios are noticing that their strategy minimized their upside potential in the past year. Therefore, a psychological view can entice participants to deploy more capital. Generally, this euphoric response can create additional buyers, based on performance chasing.
This week’s showcase earnings can provide some guidance on investor attitude. Perhaps, the shift towards bonds can present outflow from equity markets. Secondly, debt issuance continues to present a noteworthy trend. Finally, characteristics of those participating in these markets are slowly shifting as well. That said, adjusting analysis to a new climate takes some time and is less noticeable at this junction. Meanwhile, deciphering political policies and international posturing remains an ongoing challenge.
Article Quotes:
“Notably, even at the March 2009 lows, the implied total return barely crossed 10%, suggesting that stocks were modestly undervalued at that point, but nowhere near the level of valuation observed at major long-term buying opportunities, such as 1950, 1974, and 1982. This is not intended to excuse what, in hindsight, has been my awful underestimation of the extent to which investors would abandon their aversion to risk - in hopes that credit difficulties have been solved and that record profit margins will be recovered and sustained into the indefinite future. It's just that current market levels now rely on those hopes to be validated.” (John P. Hussman, April 5, 2010)
"’China's foreign exchange reserves face a “triple whammy” as a decline in the U.S. dollar and Treasuries and possible inflation in the longer run erode the value of its savings,’ said Yu Yongding, a former adviser to the People's Bank of China... 'There is no question whatsoever that the U.S. dollar will go south in the long run,' he wrote. 'Unless the U.S. economy improves its trade balance, the dollar will fall. But the U.S. cannot improve its trade balance unless the dollar falls.'" (Bloomberg, April 6, 2010)
Levels:
S&P 500 [1194.37] is making new annual highs, and it is up nearly 15% since February 5th lows. Positive momentum remains in place.
Crude [$84.92] is marking a new uptrend level after breaking above $82. Solid recovery continues to appease buyers.
Gold [$1152.50] is in a recovering pattern, developing as the commodity attempts to reaccelerate towards 52-week highs.
DXY– US Dollar Index [81.09] has strength, seen in first quarter, is now pausing. The index peaked on March 25, 2010. However, trend is intact and staying above 80.50.
US 10 Year Treasury Yields [3.88%] is retracing the past few days after hitting a much anticipated 4%.
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.
Monday, April 05, 2010
Market Outlook | April 5, 2010
“Make no little plans; they have no magic to stir men's blood. Make big plans Aim high in hope and work.” - Daniel H. Burnham (1846 - 1912)
April was greeted warmly with new highs across global assets. This behavior is proving skeptics wrong once again, and a much feared market decline is not materializing. Importantly, the resilience of a cycle recovery is too powerful, and ignoring these publicized worries has been fruitful for buyers. A synchronized pattern in asset classes is a trend that is becoming too familiar. This time, interest rates are rising along with commodity prices. Once again, this is a subtle reminder for investors to maintain an open mind. Of course, rising markets, with low volume at this junction, are puzzling, especially when attempting to make the next move. Similarly, corporate debt issuance and demand for collateralized loans remain strong. This is a sign of confidence restoration in credit markets. Basically, there is willingness to borrow among companies, and inflow data supports these points, especially in the first quarter. Therefore, risk appetite is generally healthy along with sentiment. Nonetheless, making a differentiated call is an ongoing challenge that haunts managers into this second quarter.
At this point, fighting the interconnected trend has been costly. Specifically, investors are gaining comfort in rising rates and improving economic data. However, recent movements will require further confirmation ahead, especially at the start of the second quarter. At the same time, volatility has remained low enough to create an encouraging atmosphere, which results in less impactful surprises. Now, Gold related stocks have not outperformed on a relative basis since the start of the year. Therefore, some investors might consider reentering with hopes of a Gold recovery. Meanwhile, Crude is making multi-month highs, but stocks related to China are cooling off, unlike the emerging market run-up of last decade. This point to some disconnect of previous correlations, and those gaps are worth tracking for profitable pursuits.
Article Quotes:
"Global steel prices are set to leap by up to a third, pushing up the cost of everyday goods from cars to domestic appliances, after miners and steelmakers on Tuesday agreed on a ground-breaking change in the iron ore price system. The deal by Vale of Brazil and Anglo-Australian BHP Billiton with Japanese and Chinese mills marks the end of the 40-year-old benchmark system of annual contracts and lengthy price negotiations. The industry instead agreed to move to quarterly contracts linked to the nascent iron ore spot market. The benchmark system has ended.” (Financial Times, March 30, 2010)
“Businesses have also become less reliable defenders of China, rankled by measures, such as an edict last autumn, which, according to American technology companies, virtually shuts them out of Chinese government procurement. The hacking attacks on Google and the trial of Rio Tinto executives have hardly helped. ‘A whole slew of multinationals I’ve talked to are increasingly fed up with how they are being dealt with on micro, industry, product-specific stuff,’ says Fred Bergsten, director of the Peterson Institute for International Economics, a think-tank.” (Economist, March 31, 2010)
Levels:
S&P 500 [1178.10] is strengthening since mid-March by holding above 1160 and reaching intra-day highs of 1181.43 by Thursday’s market behavior.
Crude [$84.87] is breaking out above $84, which showcases positive momentum and new highs for the year.
Gold [$1123.50] is mostly trading between 1100 and 1120 in the past few days. Last week, it witnessed an early resurgence yet far removed from previous highs.
DXY– US Dollar Index [80.70] has had early pauses after a sharp multi-week run. March 25th marked a top in the near-term. The index is normalizing around a familiar territory of 80.
US 10 Year Treasury Yields [3.86%] is stabilizing in a new range between 3.80% and 3.90%. These levels confirm further technical strength.
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.
April was greeted warmly with new highs across global assets. This behavior is proving skeptics wrong once again, and a much feared market decline is not materializing. Importantly, the resilience of a cycle recovery is too powerful, and ignoring these publicized worries has been fruitful for buyers. A synchronized pattern in asset classes is a trend that is becoming too familiar. This time, interest rates are rising along with commodity prices. Once again, this is a subtle reminder for investors to maintain an open mind. Of course, rising markets, with low volume at this junction, are puzzling, especially when attempting to make the next move. Similarly, corporate debt issuance and demand for collateralized loans remain strong. This is a sign of confidence restoration in credit markets. Basically, there is willingness to borrow among companies, and inflow data supports these points, especially in the first quarter. Therefore, risk appetite is generally healthy along with sentiment. Nonetheless, making a differentiated call is an ongoing challenge that haunts managers into this second quarter.
At this point, fighting the interconnected trend has been costly. Specifically, investors are gaining comfort in rising rates and improving economic data. However, recent movements will require further confirmation ahead, especially at the start of the second quarter. At the same time, volatility has remained low enough to create an encouraging atmosphere, which results in less impactful surprises. Now, Gold related stocks have not outperformed on a relative basis since the start of the year. Therefore, some investors might consider reentering with hopes of a Gold recovery. Meanwhile, Crude is making multi-month highs, but stocks related to China are cooling off, unlike the emerging market run-up of last decade. This point to some disconnect of previous correlations, and those gaps are worth tracking for profitable pursuits.
Article Quotes:
"Global steel prices are set to leap by up to a third, pushing up the cost of everyday goods from cars to domestic appliances, after miners and steelmakers on Tuesday agreed on a ground-breaking change in the iron ore price system. The deal by Vale of Brazil and Anglo-Australian BHP Billiton with Japanese and Chinese mills marks the end of the 40-year-old benchmark system of annual contracts and lengthy price negotiations. The industry instead agreed to move to quarterly contracts linked to the nascent iron ore spot market. The benchmark system has ended.” (Financial Times, March 30, 2010)
“Businesses have also become less reliable defenders of China, rankled by measures, such as an edict last autumn, which, according to American technology companies, virtually shuts them out of Chinese government procurement. The hacking attacks on Google and the trial of Rio Tinto executives have hardly helped. ‘A whole slew of multinationals I’ve talked to are increasingly fed up with how they are being dealt with on micro, industry, product-specific stuff,’ says Fred Bergsten, director of the Peterson Institute for International Economics, a think-tank.” (Economist, March 31, 2010)
Levels:
S&P 500 [1178.10] is strengthening since mid-March by holding above 1160 and reaching intra-day highs of 1181.43 by Thursday’s market behavior.
Crude [$84.87] is breaking out above $84, which showcases positive momentum and new highs for the year.
Gold [$1123.50] is mostly trading between 1100 and 1120 in the past few days. Last week, it witnessed an early resurgence yet far removed from previous highs.
DXY– US Dollar Index [80.70] has had early pauses after a sharp multi-week run. March 25th marked a top in the near-term. The index is normalizing around a familiar territory of 80.
US 10 Year Treasury Yields [3.86%] is stabilizing in a new range between 3.80% and 3.90%. These levels confirm further technical strength.
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.
Monday, March 29, 2010
Market Outlook | March 29, 2010
“It is always easier to believe than to deny. Our minds are naturally affirmative.” - John Burroughs (1837 - 1921)
Reflective Questions
Looking back to the start of the first quarter, the age-old market illustrated a classic debate for investors. At that time, one faced two extreme alternatives: whether to either sell all winners as a panic-like response or to buy on weakness to take advantage of cheaper prices. Some market wisdom reminds us that the reasonable answer resides somewhere in between those extremes. One approach is to buy quality stocks while selling vulnerable groups. Perhaps, that decision would’ve kept some satisfied the past few months. Of course, not many strategies outperformed ‘buy and hold’ since March 2009. Ironically, that was a period where most marketers concluded that long-term investment was officially “dead”. At this point, replicating last year’s upward pattern might seem a bit ambitious, especially at this junction.
New Quarter, Old Issues
Now, similar conditions are revisited here, a few months later, with shaky European credit status, growing worries of extended broad indexes, and a sharper rise in volatility from very low ranges. Perhaps, this is a repeat of early winter jitters, highlighted by uncertain fundamental and earnings outlook. All that said, risk appetite is increasing and assets held in money market dwindle, while aggressive areas, such as junk bonds, continue to see inflows. Also, those severely worried about credit conditions should not forget that Homebuilders index peaked in 2005 (well before market peak), banks topped on February 2007, and, for a while, credit crisis is being addressed and reassessed. In other words, these fears are not breaking news. In fact, overall, actual resolutions are unknown even with on-going deliberation, political posturing, and heavily documented financial crisis. Maybe these matters are not for investors to solve and even difficult for policymakers. Through these generational extremes, global investors seem to favor US markets for its liquid capital markets, highly demanded currency, and relative attractiveness, especially in fragile economic conditions.
Perspective
From US perspective, the S&P 500 is up 4.6% and the Dollar index has risen by 4.8% year-to-date. Therefore, both showcase a positive trend, despite the misconception of an inverse relationship between a country’s currency and its stock market. Similarly, US 10 Year Treasury has climbed higher, as well, along with Crude prices. On the other hand, the Gold frenzy has not lived up to the hype, as prices stayed in a range for the most part of the first quarter. In connecting the macro dots, this confirms investor’s willingness to take on further risk. Interestingly, this is one year after the market bottom, confidence restoration, and the entrance to a new cycle.
Through this thought process, one should examine the outlook for the rest of the year. For example, consumer and financials groups offered the highest risk/reward at the height of worries. Those gutsy bets have paid off for some on a selective basis. However, too much optimism, especially in analyst outlook, makes contrarian pundits a bit weary, as in, complacency might be a concern. Yet, this uptrend has faced various challenges. Sharp declines in the days ahead would not surprise many either. For example, some signs of vulnerability are visible in emerging markets and Commodity Index (RJ CRB), in which both failed to make new highs this year. Perhaps, those ideas were well served last decade. Finally, the profitability of short-term declines versus long-term rewards is the better decision making question.
Article Quotes:
“Some finance scholars and a few practitioners are moving away from a mechanical approach, derived from Newtonian physics, to a more organic one, based on biological observations. Attention is shifting, in recognition that economic systems, based on human interactions, can become more complex and unpredictable than planets or toasters. Financial theorists are turning to organic biological models, to help monitor the global economy and regulate key institutions that may be too big or interconnected to fail. Vivid metaphors serve to describe the phenomena.” (FundStradegy, March 22, 2010)
“The historically low level of inventories, relative to sales, suggests that companies need to restock. However, this figure alone can't provide a definitive signal, because there has been a secular decline in the inventory/sales ratio for the past 20 years, due to various technological and management innovations. It is the extraordinarily low inventory-sales ratio combined with other data that indicates to me that the strong inventory building process, already evident in the fourth-quarter GDP data for 2009, may sustain itself during the next few quarters, providing a major boost to employment. (Minyanville, March 26, 2010)
Levels:
S&P 500 [1166.59] reached new annual highs last week, yet again. For the past 8 trading days, index has held above 1160 majority of the time.
Crude [$80.00]closed exactly at a critical level of $80. There is heavy resistance around $83. That marks a significant, near-term hurdle for those seeking a breakout.
Gold [$1096.50] closed below its 50-day moving average of 1104, which matches the four month downtrend that began in early December 2009. Next important levels reside around 1045-1050 where investors will determine the faith of rising gold prices.
DXY– US Dollar Index [82.17], after completing a first wave of a multi-month recovery, is re-accelerating, especially since March 17, 2010. This is a confirmation of strength that’s emerging in the US Dollar.
US 10 Year Treasury Yields [3.84%] had a noticeable rise in the past 3 trading dates, lifting yields above 3.80%. This behavior attempts to retest recent highs of 3.90, reached on the last day of 2009. In addition, rates last hit the 4% mark in mid 2009.
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.
Reflective Questions
Looking back to the start of the first quarter, the age-old market illustrated a classic debate for investors. At that time, one faced two extreme alternatives: whether to either sell all winners as a panic-like response or to buy on weakness to take advantage of cheaper prices. Some market wisdom reminds us that the reasonable answer resides somewhere in between those extremes. One approach is to buy quality stocks while selling vulnerable groups. Perhaps, that decision would’ve kept some satisfied the past few months. Of course, not many strategies outperformed ‘buy and hold’ since March 2009. Ironically, that was a period where most marketers concluded that long-term investment was officially “dead”. At this point, replicating last year’s upward pattern might seem a bit ambitious, especially at this junction.
New Quarter, Old Issues
Now, similar conditions are revisited here, a few months later, with shaky European credit status, growing worries of extended broad indexes, and a sharper rise in volatility from very low ranges. Perhaps, this is a repeat of early winter jitters, highlighted by uncertain fundamental and earnings outlook. All that said, risk appetite is increasing and assets held in money market dwindle, while aggressive areas, such as junk bonds, continue to see inflows. Also, those severely worried about credit conditions should not forget that Homebuilders index peaked in 2005 (well before market peak), banks topped on February 2007, and, for a while, credit crisis is being addressed and reassessed. In other words, these fears are not breaking news. In fact, overall, actual resolutions are unknown even with on-going deliberation, political posturing, and heavily documented financial crisis. Maybe these matters are not for investors to solve and even difficult for policymakers. Through these generational extremes, global investors seem to favor US markets for its liquid capital markets, highly demanded currency, and relative attractiveness, especially in fragile economic conditions.
Perspective
From US perspective, the S&P 500 is up 4.6% and the Dollar index has risen by 4.8% year-to-date. Therefore, both showcase a positive trend, despite the misconception of an inverse relationship between a country’s currency and its stock market. Similarly, US 10 Year Treasury has climbed higher, as well, along with Crude prices. On the other hand, the Gold frenzy has not lived up to the hype, as prices stayed in a range for the most part of the first quarter. In connecting the macro dots, this confirms investor’s willingness to take on further risk. Interestingly, this is one year after the market bottom, confidence restoration, and the entrance to a new cycle.
Through this thought process, one should examine the outlook for the rest of the year. For example, consumer and financials groups offered the highest risk/reward at the height of worries. Those gutsy bets have paid off for some on a selective basis. However, too much optimism, especially in analyst outlook, makes contrarian pundits a bit weary, as in, complacency might be a concern. Yet, this uptrend has faced various challenges. Sharp declines in the days ahead would not surprise many either. For example, some signs of vulnerability are visible in emerging markets and Commodity Index (RJ CRB), in which both failed to make new highs this year. Perhaps, those ideas were well served last decade. Finally, the profitability of short-term declines versus long-term rewards is the better decision making question.
Article Quotes:
“Some finance scholars and a few practitioners are moving away from a mechanical approach, derived from Newtonian physics, to a more organic one, based on biological observations. Attention is shifting, in recognition that economic systems, based on human interactions, can become more complex and unpredictable than planets or toasters. Financial theorists are turning to organic biological models, to help monitor the global economy and regulate key institutions that may be too big or interconnected to fail. Vivid metaphors serve to describe the phenomena.” (FundStradegy, March 22, 2010)
“The historically low level of inventories, relative to sales, suggests that companies need to restock. However, this figure alone can't provide a definitive signal, because there has been a secular decline in the inventory/sales ratio for the past 20 years, due to various technological and management innovations. It is the extraordinarily low inventory-sales ratio combined with other data that indicates to me that the strong inventory building process, already evident in the fourth-quarter GDP data for 2009, may sustain itself during the next few quarters, providing a major boost to employment. (Minyanville, March 26, 2010)
Levels:
S&P 500 [1166.59] reached new annual highs last week, yet again. For the past 8 trading days, index has held above 1160 majority of the time.
Crude [$80.00]closed exactly at a critical level of $80. There is heavy resistance around $83. That marks a significant, near-term hurdle for those seeking a breakout.
Gold [$1096.50] closed below its 50-day moving average of 1104, which matches the four month downtrend that began in early December 2009. Next important levels reside around 1045-1050 where investors will determine the faith of rising gold prices.
DXY– US Dollar Index [82.17], after completing a first wave of a multi-month recovery, is re-accelerating, especially since March 17, 2010. This is a confirmation of strength that’s emerging in the US Dollar.
US 10 Year Treasury Yields [3.84%] had a noticeable rise in the past 3 trading dates, lifting yields above 3.80%. This behavior attempts to retest recent highs of 3.90, reached on the last day of 2009. In addition, rates last hit the 4% mark in mid 2009.
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.
Monday, March 22, 2010
Market Outlook | March 22, 2010
“An optimist is the human personification of spring.” - Susan J. Bissonette
The official start of spring brings a glimpse of hope for sustainable recovery. For attentive financial followers, it’s hardly rosy some days when viewing updates on regulatory debates, European credit status, or worries of inflation. That said, a glance of the scoreboard tells us of stocks holding their gains with relatively low volatility and no alarming calls for the panic button, at least for the past week. In fact, optimism is visible as investors pulled $61.1 billion out of money markets, according to EPFR. That’s a symbol of optimism, which echoes a low interest rate policy by the Federal Reserve. Simply, the message is translated to support ongoing cycle recovery. In the weeks ahead, we’ll gain a better read on investor risk tolerance.
The inverse relationship between Gold and Dollar is closely monitored by pundits. Mainly, this is an accepted tool for gauging sentiment towards investor demands for risky assets. Importantly, it’s on the radar of observers, seeking hints across financial markets. The last few months witnessed a rise in US Dollar, which generally suggests a rotation towards safer instruments. However, both indicators are not currently pointing to a dramatic trend shift.
Another perspective shows outperformance of S&P 500 Index over Gold since March 2009. Possibly, this recovery cycle points to favorable returns in equities as commodities cool off from their previous decade run up. Similarly, the related groups of Steel and Oil Services led weekly declines. This corresponds with a sluggish, six-month performance by major commodities, which have few wondering on changing dynamics. Perhaps, it’s too premature to call tops on Gold and Crude prices, but it’s definitely worth watching.
Liquidity remains in high demand, especially in a period where most scramble to find preventative methods towards another crisis. Of course, it makes sense given key lessons learned in 2008. However, dwelling on past findings should not blur one’s drive to search potential opportunities. Some fundamental studies argue that stock multiples are too high and majority chart observers point to extended levels. However, financial markets have a tendency to surprise, and keeping an open mind might provide a prudent approach.
Article Quotes:
“I liken it to the cardiovascular system. In an economy, the central bank is the heart, money is the lifeblood, and financial markets are the arteries and capillaries that provide critical sustenance to the muscles that are the makers of goods and services and the creators of employment. A properly functioning cardiovascular system fosters healthy growth; if that system fails, the body breaks down and the muscles atrophy.” (Federal Reserve of Dallas, March 3, 2010)
“The first worry for China is that lending won't come down fast enough. Banks have made commitments to finance projects and cannot easily back out; besides, money may leak into bubbly real estate projects via channels that circumvent the banking system. Moreover, even if lending is reined in, the banks may do so inefficiently: China sets monetary policy by targeting the quantity of loans rather than their price, so powerful state-owned enterprises are liable to get capital while more productive private firms are starved of it.” (Washington Post, March 19, 2010)
Levels:
S&P 500 [1159.90] is closing near annual highs, confirming the established uptrend since March 2008. The index showcases strength and a re-acceleration that began in early February.
Crude [$80.68] had a retest of previous highs, which is a key hurdle for crude prices. Once again, crude prices are decelerating from $82 range, which suggests a weakening momentum.
Gold [$1105.50] maintains a sideway pattern. There is not much to surmise from chart patterns, except to conclude that investors appear to await impactful news material to cause a reaction.
DXY– US Dollar Index [80.22] is providing clues of reacceleration despite the multi-week neutral behavior. The follow through of last week’s strong finish will be highly anticipated.
US 10 Year Treasury Yields [3.68%] is staying above 3.60%, which serves as a key near-term level.
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.
The official start of spring brings a glimpse of hope for sustainable recovery. For attentive financial followers, it’s hardly rosy some days when viewing updates on regulatory debates, European credit status, or worries of inflation. That said, a glance of the scoreboard tells us of stocks holding their gains with relatively low volatility and no alarming calls for the panic button, at least for the past week. In fact, optimism is visible as investors pulled $61.1 billion out of money markets, according to EPFR. That’s a symbol of optimism, which echoes a low interest rate policy by the Federal Reserve. Simply, the message is translated to support ongoing cycle recovery. In the weeks ahead, we’ll gain a better read on investor risk tolerance.
The inverse relationship between Gold and Dollar is closely monitored by pundits. Mainly, this is an accepted tool for gauging sentiment towards investor demands for risky assets. Importantly, it’s on the radar of observers, seeking hints across financial markets. The last few months witnessed a rise in US Dollar, which generally suggests a rotation towards safer instruments. However, both indicators are not currently pointing to a dramatic trend shift.
Another perspective shows outperformance of S&P 500 Index over Gold since March 2009. Possibly, this recovery cycle points to favorable returns in equities as commodities cool off from their previous decade run up. Similarly, the related groups of Steel and Oil Services led weekly declines. This corresponds with a sluggish, six-month performance by major commodities, which have few wondering on changing dynamics. Perhaps, it’s too premature to call tops on Gold and Crude prices, but it’s definitely worth watching.
Liquidity remains in high demand, especially in a period where most scramble to find preventative methods towards another crisis. Of course, it makes sense given key lessons learned in 2008. However, dwelling on past findings should not blur one’s drive to search potential opportunities. Some fundamental studies argue that stock multiples are too high and majority chart observers point to extended levels. However, financial markets have a tendency to surprise, and keeping an open mind might provide a prudent approach.
Article Quotes:
“I liken it to the cardiovascular system. In an economy, the central bank is the heart, money is the lifeblood, and financial markets are the arteries and capillaries that provide critical sustenance to the muscles that are the makers of goods and services and the creators of employment. A properly functioning cardiovascular system fosters healthy growth; if that system fails, the body breaks down and the muscles atrophy.” (Federal Reserve of Dallas, March 3, 2010)
“The first worry for China is that lending won't come down fast enough. Banks have made commitments to finance projects and cannot easily back out; besides, money may leak into bubbly real estate projects via channels that circumvent the banking system. Moreover, even if lending is reined in, the banks may do so inefficiently: China sets monetary policy by targeting the quantity of loans rather than their price, so powerful state-owned enterprises are liable to get capital while more productive private firms are starved of it.” (Washington Post, March 19, 2010)
Levels:
S&P 500 [1159.90] is closing near annual highs, confirming the established uptrend since March 2008. The index showcases strength and a re-acceleration that began in early February.
Crude [$80.68] had a retest of previous highs, which is a key hurdle for crude prices. Once again, crude prices are decelerating from $82 range, which suggests a weakening momentum.
Gold [$1105.50] maintains a sideway pattern. There is not much to surmise from chart patterns, except to conclude that investors appear to await impactful news material to cause a reaction.
DXY– US Dollar Index [80.22] is providing clues of reacceleration despite the multi-week neutral behavior. The follow through of last week’s strong finish will be highly anticipated.
US 10 Year Treasury Yields [3.68%] is staying above 3.60%, which serves as a key near-term level.
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.
Sunday, March 14, 2010
Market Outlook | March 15, 2010
“Any genuine philosophy leads to action and from action back again to wonder, to enduring fact of mystery. “ - Henry Miller (1891 - 1980)
Current Landscape
This has been another positive week that increases the difficulty of reaching a comfort level regarding recent market trends. As for the current mindset, even pessimists would have to accept the market strength with the S&P 500 breaking out near annual highs. As for sentiment, it feels like majority money managers would have liked to bet against this price appreciation, but the resilience is casting doubts in conviction levels of those maintaining a negative outlook. Also, sharp decline in volatility levels are puzzling, along with low volume levels, which questions the willingness of participants to add more risky assets. Basically, this run-up continues to reinforce itself of an ongoing positive momentum, despite fuzzy fundamental picture. From a cycle viewpoint, the March 2009 bottoming process should not be taking lightly, and last week marked a one year anniversary to this bullish run.
Anticipations and Clues
In the short-term, lows established on February 5, 2010, symbolized an early restoration of confidence. There is plenty of headline buzz over regulatory changes in derivative markets and financial regulations in US and Europe. However, data on interest rate policies and confirmation of an economic recovery are poised to cause sensitive responses. This week offers a meeting by the Federal Reserve, along with key economic results, which can lead to eventful reactions. At least, investors can gain better clues given key inflection points.
There are similarities when comparing current conditions with January 2010 sell-offs. For example, the S&P 500 Index was 3.41% above its 50-day moving average when the market peaked on January 19, 2010. Heading into Monday, currently S&P 500 is 3.37% higher than its 50-day moving average. This points to a similar set-up when applying simple math. Combining investor psychology along with policy approaches begins to increase odds for spring surprises.
Changing Dynamics
Asset managers are trying to gain a better gauge on risk and other financial theories post 2008. We’re in a period of the skepticism of investors as managers scramble to understand risk assessment while adjusting to a changing landscape. Investor comfort level for committing risky capital is unclear and partially explained by synchronized movement across financial markets. In other words, strong correlation among asset classes presents a challenge in mapping out a long-term plan. Basically, interest rates, stocks, and commodities have mostly risen and declined in tandem since 2008. Perhaps, one key mystery is the possibility of dispersion, leading to less synchronized patter. Nonetheless, stock picking and theme based investing generally provide opportunities. However, finding those selective ideas without a clear macro picture presents another layer of difficulty. Therefore, patience is required more than usual.
Article Quotes:
"The inventory-sales ratio of the business sector was down one notch to 1.25 in January; the record low for this ratio is 1.24 set in 2005. As the economy gathers momentum, inventories are projected to make a sizable contribution to real GDP, which could be in the first-half of 2010 or later in the year. The timing is unclear, but it is nearly certain that an inventory accumulation led spike in real GDP is in store for 2010." (Northern Trust, March 12, 2010)
"The percentage of stocks in the S&P 500 currently trades above their 50-day moving averages stands at 78%. As shown in the chart below, this is getting up to the top end of the range the indicator has seen during the bull market. It still has a little bit farther to go before it reaches extreme overbought territory….On a sector basis, Financials currently has the highest reading at 94%. This level is at the top of its range over the last year, and it's the most overbought of any sector.” ( Bespoke, March 11, 2010)
Levels:
S&P 500 [1149.99] is climbing back to January 2010 highs while holding above 1140. It appears due for a pause, but momentum is positive.
Crude [$81.24] is struggling to hold above $82. A glance back showcases that those current levels were previously critical turning points in October and January.
Gold [$1106.25] is trading in a tight range between 1080 and 1120, which confirms the neutrality of investor reaction.
DXY– US Dollar Index [79.83] is pausing, following a multi-week upside trend. Index is slightly below a key technical range of 80.
US 10 Year Treasury Yields [3.70%] has had no significant directional changes since the start of the year. The last 6 trading days witnessed rise in rates from 3.58%.
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.
Current Landscape
This has been another positive week that increases the difficulty of reaching a comfort level regarding recent market trends. As for the current mindset, even pessimists would have to accept the market strength with the S&P 500 breaking out near annual highs. As for sentiment, it feels like majority money managers would have liked to bet against this price appreciation, but the resilience is casting doubts in conviction levels of those maintaining a negative outlook. Also, sharp decline in volatility levels are puzzling, along with low volume levels, which questions the willingness of participants to add more risky assets. Basically, this run-up continues to reinforce itself of an ongoing positive momentum, despite fuzzy fundamental picture. From a cycle viewpoint, the March 2009 bottoming process should not be taking lightly, and last week marked a one year anniversary to this bullish run.
Anticipations and Clues
In the short-term, lows established on February 5, 2010, symbolized an early restoration of confidence. There is plenty of headline buzz over regulatory changes in derivative markets and financial regulations in US and Europe. However, data on interest rate policies and confirmation of an economic recovery are poised to cause sensitive responses. This week offers a meeting by the Federal Reserve, along with key economic results, which can lead to eventful reactions. At least, investors can gain better clues given key inflection points.
There are similarities when comparing current conditions with January 2010 sell-offs. For example, the S&P 500 Index was 3.41% above its 50-day moving average when the market peaked on January 19, 2010. Heading into Monday, currently S&P 500 is 3.37% higher than its 50-day moving average. This points to a similar set-up when applying simple math. Combining investor psychology along with policy approaches begins to increase odds for spring surprises.
Changing Dynamics
Asset managers are trying to gain a better gauge on risk and other financial theories post 2008. We’re in a period of the skepticism of investors as managers scramble to understand risk assessment while adjusting to a changing landscape. Investor comfort level for committing risky capital is unclear and partially explained by synchronized movement across financial markets. In other words, strong correlation among asset classes presents a challenge in mapping out a long-term plan. Basically, interest rates, stocks, and commodities have mostly risen and declined in tandem since 2008. Perhaps, one key mystery is the possibility of dispersion, leading to less synchronized patter. Nonetheless, stock picking and theme based investing generally provide opportunities. However, finding those selective ideas without a clear macro picture presents another layer of difficulty. Therefore, patience is required more than usual.
Article Quotes:
"The inventory-sales ratio of the business sector was down one notch to 1.25 in January; the record low for this ratio is 1.24 set in 2005. As the economy gathers momentum, inventories are projected to make a sizable contribution to real GDP, which could be in the first-half of 2010 or later in the year. The timing is unclear, but it is nearly certain that an inventory accumulation led spike in real GDP is in store for 2010." (Northern Trust, March 12, 2010)
"The percentage of stocks in the S&P 500 currently trades above their 50-day moving averages stands at 78%. As shown in the chart below, this is getting up to the top end of the range the indicator has seen during the bull market. It still has a little bit farther to go before it reaches extreme overbought territory….On a sector basis, Financials currently has the highest reading at 94%. This level is at the top of its range over the last year, and it's the most overbought of any sector.” ( Bespoke, March 11, 2010)
Levels:
S&P 500 [1149.99] is climbing back to January 2010 highs while holding above 1140. It appears due for a pause, but momentum is positive.
Crude [$81.24] is struggling to hold above $82. A glance back showcases that those current levels were previously critical turning points in October and January.
Gold [$1106.25] is trading in a tight range between 1080 and 1120, which confirms the neutrality of investor reaction.
DXY– US Dollar Index [79.83] is pausing, following a multi-week upside trend. Index is slightly below a key technical range of 80.
US 10 Year Treasury Yields [3.70%] has had no significant directional changes since the start of the year. The last 6 trading days witnessed rise in rates from 3.58%.
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.
Monday, March 08, 2010
Market Outlook | March 8, 2010
“There is no security on this earth; there is only opportunity.” General Douglas MacArthur (1880 - 1964)
Slowly Marching
The last three weeks have tested the patience of both optimists and skeptics. Simply, the current environment appears dull, given a much anticipated inflection point in stocks, commodities, and interest rates. For example, S&P 500 Index, Crude, and US 10 Year Yields all bottomed on February 5, 2010. These are all interconnected and highly watched indeed. Thus far, there are no major surprises in economic data, headline interpretations, and technical signals. However, this sideways pattern should not be alarming after a weak January and strong February. That said, this neutral behavior may drive managers and investors to seek concentrated and narrow based ideas. At the same time, interest rates levels continue to encourage more risk taking in global assets. Meanwhile, risk appetite is moderately increasing as hinted by weekly inflow in junk bonds and recent issuance of corporate bonds.
Short-Term View
Most broad indexes have been up 5-8 days in a row, as a continuation of market strength since March 2009 lows. Some near-term indicators were suggesting that financial markets were extended even by mid-week. Friday’s action confirmed overall buyer strength. Importantly, resilience of the Nasdaq Index showcases strength in technology and healthcare based themes. Perhaps, this is another hint of a leadership groups based on innovation that present sustainability. Similarly, Small Cap Index was nearly up 6 % for the week. From a psychological view, the S&P 500 is positive so far this year, which can entice some optimism. An explosive upside bias remains in place since the lows of March 6, 2009. However, the looming short-term pullbacks ignite further tests of buyer conviction. Several periods of inevitable sell-offs have taught us not to lose track of attractive opportunities based on minor macro worries.
Tricky Sentiment
The resilience in global stock prices and steady recoveries would imply improving investor sentiment. Positive economic conditions and rising interest rates were expected by many pundits at the start of the year. On the other hand, the fear of asset bubbles is a reoccurring theme among those arguing for a sharp sell-off. Clearly, the credit crisis in Europe and explosive real estate market in China are on the radar of worrisome issues. The surprise element rests on the decisions and messages of policymakers that can influence the mindset of participants. Investors might choose to shorten the overall holding period in big picture ideas. In upcoming weeks, it enables one to examine a handful of specific ideas that are worth accumulating on weakness.
Article Quotes:
"Federal Reserve Bank of Richmond President Jeffrey Lacker said the central bank is 'being made a scapegoat' to satisfy anger over bailouts as Congress seeks to limit its consumer-protection and bank-supervision powers. 'People are mad at us,' Lacker said... 'I can understand the ire after what happened in 2008. It was so unexpected, and it seemed to overstep boundaries that everyone thought we were going to obey.' Lacker said he wouldn't 'second guess' moves by Federal Reserve Chairman Ben S. Bernanke to backstop non-bank financial institutions... He said proposals to curtail the Fed's supervision authority would weaken its ability to lend to banks." (Bloomberg, March 1, 2010)
“Signs of exuberance are everywhere. An investor in Shanghai recently bought 54 apartments in a single day; a villa sold for $30 million last year; and in December a consortium of developers paid more than $3.5 billion for a huge tract of land in Guangzhou, one of the highest prices paid for any property, anywhere. In the city of Tianjin, in north China, developers have created a $3 billion ‘floating city,’ a series of islands built on a natural reservoir, featuring villas, shopping malls, a water amusement park and what they say will be the world’s largest indoor ski resort.” (New York Times, March 4th 2010)
Levels:
S&P 500 [1138.70] is showcasing a steady recovery while maintaining its uptrend. Few points removed from annual highs of 1150.
Crude [$81.50] recent recovery mirrors stocks as the commodity bottomed on February 5th. It is nearing key ranges between $82.00 and $83.95.
Gold [$1135.00] is establishing a 3 month pause within a defined range 1050-1150. Catalyst needed for a trend shift.
DXY– US Dollar Index [80.42] has had prices sitting slightly above 80, which remain above its 50- and 200-day averages.
US 10 Year Treasury Yields [3.68%] is mostly sideways in the past few weeks. Rates are holding steady at about 3.60%, which has been consistent so far this year.
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.
Slowly Marching
The last three weeks have tested the patience of both optimists and skeptics. Simply, the current environment appears dull, given a much anticipated inflection point in stocks, commodities, and interest rates. For example, S&P 500 Index, Crude, and US 10 Year Yields all bottomed on February 5, 2010. These are all interconnected and highly watched indeed. Thus far, there are no major surprises in economic data, headline interpretations, and technical signals. However, this sideways pattern should not be alarming after a weak January and strong February. That said, this neutral behavior may drive managers and investors to seek concentrated and narrow based ideas. At the same time, interest rates levels continue to encourage more risk taking in global assets. Meanwhile, risk appetite is moderately increasing as hinted by weekly inflow in junk bonds and recent issuance of corporate bonds.
Short-Term View
Most broad indexes have been up 5-8 days in a row, as a continuation of market strength since March 2009 lows. Some near-term indicators were suggesting that financial markets were extended even by mid-week. Friday’s action confirmed overall buyer strength. Importantly, resilience of the Nasdaq Index showcases strength in technology and healthcare based themes. Perhaps, this is another hint of a leadership groups based on innovation that present sustainability. Similarly, Small Cap Index was nearly up 6 % for the week. From a psychological view, the S&P 500 is positive so far this year, which can entice some optimism. An explosive upside bias remains in place since the lows of March 6, 2009. However, the looming short-term pullbacks ignite further tests of buyer conviction. Several periods of inevitable sell-offs have taught us not to lose track of attractive opportunities based on minor macro worries.
Tricky Sentiment
The resilience in global stock prices and steady recoveries would imply improving investor sentiment. Positive economic conditions and rising interest rates were expected by many pundits at the start of the year. On the other hand, the fear of asset bubbles is a reoccurring theme among those arguing for a sharp sell-off. Clearly, the credit crisis in Europe and explosive real estate market in China are on the radar of worrisome issues. The surprise element rests on the decisions and messages of policymakers that can influence the mindset of participants. Investors might choose to shorten the overall holding period in big picture ideas. In upcoming weeks, it enables one to examine a handful of specific ideas that are worth accumulating on weakness.
Article Quotes:
"Federal Reserve Bank of Richmond President Jeffrey Lacker said the central bank is 'being made a scapegoat' to satisfy anger over bailouts as Congress seeks to limit its consumer-protection and bank-supervision powers. 'People are mad at us,' Lacker said... 'I can understand the ire after what happened in 2008. It was so unexpected, and it seemed to overstep boundaries that everyone thought we were going to obey.' Lacker said he wouldn't 'second guess' moves by Federal Reserve Chairman Ben S. Bernanke to backstop non-bank financial institutions... He said proposals to curtail the Fed's supervision authority would weaken its ability to lend to banks." (Bloomberg, March 1, 2010)
“Signs of exuberance are everywhere. An investor in Shanghai recently bought 54 apartments in a single day; a villa sold for $30 million last year; and in December a consortium of developers paid more than $3.5 billion for a huge tract of land in Guangzhou, one of the highest prices paid for any property, anywhere. In the city of Tianjin, in north China, developers have created a $3 billion ‘floating city,’ a series of islands built on a natural reservoir, featuring villas, shopping malls, a water amusement park and what they say will be the world’s largest indoor ski resort.” (New York Times, March 4th 2010)
Levels:
S&P 500 [1138.70] is showcasing a steady recovery while maintaining its uptrend. Few points removed from annual highs of 1150.
Crude [$81.50] recent recovery mirrors stocks as the commodity bottomed on February 5th. It is nearing key ranges between $82.00 and $83.95.
Gold [$1135.00] is establishing a 3 month pause within a defined range 1050-1150. Catalyst needed for a trend shift.
DXY– US Dollar Index [80.42] has had prices sitting slightly above 80, which remain above its 50- and 200-day averages.
US 10 Year Treasury Yields [3.68%] is mostly sideways in the past few weeks. Rates are holding steady at about 3.60%, which has been consistent so far this year.
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.
Monday, March 01, 2010
Market Outlook | March 1, 2010
“Many people despise wealth, but few know how to give it away.” Francois de La Rochefoucauld (1613 - 1680)
Lack of Rhythm
Coming into the year, there were growing expectations of a recovering economy, but the pace of improving conditions is being questioned. A strong February stock performance showcased a solid recovery, which appears to make up January’s losses. This is visible in the neutral results of broad indexes in which the S&P is down 1% year-to-date. This is yet another view, describing the lack of major movements while setting the stage for a suspenseful spring. Clearly, the consequences of European credit concerns dominate headlines by triggering fear-like responses, especially for banks with risky asset exposure.
US credit crisis of mid 2007 serves as the roots of recent trouble in Europe. Therefore, one should not be surprised to see discussion and implementation of reforms in financial services. For example, new short-selling rules were enforced last week. Now, this will take time to materialize as facilitators implement and adjust for these changes. On the other hand, several pundits keep featuring worrisome big picture issues, which make long-term investors wary to commit capital and exercise patience.
Moreover, technical indicators are not showcasing opportunistic extremes, which suggest increasing market sensitively in response to event reactions. In short, identifying the natural market rhythm is less evident at this junction. Now, money managers might have to understand headline interpretations while attempting to guess sustainable results. This is a challenge indeed. For traders, this means to expect plenty of news material related to credit and sovereign crisis. Knowing how to respond will be vital.
Evaluating New Trends
Only few months ago, the Dollar began to recover from extreme lows. Similarly, within the same timeframe, Gold prices peaked along with global equities. This pause is not only attributed to structural concerns of financial systems but a bubble-like behavior in emerging markets. As a result, the multi-week correction is highlighted by risk aversion and sell-off in the Euro. The nature of these pullbacks is broad based and finding distinct ideas on a relative basis, stock specific companies with less currency, and commodity exposure is worth examining. That said, investor willingness to own shares for an extended period remains part of the ongoing puzzle.
On the bright side, Volatility Index (VIX) has calmed down despite sharp turbulences in 2010. The Volatility Index is slightly below where we started the year. Of course, this is temporary, and shift in sentiment is a wildcard that’s unpredictable. However, interest rate sensitive themes and material based groups remain vulnerable from the current sell-off. In turn, this favors innovative companies as investor demand shifts away from previous leaders, such as resource and some emerging markets. If this holds, then money managers will begin to wonder a potential inflow into US currency and capital markets.
Article Quotes:
“The existence of this long-term trend makes recent developments all the more interesting. Since the recent lows in early February, equity markets around the world have all recovered to some degree. However, unlike prior rebounds, emerging markets have been underperforming. In fact, while the major US averages (S&P 500, DJIA and Nasdaq) closed above their 50-day averages on Friday, all four BRIC countries (Brazil, Russia, India, and China) had yet to achieve that milestone. Whether or not this trend fizzles out or is an early warning sign for the global economy is debatable, but in either case, emerging market investors would be wise to be on alert.” (Bespoke February 22, 2010)
“Everywhere you look, the quantity of information in the world is soaring. According to one estimate, mankind created 150 exabytes (billion gigabytes) of data in 2005. This year, it will create 1,200 exabytes. Merely keeping up with this flood, and storing the bits that might be useful, is difficult enough. Analyzing it, to spot patterns and extract useful information, is harder still. Even so, the data deluge is already starting to transform business, government, science, and everyday life). It has great potential for good—as long as consumers, companies and governments make the right choices about when to restrict the flow of data and when to encourage it.” (The Economist, February 25th 2010)
Levels:
S&P 500 [1104.49] is recovering from February 5th lows of 1044 and beginning to stall at current range.
Crude [$79.66] is facing heavy resistance at $80. In upcoming weeks, investor will examine the willingness of buyers. Remains highly correlated to equity markets in the recent run-up.
Gold [$1108.25] has yet to establish a defined trend following a December 2009 peak. It’s now trading in-line with its 50 day moving average of $1108.
DXY– US Dollar Index [80.36] is in a three month uptrend and nearing an inflection point yet again at 80. It’s poised for minor pullbacks, but the recovery appears intact.
US 10 Year Treasury Yields [3.61%], which is further confirmation that current trend favors rates between 3.60% and 3.80%. The last 50 days of trading showcase an average of 3.70%, which is a midpoint level of a multi-month trend.
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.
Lack of Rhythm
Coming into the year, there were growing expectations of a recovering economy, but the pace of improving conditions is being questioned. A strong February stock performance showcased a solid recovery, which appears to make up January’s losses. This is visible in the neutral results of broad indexes in which the S&P is down 1% year-to-date. This is yet another view, describing the lack of major movements while setting the stage for a suspenseful spring. Clearly, the consequences of European credit concerns dominate headlines by triggering fear-like responses, especially for banks with risky asset exposure.
US credit crisis of mid 2007 serves as the roots of recent trouble in Europe. Therefore, one should not be surprised to see discussion and implementation of reforms in financial services. For example, new short-selling rules were enforced last week. Now, this will take time to materialize as facilitators implement and adjust for these changes. On the other hand, several pundits keep featuring worrisome big picture issues, which make long-term investors wary to commit capital and exercise patience.
Moreover, technical indicators are not showcasing opportunistic extremes, which suggest increasing market sensitively in response to event reactions. In short, identifying the natural market rhythm is less evident at this junction. Now, money managers might have to understand headline interpretations while attempting to guess sustainable results. This is a challenge indeed. For traders, this means to expect plenty of news material related to credit and sovereign crisis. Knowing how to respond will be vital.
Evaluating New Trends
Only few months ago, the Dollar began to recover from extreme lows. Similarly, within the same timeframe, Gold prices peaked along with global equities. This pause is not only attributed to structural concerns of financial systems but a bubble-like behavior in emerging markets. As a result, the multi-week correction is highlighted by risk aversion and sell-off in the Euro. The nature of these pullbacks is broad based and finding distinct ideas on a relative basis, stock specific companies with less currency, and commodity exposure is worth examining. That said, investor willingness to own shares for an extended period remains part of the ongoing puzzle.
On the bright side, Volatility Index (VIX) has calmed down despite sharp turbulences in 2010. The Volatility Index is slightly below where we started the year. Of course, this is temporary, and shift in sentiment is a wildcard that’s unpredictable. However, interest rate sensitive themes and material based groups remain vulnerable from the current sell-off. In turn, this favors innovative companies as investor demand shifts away from previous leaders, such as resource and some emerging markets. If this holds, then money managers will begin to wonder a potential inflow into US currency and capital markets.
Article Quotes:
“The existence of this long-term trend makes recent developments all the more interesting. Since the recent lows in early February, equity markets around the world have all recovered to some degree. However, unlike prior rebounds, emerging markets have been underperforming. In fact, while the major US averages (S&P 500, DJIA and Nasdaq) closed above their 50-day averages on Friday, all four BRIC countries (Brazil, Russia, India, and China) had yet to achieve that milestone. Whether or not this trend fizzles out or is an early warning sign for the global economy is debatable, but in either case, emerging market investors would be wise to be on alert.” (Bespoke February 22, 2010)
“Everywhere you look, the quantity of information in the world is soaring. According to one estimate, mankind created 150 exabytes (billion gigabytes) of data in 2005. This year, it will create 1,200 exabytes. Merely keeping up with this flood, and storing the bits that might be useful, is difficult enough. Analyzing it, to spot patterns and extract useful information, is harder still. Even so, the data deluge is already starting to transform business, government, science, and everyday life). It has great potential for good—as long as consumers, companies and governments make the right choices about when to restrict the flow of data and when to encourage it.” (The Economist, February 25th 2010)
Levels:
S&P 500 [1104.49] is recovering from February 5th lows of 1044 and beginning to stall at current range.
Crude [$79.66] is facing heavy resistance at $80. In upcoming weeks, investor will examine the willingness of buyers. Remains highly correlated to equity markets in the recent run-up.
Gold [$1108.25] has yet to establish a defined trend following a December 2009 peak. It’s now trading in-line with its 50 day moving average of $1108.
DXY– US Dollar Index [80.36] is in a three month uptrend and nearing an inflection point yet again at 80. It’s poised for minor pullbacks, but the recovery appears intact.
US 10 Year Treasury Yields [3.61%], which is further confirmation that current trend favors rates between 3.60% and 3.80%. The last 50 days of trading showcase an average of 3.70%, which is a midpoint level of a multi-month trend.
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.
Monday, February 22, 2010
Market Outlook | February 22, 2010
“Do not anticipate trouble or worry about what may never happen. Keep in the sunlight.” Benjamin Franklin (1706 - 1790)
Stabilizing
A sluggish start to 2010 might explain profit taking and early jitters but not necessarily a downtrend. The S&P 500 has yet to correct 10%, while economic numbers are set to improve in this period of stabilization. Last week presented a holiday shortened week as well as option expiration. The S&P 500 is trading near its midpoint range, between the highs of October 2007 (1576) and the lows of March 2008 (666). To be exact, the midpoint level is 1121; that’s just 12 points removed from S&P 500 Index as of Friday’s close. In other words, a 42% rise from current levels would be required to get back to last decade’s highs. This simple math provides a perspective that markets are trading closer to neutral and not at extremes. This sentiment matches the decisions by policymakers and anticipated earnings improvement. Interestingly, the last 10 days have witnessed a nearly 9% rise in the Russell Small Cap Index. This sharp upside is visible in commodity related indexes and stocks as buyer bias followed up a weak January.
Sideway patterns may continue in stocks and, in turn, force investors to actively monitor short-term patterns. At least in US, finding long-term investments with sustainable growth require some patience. In addition, more precision is required in selecting the right companies. Now, the ability to pick quality stocks, while navigating through a fuzzy broad market outlook, is the challenge ahead for 10 months. Investors eagerly await data points to determine the next leadership groups. However, only seeking for a defined uptrend might not be sufficient to outpace competing managers. Plus, investors have witnessed rollercoaster’s in the past 3 years, which explains growing skepticism, along with requests for higher transparency. This can further delay the recovery process.
In Upcoming Days
The hike in discount rates by the Federal Reserve should not be a surprise as participants look to digest the awkward timing of the announcement. Perhaps, the move by the central banks suggests that policies implemented for crisis management of the previous years are moving back to normal levels. Others anticipate these hikes will trigger the start of a rising rate policy. In both cases, it’s too early to assume and conclude. In upcoming days, interpretation of this announcement should play out in stocks and commodities. Meanwhile, Europe attempts to resolve various debt concerns, and China hopes to cool the ongoing bubble. Basically, the results of the credit crisis are lingering and reforms will continue to be discussed. Therefore, participants have to track pending reforms, while not losing sight of emerging ideas in a new cycle.
Article Quotes:
“Some Chinese economists worry out loud that China’s massive stimulus-spending might have bought the country only a temporary reprieve. Bubbles, they fret, are forming in property markets, inflationary pressure is building up, and reforms needed to promote sustained growth (including measures to promote urbanization) are not being carried out fast enough. Occasionally, even the government’s worst nightmare is mooted as a possibility: stagflation. A combination of fast-rising prices and low growth might indeed be enough to send protesters on to the streets.” (The Economist, February 18, 2010)
“True, monetary union came before political union. But it did not come with a promise that there would never be such a union. Quite to the contrary: the founding fathers wanted the euro primarily as a step towards political union, knowing little of the overriding technical arguments in its favour. Those who argued against it then, on the grounds that “there can that there could be no monetary union without political union”, are precisely those who should welcome political union now that it finally knocks at the door claiming its rights.” (Financial Times, February 18, 2010)
Levels:
S&P 500 [1109.17] is facing early resistance as the index closed near its 50-day average of 1109. Most likely index continues to trade in the range of 1080-1120.
Crude [$79.81] had a 15% rally since February 5th demonstrates the sharpness of this recent recovery.
Gold [1112.75] continues its multi-week decline after peaking in early December 2009. Recent pattern points to a settling process taking place.
DXY– US Dollar Index [80.93] had another strong week, making new annual highs. The Dollar is reverting back to levels seen in early and mid 2009 levels.
US 10 Year Treasury Yields [3.77%] is stabilizing between 3.60% and 3.80%. Observers await the possible retest of 3.90 at the end of last year.
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.
Stabilizing
A sluggish start to 2010 might explain profit taking and early jitters but not necessarily a downtrend. The S&P 500 has yet to correct 10%, while economic numbers are set to improve in this period of stabilization. Last week presented a holiday shortened week as well as option expiration. The S&P 500 is trading near its midpoint range, between the highs of October 2007 (1576) and the lows of March 2008 (666). To be exact, the midpoint level is 1121; that’s just 12 points removed from S&P 500 Index as of Friday’s close. In other words, a 42% rise from current levels would be required to get back to last decade’s highs. This simple math provides a perspective that markets are trading closer to neutral and not at extremes. This sentiment matches the decisions by policymakers and anticipated earnings improvement. Interestingly, the last 10 days have witnessed a nearly 9% rise in the Russell Small Cap Index. This sharp upside is visible in commodity related indexes and stocks as buyer bias followed up a weak January.
Sideway patterns may continue in stocks and, in turn, force investors to actively monitor short-term patterns. At least in US, finding long-term investments with sustainable growth require some patience. In addition, more precision is required in selecting the right companies. Now, the ability to pick quality stocks, while navigating through a fuzzy broad market outlook, is the challenge ahead for 10 months. Investors eagerly await data points to determine the next leadership groups. However, only seeking for a defined uptrend might not be sufficient to outpace competing managers. Plus, investors have witnessed rollercoaster’s in the past 3 years, which explains growing skepticism, along with requests for higher transparency. This can further delay the recovery process.
In Upcoming Days
The hike in discount rates by the Federal Reserve should not be a surprise as participants look to digest the awkward timing of the announcement. Perhaps, the move by the central banks suggests that policies implemented for crisis management of the previous years are moving back to normal levels. Others anticipate these hikes will trigger the start of a rising rate policy. In both cases, it’s too early to assume and conclude. In upcoming days, interpretation of this announcement should play out in stocks and commodities. Meanwhile, Europe attempts to resolve various debt concerns, and China hopes to cool the ongoing bubble. Basically, the results of the credit crisis are lingering and reforms will continue to be discussed. Therefore, participants have to track pending reforms, while not losing sight of emerging ideas in a new cycle.
Article Quotes:
“Some Chinese economists worry out loud that China’s massive stimulus-spending might have bought the country only a temporary reprieve. Bubbles, they fret, are forming in property markets, inflationary pressure is building up, and reforms needed to promote sustained growth (including measures to promote urbanization) are not being carried out fast enough. Occasionally, even the government’s worst nightmare is mooted as a possibility: stagflation. A combination of fast-rising prices and low growth might indeed be enough to send protesters on to the streets.” (The Economist, February 18, 2010)
“True, monetary union came before political union. But it did not come with a promise that there would never be such a union. Quite to the contrary: the founding fathers wanted the euro primarily as a step towards political union, knowing little of the overriding technical arguments in its favour. Those who argued against it then, on the grounds that “there can that there could be no monetary union without political union”, are precisely those who should welcome political union now that it finally knocks at the door claiming its rights.” (Financial Times, February 18, 2010)
Levels:
S&P 500 [1109.17] is facing early resistance as the index closed near its 50-day average of 1109. Most likely index continues to trade in the range of 1080-1120.
Crude [$79.81] had a 15% rally since February 5th demonstrates the sharpness of this recent recovery.
Gold [1112.75] continues its multi-week decline after peaking in early December 2009. Recent pattern points to a settling process taking place.
DXY– US Dollar Index [80.93] had another strong week, making new annual highs. The Dollar is reverting back to levels seen in early and mid 2009 levels.
US 10 Year Treasury Yields [3.77%] is stabilizing between 3.60% and 3.80%. Observers await the possible retest of 3.90 at the end of last year.
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.
Tuesday, February 16, 2010
Market Outlook | February 16, 2010
“When people have lost their money, they strike out unthinkingly, like a wounded snake, at whoever is most prominent in the line of vision.” - Theodore Roosevelt (US President 1901-1909)
Market Feel:
Investors await sensitive changes in regulatory and interest rate policies. These issues are highly discussed, hard to assess, and clearly too difficult to predict. At this point, a recovering business environment appears to be in the best interest of all parties involved, especially with upcoming US elections this fall. Establishing new laws in market related matters are challenging the minds and fortitude of policymakers. Meanwhile, financial markets are in some neural state of confusion. At least, a much needed breather is taking place. Yet growing anxiousness is highlighted by credit concerns in Europe and policymakers bubble-like behaviors in China. That said, these worries in Europe are not overly surprising but are mostly an extension of the credit crisis that was triggered in mid-2007 and new occurrence.
Liquid and Relatively Attractive:
Depreciation of the US Dollar in the past few years should not be confused with the currency’s global prominence. The US Dollar remains liquid in international trades and pegged to the currencies of 89 countries. Importantly, the Dollar did not lose significant market share to the Euro, as commonly stated in previous years. In fact, foreign reserves held by foreign governments exceeded $7 trillion in 2008, and, overall, reserve portfolios have remained stable since 2000 (Federal Reserve of New York, January 2010).
Digesting the points above may partially explain a major theme of a stronger Dollar so far this year. This appreciation can be mostly attributed to risk aversion, or a simple recovery, from deeply oversold levels. Nonetheless, investors, who placed their bets on Dollar recovery, would’ve enjoyed early fruitful returns. In terms of liquidity, just like its currency, the US offers a relatively advanced, well tested, and attractive capital markets. Again, it’s important not to confuse, the lingering economic and deficit concerns along with the stability of financial system. On that note, with commodities declining, euro-zone weakening, and emerging markets cooling, one has to wonder about the opportunities presented from these results. Perhaps, these issues can make US stocks and Dollar attractive from a longer-term perspective. Since November 25, 2009, DXY (US Dollar Index) is up over 8%, as Gold prices dropped nearly 11% in the same timeframe. This is early to call: however, a shift might take place in overall sentiment and a behavior change from the previous decade.
Short-week Ahead:
Optimists will look for entry points here, given the oversold conditions. In other words, odds for a near-term turnaround are slightly favorable. Industry groups, such as solar panel, biotech, and communications are poised for market leadership. This presents relative attractiveness to “idea driven” sectors, as financials attempt to reform business conducts and profit taking in commodities. Finally, if global markets stop moving in tandem, specific sections will become instrumental. At this stage of the cycle, finding distinguished companies with growth potential is not easily discoverable, but the higher reward potential can entice the interest of participants.
Article Quotes:
“With one brief exception, the federal government has been in debt every year since 1776. In January 1835, for the first and only time in U.S. history, the public debt was retired, and a budget surplus was maintained for the next two years in order to accumulate what Treasury Secretary Levi Woodbury called “a fund to meet future deficits.” In 1837, the economy collapsed into a deep depression that drove the budget into deficit, and the federal government has been in debt ever since.” (Business Insider, February 10, 2010)
“Since the second world war, businesses have increasingly used retained earnings, third-party insurance and pension funds to promise future benefits to employees. To fund these, large pools of financial assets have accumulated in collective savings institutions run by self-selected investment professionals with little experience of private business and non-traded assets. This paved the way for private equity managers, who plunged into debt up to the hilt and earned egregious personal rewards. Their model relies on short-term financial engineering and ‘exit strategies’, not sustainable profits.” (Financial Times, February 14, 2010)
Levels:
S&P 500 [1075.51] remains strong, especially around 1060 where buyers showed interest in the past few days.
Crude [$74.13] prices are trading between its 50- and 200-day moving averages. Next key level is around levels last seen in mid-December.
Gold [1082] is attempting to bottom, as recovery attempts will be tested. Near-term traders are closely watching if prices stay above 1080.
DXY– US Dollar Index [79.98] is approaching new multi-month highs and hinting a turnaround. Investors eagerly await confirmation on recent moves and the sustainability of a recovering Dollar.
US 10 Year Treasury Yields [3.69%] is narrowly hovering between 3.60% and 3.70% in recent weeks.
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 Feel:
Investors await sensitive changes in regulatory and interest rate policies. These issues are highly discussed, hard to assess, and clearly too difficult to predict. At this point, a recovering business environment appears to be in the best interest of all parties involved, especially with upcoming US elections this fall. Establishing new laws in market related matters are challenging the minds and fortitude of policymakers. Meanwhile, financial markets are in some neural state of confusion. At least, a much needed breather is taking place. Yet growing anxiousness is highlighted by credit concerns in Europe and policymakers bubble-like behaviors in China. That said, these worries in Europe are not overly surprising but are mostly an extension of the credit crisis that was triggered in mid-2007 and new occurrence.
Liquid and Relatively Attractive:
Depreciation of the US Dollar in the past few years should not be confused with the currency’s global prominence. The US Dollar remains liquid in international trades and pegged to the currencies of 89 countries. Importantly, the Dollar did not lose significant market share to the Euro, as commonly stated in previous years. In fact, foreign reserves held by foreign governments exceeded $7 trillion in 2008, and, overall, reserve portfolios have remained stable since 2000 (Federal Reserve of New York, January 2010).
Digesting the points above may partially explain a major theme of a stronger Dollar so far this year. This appreciation can be mostly attributed to risk aversion, or a simple recovery, from deeply oversold levels. Nonetheless, investors, who placed their bets on Dollar recovery, would’ve enjoyed early fruitful returns. In terms of liquidity, just like its currency, the US offers a relatively advanced, well tested, and attractive capital markets. Again, it’s important not to confuse, the lingering economic and deficit concerns along with the stability of financial system. On that note, with commodities declining, euro-zone weakening, and emerging markets cooling, one has to wonder about the opportunities presented from these results. Perhaps, these issues can make US stocks and Dollar attractive from a longer-term perspective. Since November 25, 2009, DXY (US Dollar Index) is up over 8%, as Gold prices dropped nearly 11% in the same timeframe. This is early to call: however, a shift might take place in overall sentiment and a behavior change from the previous decade.
Short-week Ahead:
Optimists will look for entry points here, given the oversold conditions. In other words, odds for a near-term turnaround are slightly favorable. Industry groups, such as solar panel, biotech, and communications are poised for market leadership. This presents relative attractiveness to “idea driven” sectors, as financials attempt to reform business conducts and profit taking in commodities. Finally, if global markets stop moving in tandem, specific sections will become instrumental. At this stage of the cycle, finding distinguished companies with growth potential is not easily discoverable, but the higher reward potential can entice the interest of participants.
Article Quotes:
“With one brief exception, the federal government has been in debt every year since 1776. In January 1835, for the first and only time in U.S. history, the public debt was retired, and a budget surplus was maintained for the next two years in order to accumulate what Treasury Secretary Levi Woodbury called “a fund to meet future deficits.” In 1837, the economy collapsed into a deep depression that drove the budget into deficit, and the federal government has been in debt ever since.” (Business Insider, February 10, 2010)
“Since the second world war, businesses have increasingly used retained earnings, third-party insurance and pension funds to promise future benefits to employees. To fund these, large pools of financial assets have accumulated in collective savings institutions run by self-selected investment professionals with little experience of private business and non-traded assets. This paved the way for private equity managers, who plunged into debt up to the hilt and earned egregious personal rewards. Their model relies on short-term financial engineering and ‘exit strategies’, not sustainable profits.” (Financial Times, February 14, 2010)
Levels:
S&P 500 [1075.51] remains strong, especially around 1060 where buyers showed interest in the past few days.
Crude [$74.13] prices are trading between its 50- and 200-day moving averages. Next key level is around levels last seen in mid-December.
Gold [1082] is attempting to bottom, as recovery attempts will be tested. Near-term traders are closely watching if prices stay above 1080.
DXY– US Dollar Index [79.98] is approaching new multi-month highs and hinting a turnaround. Investors eagerly await confirmation on recent moves and the sustainability of a recovering Dollar.
US 10 Year Treasury Yields [3.69%] is narrowly hovering between 3.60% and 3.70% in recent weeks.
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.
Monday, February 08, 2010
Market Outlook | February 8, 2010
“You cannot depend on your eyes when your imagination is out of focus.” - Mark Twain (1835 - 1910)
Markets Sway
It is hard to deny the eventful and tricky week that witnessed significant swings. Perhaps, the VIX (volatility index) chart paints a better picture of this trendless action, causing mild unrest. Last week started on a positive note, followed by sharp sell-offs in-between, and ended with a late Friday recovery. That mostly sums up a lively five days of trading at the start of February.
Through this maze, the S&P 500 held above 1035 which marks a 10% correction since January highs. Of course, one should not assume that 10% is a magic number, yet it serves as a gauge to distinguish an inevitable short-term correction from a long-term breakdown. Labor data, earnings results, and investment sentiment remain fuzzy, which frustrates those seeking bold answers. Perhaps, these answers are rarely bold and require flexibility when analyzing ongoing data points. In many ways, those investors, accustomed to trend-following and simple momentum, might have to adjust their strategy.
Perceived Risk
In terms of big picture themes, Europe, along with emerging markets and commodities, are inter-linked in the current weakness. The last few days, financial headlines have highlighted the debt crisis in Spain, Greece, and Portugal. This contributes to a strengthening Dollar, falling currency prices, and a general bias towards risk-aversion. Generally, it’s safe to assume that high volatility leads to moderate panic, which ends up favoring “safer” assets. European conditions are weakening, which is an erosion that stems from the recent credit top. That said, some worries are too early to conclude, especially with only 1/3 of the US stimulus being spent (ProPublica.org). Therefore, one should leave some room for upside surprises to come, despite the recent negative tone.
Positioning
Money managers, whose skills are measured by annual returns, might be less willing to take on significant risk here. It’s too early to risk performance returns at this early stage of the year. Similarly, some wonder if investors sold their winning positions from 2009 in the recent weeks. At least, the turnaround in the US Dollar confirms a further shift towards risk aversion. On a similar point, there is an early movement away from emerging markets and commodities. After a multi-year run, global demand from hard commodities, especially crude, is slowing. Finally, Chinese regulators are recognizing the bubble-like behavior that can put a pause in the explosive run.
Given the points above, a rotation into US equities can be an increasing possibility. At the same time, interest rates are relatively low and some fixed income groups are extended. This sets the stage for a potential capital inflow from foreign investors into US companies. This bodes well for companies reviving their innovation efforts, especially groups related to media, communication, and biotech. For example, in the media sector, a company like FMCN (Focus Media) offers a favorable cycle entry point, management changes, and products with growth potential. Similarly, healthcare companies, like VRUS (Pharmasset, Inc.), are worth a closer look. For instance, Pharmasset, Inc. discovers antiviral drugs and presents a relatively attractive exposure in small cap stocks.
Article Quotes:
“If the Greeks do not regain the markets’ confidence, they may fail to refinance the €20 billion ($28 billion) or so of debt that falls due in April and May. At that point, the government would default or would have to be bailed out. And Greece is not the only country about which the bond markets are worried. On the same day as the commission approved the Greek plans, investors were selling Portuguese bonds. The spread of ten-year bonds against bunds widened by 0.16 percentage points, to 1.43 points.” (The Economist, February 4, 2010 )
"China's government, seeking to stem property speculation, told banks to raise interest rates on third mortgages and demand bigger down payments for such loans... The China Banking Regulatory Commission warned lenders of the risks associated with 'hot money' flowing into the property market... Tighter rules on third mortgages 'should have some effect on home prices, especially in regions such as Hainan,' said May Yan, a...analyst at Nomura International HK Ltd." (Bloomberg, February 3, 2010)
Levels:
S&P 500 [1066.19] is trading near 1060, similar to levels last seen in November 2009. The index remains above its 200-day moving average, standing at 1018. S&P 500 is poised for a near-term recovery in spite of the established downtrend.
Crude [$71.19] has had a recent trading pattern that is in-line with a multi-month range, which is forming between $70 and $75. A step back reminds us that the commodity is establishing a downtrend. Crude struggled to hold above $80 twice in the last 4 months.
Gold [1058] shows no signs of recovery, although, at this point, sellers appear to take a breather. Importantly, Gold peaked earlier than other assets. Perhaps, this selling pressure can provide clues to the condition of this decade-long uptrend.
DXY– US Dollar Index [80.41] is showcasing further evidence of strengthening, as the index surpassed its 200-day moving average. Technicals argue that a key trend reversal is taking hold.
US 10 Year Treasury Yields [3.56%] is hovering above 3.50% as the rates remain in a sideway pattern.
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.
Markets Sway
It is hard to deny the eventful and tricky week that witnessed significant swings. Perhaps, the VIX (volatility index) chart paints a better picture of this trendless action, causing mild unrest. Last week started on a positive note, followed by sharp sell-offs in-between, and ended with a late Friday recovery. That mostly sums up a lively five days of trading at the start of February.
Through this maze, the S&P 500 held above 1035 which marks a 10% correction since January highs. Of course, one should not assume that 10% is a magic number, yet it serves as a gauge to distinguish an inevitable short-term correction from a long-term breakdown. Labor data, earnings results, and investment sentiment remain fuzzy, which frustrates those seeking bold answers. Perhaps, these answers are rarely bold and require flexibility when analyzing ongoing data points. In many ways, those investors, accustomed to trend-following and simple momentum, might have to adjust their strategy.
Perceived Risk
In terms of big picture themes, Europe, along with emerging markets and commodities, are inter-linked in the current weakness. The last few days, financial headlines have highlighted the debt crisis in Spain, Greece, and Portugal. This contributes to a strengthening Dollar, falling currency prices, and a general bias towards risk-aversion. Generally, it’s safe to assume that high volatility leads to moderate panic, which ends up favoring “safer” assets. European conditions are weakening, which is an erosion that stems from the recent credit top. That said, some worries are too early to conclude, especially with only 1/3 of the US stimulus being spent (ProPublica.org). Therefore, one should leave some room for upside surprises to come, despite the recent negative tone.
Positioning
Money managers, whose skills are measured by annual returns, might be less willing to take on significant risk here. It’s too early to risk performance returns at this early stage of the year. Similarly, some wonder if investors sold their winning positions from 2009 in the recent weeks. At least, the turnaround in the US Dollar confirms a further shift towards risk aversion. On a similar point, there is an early movement away from emerging markets and commodities. After a multi-year run, global demand from hard commodities, especially crude, is slowing. Finally, Chinese regulators are recognizing the bubble-like behavior that can put a pause in the explosive run.
Given the points above, a rotation into US equities can be an increasing possibility. At the same time, interest rates are relatively low and some fixed income groups are extended. This sets the stage for a potential capital inflow from foreign investors into US companies. This bodes well for companies reviving their innovation efforts, especially groups related to media, communication, and biotech. For example, in the media sector, a company like FMCN (Focus Media) offers a favorable cycle entry point, management changes, and products with growth potential. Similarly, healthcare companies, like VRUS (Pharmasset, Inc.), are worth a closer look. For instance, Pharmasset, Inc. discovers antiviral drugs and presents a relatively attractive exposure in small cap stocks.
Article Quotes:
“If the Greeks do not regain the markets’ confidence, they may fail to refinance the €20 billion ($28 billion) or so of debt that falls due in April and May. At that point, the government would default or would have to be bailed out. And Greece is not the only country about which the bond markets are worried. On the same day as the commission approved the Greek plans, investors were selling Portuguese bonds. The spread of ten-year bonds against bunds widened by 0.16 percentage points, to 1.43 points.” (The Economist, February 4, 2010 )
"China's government, seeking to stem property speculation, told banks to raise interest rates on third mortgages and demand bigger down payments for such loans... The China Banking Regulatory Commission warned lenders of the risks associated with 'hot money' flowing into the property market... Tighter rules on third mortgages 'should have some effect on home prices, especially in regions such as Hainan,' said May Yan, a...analyst at Nomura International HK Ltd." (Bloomberg, February 3, 2010)
Levels:
S&P 500 [1066.19] is trading near 1060, similar to levels last seen in November 2009. The index remains above its 200-day moving average, standing at 1018. S&P 500 is poised for a near-term recovery in spite of the established downtrend.
Crude [$71.19] has had a recent trading pattern that is in-line with a multi-month range, which is forming between $70 and $75. A step back reminds us that the commodity is establishing a downtrend. Crude struggled to hold above $80 twice in the last 4 months.
Gold [1058] shows no signs of recovery, although, at this point, sellers appear to take a breather. Importantly, Gold peaked earlier than other assets. Perhaps, this selling pressure can provide clues to the condition of this decade-long uptrend.
DXY– US Dollar Index [80.41] is showcasing further evidence of strengthening, as the index surpassed its 200-day moving average. Technicals argue that a key trend reversal is taking hold.
US 10 Year Treasury Yields [3.56%] is hovering above 3.50% as the rates remain in a sideway pattern.
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.
Monday, February 01, 2010
Market Outlook | February 1, 2010
A perspective:
It’s nearly a year since the markets bounced back following the recent crisis. Plenty wonder, if the fruitful returns last year were a result of economic improvement, low interest policies or simply a usual cycle move. Perhaps, we can conclude that all three factors played a role in the recovery that began last spring. Now, the sustainability of that run is being challenged.
So far, the current pullback seems like a normal pause. That said, in upcoming weeks optimists will be tested in their willingness to purchase assets at a discounted prices. For example, Gold has dropped more than 11% since early December and Nasdaq is 8% cheaper than three weeks ago. In days ahead, investors will get a better gauge of buyer conviction as markets approach key technical levels, await earning announcements and ponder monthly economic data. Meanwhile, bubble-like behavior persists in assets such as China, Commodities and Credit related themes. In other words, previous worries triggered in 2007 continue to resurface as a catalyst for panic selling. However, believers of a new market recovery can plan for opportunistic entry points in months ahead. However, patience might be greatly required in trendless markets, in which investors become more comfortable between stock market behavior and economic conditions.
The debate noise:
Outside of the general business uncertainties there are growing confusions that extend beyond portfolio management. Highly debated and ongoing topics include bailout versus free markets, packaged products versus traditional assets and low interest rate polices versus less interference. The core theme of these debates revolves around the idea and degree of human involvement. Of course, this raises a whole list of sensitive topics beyond the scope of markets. However, these events are difficult to speculate for investors attempting to manage their market exposure. Despite these debates, money managers have to focus on finding growth driven companies that can outperform in this new cycle.
Understanding corrections:
This recent sell-off is hardly a surprise when taking a look at three significant corrections since the lows of March 2009. In all three cases, the S&P 500 failed to correct more than 10% and maintained its uptrend despite the wall of headline worries. Once again, we’re witnessing a selling pressure that’s nearly 7% off the previous top. This can be a reminder for investors not to make a conclusive evidence of a topping market. Let’s also remember that the reward was great for those owning stocks despite several downside moves. Similarly, some argued that buy and hold approach was dead but a strong trend conviction produced multi-month gains last year. At least, we’ve learned many times that surprises are part of the game.
Key S&P 500corrections since March 2009
• [-9.09%] June 11, 2009 – July 8, 2009
• [-5.57%] September 23, 2009- October 2, 2009
• [-6.54%] October 21, 2009- November 2, 2009
Article Quotes:
“Policy makers are addressing the bubbles of 2009. Since the collapse of Lehman Brothers Holdings Inc. in September 2008, the Group of 20 nations has spent more than $2.2 trillion trying to restore growth. Efforts are afoot to take back some of the fiscal and monetary stimulus, and that’s healthy. China, where banks have begun restricting new loans, is responding to a push by regulators to contain credit after a surge in lending. Investors such as Mark Mobius, chairman of Templeton Asset Management Ltd. in Singapore, have a point when they argue that such steps may benefit China’s economy. At a minimum, they will reduce overheating risks and make markets more stable.” (William Pesek. Bloomberg, January 29, 2009)
“The last time the Chinese authorities attempted to deflate an asset price bubble was in January 2007. At that time interest rates were raised, bank reserve requirements increased, and important officials spoke openly about the need to quell speculation. Several commentators anticipated an imminent collapse of the Chinese stock market, which had doubled over the previous year. The outcome was rather different. Over the following months the Shanghai Composite entered a period of exponential growth. The market finally peaked in October 2007 after five rate hikes and 13 increases in bank reserve requirements since the beginning of the year. Experience suggests that recent tightening in Beijing is unlikely to mark the immediate demise of the frenzied Chinese real estate boom. Nevertheless, it brings that end one step closer. (Edward Chancellor. Financial Times, January 31, 2009)”
Levels:
S&P 500 [1073.87] nearly a 7% correction from January 19th 2009 highs. Charts suggest a completion of the first wave of sell-offs as the index fell below 1080.
Crude [$72.89] is narrowly trading between $70-80 in the past 4 months. Like October, the commodity peaked at $80 and its 200 day moving average stands at near $70.
Gold [1078.50] is pausing after a strong reacceleration in mid 2009. Currently, investors are watching if price can stay around 1100. Meanwhile, key moving averages stand near key support of $980
DXY– US Dollar Index [79.46] continues to rise and is up over 7% after bottoming three month ago. Further confirmation is needed to solidify a strengthening dollar.
US 10 Year Treasury Yields [3.58%] Consolidating between 3.55-3.60% as the 50 day moving average stands at 3.37%
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.
It’s nearly a year since the markets bounced back following the recent crisis. Plenty wonder, if the fruitful returns last year were a result of economic improvement, low interest policies or simply a usual cycle move. Perhaps, we can conclude that all three factors played a role in the recovery that began last spring. Now, the sustainability of that run is being challenged.
So far, the current pullback seems like a normal pause. That said, in upcoming weeks optimists will be tested in their willingness to purchase assets at a discounted prices. For example, Gold has dropped more than 11% since early December and Nasdaq is 8% cheaper than three weeks ago. In days ahead, investors will get a better gauge of buyer conviction as markets approach key technical levels, await earning announcements and ponder monthly economic data. Meanwhile, bubble-like behavior persists in assets such as China, Commodities and Credit related themes. In other words, previous worries triggered in 2007 continue to resurface as a catalyst for panic selling. However, believers of a new market recovery can plan for opportunistic entry points in months ahead. However, patience might be greatly required in trendless markets, in which investors become more comfortable between stock market behavior and economic conditions.
The debate noise:
Outside of the general business uncertainties there are growing confusions that extend beyond portfolio management. Highly debated and ongoing topics include bailout versus free markets, packaged products versus traditional assets and low interest rate polices versus less interference. The core theme of these debates revolves around the idea and degree of human involvement. Of course, this raises a whole list of sensitive topics beyond the scope of markets. However, these events are difficult to speculate for investors attempting to manage their market exposure. Despite these debates, money managers have to focus on finding growth driven companies that can outperform in this new cycle.
Understanding corrections:
This recent sell-off is hardly a surprise when taking a look at three significant corrections since the lows of March 2009. In all three cases, the S&P 500 failed to correct more than 10% and maintained its uptrend despite the wall of headline worries. Once again, we’re witnessing a selling pressure that’s nearly 7% off the previous top. This can be a reminder for investors not to make a conclusive evidence of a topping market. Let’s also remember that the reward was great for those owning stocks despite several downside moves. Similarly, some argued that buy and hold approach was dead but a strong trend conviction produced multi-month gains last year. At least, we’ve learned many times that surprises are part of the game.
Key S&P 500corrections since March 2009
• [-9.09%] June 11, 2009 – July 8, 2009
• [-5.57%] September 23, 2009- October 2, 2009
• [-6.54%] October 21, 2009- November 2, 2009
Article Quotes:
“Policy makers are addressing the bubbles of 2009. Since the collapse of Lehman Brothers Holdings Inc. in September 2008, the Group of 20 nations has spent more than $2.2 trillion trying to restore growth. Efforts are afoot to take back some of the fiscal and monetary stimulus, and that’s healthy. China, where banks have begun restricting new loans, is responding to a push by regulators to contain credit after a surge in lending. Investors such as Mark Mobius, chairman of Templeton Asset Management Ltd. in Singapore, have a point when they argue that such steps may benefit China’s economy. At a minimum, they will reduce overheating risks and make markets more stable.” (William Pesek. Bloomberg, January 29, 2009)
“The last time the Chinese authorities attempted to deflate an asset price bubble was in January 2007. At that time interest rates were raised, bank reserve requirements increased, and important officials spoke openly about the need to quell speculation. Several commentators anticipated an imminent collapse of the Chinese stock market, which had doubled over the previous year. The outcome was rather different. Over the following months the Shanghai Composite entered a period of exponential growth. The market finally peaked in October 2007 after five rate hikes and 13 increases in bank reserve requirements since the beginning of the year. Experience suggests that recent tightening in Beijing is unlikely to mark the immediate demise of the frenzied Chinese real estate boom. Nevertheless, it brings that end one step closer. (Edward Chancellor. Financial Times, January 31, 2009)”
Levels:
S&P 500 [1073.87] nearly a 7% correction from January 19th 2009 highs. Charts suggest a completion of the first wave of sell-offs as the index fell below 1080.
Crude [$72.89] is narrowly trading between $70-80 in the past 4 months. Like October, the commodity peaked at $80 and its 200 day moving average stands at near $70.
Gold [1078.50] is pausing after a strong reacceleration in mid 2009. Currently, investors are watching if price can stay around 1100. Meanwhile, key moving averages stand near key support of $980
DXY– US Dollar Index [79.46] continues to rise and is up over 7% after bottoming three month ago. Further confirmation is needed to solidify a strengthening dollar.
US 10 Year Treasury Yields [3.58%] Consolidating between 3.55-3.60% as the 50 day moving average stands at 3.37%
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.
Sunday, January 24, 2010
Market Outlook | January 25, 2010
“Sanity calms, but madness is more interesting.” - John Russell
Absorbing Results:
As anticipated, markets that started the short holiday week extended and remained in a decline mode. On Friday, January 15, 2010, right before options expiration; Technicals gave early clues of a peaking market. A week later, investors are wondering as to the magnitude of this selling pressure. That said, veterans and well experienced pattern observers noticed the early possibility of pullbacks. Importantly, news flow anxiety was building with increased sensitivity for bad news, especially heading into earnings season and regulatory chatters. This is highlighted by a one-day, 22% jump in volatility this past Friday. This was a favorable action for short sellers and served as a minor surprise for the casual participants. Nonetheless, it is important to distinguish short-term behaviors versus long-term outlook. Again, fighting the wave of fears and staying focused on investment thesis is the challenge ahead for professional money managers.
Reassessing Previous Points:
Global assets are declining in a synchronized manner, which looks familiar to 2008 corrections. Yet again, it was commodities and emerging markets that led this retracement along with Financials. Clearly, higher beta themes are more sensitive. This is explained by the weekly results in which key lagging sectors included Gold -9.59%, Alternative Energy -9.96%, and Steel -11.28%. In upcoming days, these performance results can shape investor sentiment for the rest of the quarter.
Similarly, Asian stock markets declined for six consecutive days. To put things in perspective, it was only a period of a few months ago in which global policymakers discussed various tools to cool several overheating economies. Now, this early negative market tone has the potential to produce plenty of arguments of support for a significant market decline. These arguments might gain traction, especially with the S&P 500 being down 2.1% so far this year. Partially, this is understandable after a profitable 2009, where investors are deciding to take profits. Also, given uncertainties and slowing momentum some managers will seek the sidelines as a safer route.
Balancing Extreme Views:
It might be wise to digest earnings, interest rate policies, and pending regulations, while accepting the inevitable results of an overbought stock market. In looking ahead, there are two extremes that can be classified as potential knee-jerk reactions. First, optimists might decide to buy on weakness without closely examining the macroeconomic and sentiment environment. On the other hand, investors might sell on panic without evaluating the upside potential of select quality companies. In both cases, one must stay patient to understand the market performance drivers and to dismiss short-term noise. That said, quality companies with innovative growth potential might be offered at a discount, and they may be worth a look at attractive entry points in months ahead. Meanwhile, themes related to China, Credit, and Crude are less favorable in the current cycle. A step back reminds us that these groups were clear winners in the last decade, and they appear pricy when applying basic valuations.
Article Quotes:
“The recent rise in inflation was caused mainly by higher food prices as a result of severe winter weather in northern China. In many cities, fresh-vegetable prices have more than doubled in the past two months. But Helen Qiao and Yu Song at Goldman Sachs argue that it is not just food prices that risk pushing up inflation: the economy is starting to exceed its speed limit. If, as China bears contend, the economy had massive overcapacity, there would be little to worry about: excess supply would hold down prices. But bottlenecks are already appearing. Some provinces report electricity shortages and stocks of coal are low. The labour market is also tightening, forcing firms to pay higher wages.”(Economist, Jan 21, 2010)
“The main focus of financial reform should be to address such systemic risk. Separating commercial banking and other forms of financial intermediation from proprietary trading is a step in the right direction, since it limits systemic risk without affecting the financial sector’s ability to perform its core functions. This is because there is little evidence of any economies of scale that argue persuasively for principal investing to be located inside a financial conglomerate. In fact, the primary advantage appears to be that these institutions become too big to fail, and end up with access to a low cost of funding as a result of government guarantees. But, as seen from this crisis, the direct and indirect costs of government forbearance in a systemic crisis can be huge.” (Financial Times, January 22, 2010)
Levels:
S&P 500 [1091.76] has significant downside moves that are taking hold after stalling. Currently, index is nearly 8% removed from its 200 day moving average.
Crude [$74.50] is defined in a short-term weakness that began two weeks ago. Next level that’s highly watched is based on a previous pattern around $70. That’s close to its 200 day moving average of $69.35. Both add up for further selling pressures, which can decelerate price movement given this technical set up.
Gold [1084] has increasing odds for the commodity to trade between 1100 and 1150. Further unwinding is ahead, following a strong, multi-month run. Gold maintains its long-term uptrend above $980.
DXY– US Dollar Index [78.27] has had a 3 month recovery that’s over 6% from November 2009 lows to January 2010 highs. There will be a highly watched trend-shift regarding a weak Dollar policy ahead. Again, it may be too early to call a bottom, but the pattern suggests a shift.
US 10 Year Treasury Yields [3.60%] stalled at 3.80% yet again, while attempting to hold above 3.60%. However, rates singled some recovery point around the 3.20% range, which impacted the outlook of many investors.
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.
Absorbing Results:
As anticipated, markets that started the short holiday week extended and remained in a decline mode. On Friday, January 15, 2010, right before options expiration; Technicals gave early clues of a peaking market. A week later, investors are wondering as to the magnitude of this selling pressure. That said, veterans and well experienced pattern observers noticed the early possibility of pullbacks. Importantly, news flow anxiety was building with increased sensitivity for bad news, especially heading into earnings season and regulatory chatters. This is highlighted by a one-day, 22% jump in volatility this past Friday. This was a favorable action for short sellers and served as a minor surprise for the casual participants. Nonetheless, it is important to distinguish short-term behaviors versus long-term outlook. Again, fighting the wave of fears and staying focused on investment thesis is the challenge ahead for professional money managers.
Reassessing Previous Points:
Global assets are declining in a synchronized manner, which looks familiar to 2008 corrections. Yet again, it was commodities and emerging markets that led this retracement along with Financials. Clearly, higher beta themes are more sensitive. This is explained by the weekly results in which key lagging sectors included Gold -9.59%, Alternative Energy -9.96%, and Steel -11.28%. In upcoming days, these performance results can shape investor sentiment for the rest of the quarter.
Similarly, Asian stock markets declined for six consecutive days. To put things in perspective, it was only a period of a few months ago in which global policymakers discussed various tools to cool several overheating economies. Now, this early negative market tone has the potential to produce plenty of arguments of support for a significant market decline. These arguments might gain traction, especially with the S&P 500 being down 2.1% so far this year. Partially, this is understandable after a profitable 2009, where investors are deciding to take profits. Also, given uncertainties and slowing momentum some managers will seek the sidelines as a safer route.
Balancing Extreme Views:
It might be wise to digest earnings, interest rate policies, and pending regulations, while accepting the inevitable results of an overbought stock market. In looking ahead, there are two extremes that can be classified as potential knee-jerk reactions. First, optimists might decide to buy on weakness without closely examining the macroeconomic and sentiment environment. On the other hand, investors might sell on panic without evaluating the upside potential of select quality companies. In both cases, one must stay patient to understand the market performance drivers and to dismiss short-term noise. That said, quality companies with innovative growth potential might be offered at a discount, and they may be worth a look at attractive entry points in months ahead. Meanwhile, themes related to China, Credit, and Crude are less favorable in the current cycle. A step back reminds us that these groups were clear winners in the last decade, and they appear pricy when applying basic valuations.
Article Quotes:
“The recent rise in inflation was caused mainly by higher food prices as a result of severe winter weather in northern China. In many cities, fresh-vegetable prices have more than doubled in the past two months. But Helen Qiao and Yu Song at Goldman Sachs argue that it is not just food prices that risk pushing up inflation: the economy is starting to exceed its speed limit. If, as China bears contend, the economy had massive overcapacity, there would be little to worry about: excess supply would hold down prices. But bottlenecks are already appearing. Some provinces report electricity shortages and stocks of coal are low. The labour market is also tightening, forcing firms to pay higher wages.”(Economist, Jan 21, 2010)
“The main focus of financial reform should be to address such systemic risk. Separating commercial banking and other forms of financial intermediation from proprietary trading is a step in the right direction, since it limits systemic risk without affecting the financial sector’s ability to perform its core functions. This is because there is little evidence of any economies of scale that argue persuasively for principal investing to be located inside a financial conglomerate. In fact, the primary advantage appears to be that these institutions become too big to fail, and end up with access to a low cost of funding as a result of government guarantees. But, as seen from this crisis, the direct and indirect costs of government forbearance in a systemic crisis can be huge.” (Financial Times, January 22, 2010)
Levels:
S&P 500 [1091.76] has significant downside moves that are taking hold after stalling. Currently, index is nearly 8% removed from its 200 day moving average.
Crude [$74.50] is defined in a short-term weakness that began two weeks ago. Next level that’s highly watched is based on a previous pattern around $70. That’s close to its 200 day moving average of $69.35. Both add up for further selling pressures, which can decelerate price movement given this technical set up.
Gold [1084] has increasing odds for the commodity to trade between 1100 and 1150. Further unwinding is ahead, following a strong, multi-month run. Gold maintains its long-term uptrend above $980.
DXY– US Dollar Index [78.27] has had a 3 month recovery that’s over 6% from November 2009 lows to January 2010 highs. There will be a highly watched trend-shift regarding a weak Dollar policy ahead. Again, it may be too early to call a bottom, but the pattern suggests a shift.
US 10 Year Treasury Yields [3.60%] stalled at 3.80% yet again, while attempting to hold above 3.60%. However, rates singled some recovery point around the 3.20% range, which impacted the outlook of many investors.
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.
Monday, January 18, 2010
Market Outlook | January 18, 2010
“Do not fear to be eccentric in opinion, for every opinion now accepted was once eccentric.” - Bertrand Russell (1872 - 1970)
Current Feel:
At this stage, US markets appear extended after a strong multi-month run. In the near-term, a bumpy road is ahead with technical pausing, upcoming decisions by the Federal Reserve, and quarterly earnings results. The current bullish bias remains feasible from a cycle perspective. Now this long-term view will be challenged as participants become overly sensitive to the bad news affecting day-to-day trading. Options expired last Friday and showcased a slight increase in volatility. For the most part, it was inevitable and to be expected. Of course, volatility has remained low, nearing levels that were last seen before the crux of the financial crisis. In addition, stocks and commodities are moving lower as tightening liquidity is becoming an interest for global policymakers. For example, China is increasing its bank reserve requirement as another tool of easing the ongoing bubble of overheating assets.
The US 10 Year Yields recovered recently, but the sustainability of rising rates remains doubtful. Interestingly, there is anxiety in regards to rising interest rates. This behavior is visible as investors rush to raise money from bond markets. This panic-like response towards rates might be an overreaction and worth watching closely. That said, more attention will focus on macro inflection points where, collectively, investors await catalysts to result in a trend shift. Similarly, at this junction, investors are realizing that timely entry points are tricky, versus spring 2009.
Big Picture Trends:
Trends are favoring small cap and innovative based areas in the past few weeks. Non large cap themes were showcasing a positive momentum, mainly at the end of last year. Beneficiaries of this strength include Technology and Healthcare, which require company specific picks for fruitful outperformance. In addition, multi-year cycle favors these sectors, despite a pending broad market correction. Similarly, small to mid size companies are subject to consolidation, especially with increasing talks of Merger & Acquisitions. Therefore, at the end of earnings season, observers can distinguish leaders and reposition into companies, gaining fundamental strength. Innovative companies within smaller caps can be attractive, especially with solid earnings growth. Selecting ideas that fit these themes might be favorable in Biotech, Semiconductors, and Communication based areas.
Vulnerable areas:
Decade long winners are highlighted by emerging markets and commodities, which are not cheaply valued in traditional measures. Adding these ideas into portfolios has greater risks and the fear of limited upside moves. Some observers are noticing that these escalated levels present a fragile point with rising expectations. However, given the 2007/08 correction, it paints a picture that we’re still removed from all-time highs. In other words, optimists believe that previous highs will be revisited and potentially surpassed. As usual, investors need more confirmation, mostly for psychological comfort. And, certainly, government intervention will play a big role as investors react based on news flow, government policies, and regulatory events. In terms of stocks, fundamentals for Energy related areas are expected to decline, and, if that materializes, it can then trigger a market sell-off. That said, in the days and weeks ahead, material and commodity based companies can lead on downside moves.
Article Quotes:
“Even so, we believe a full-blown dollar crisis — involving a collapse in our currency and an inability to pay our debts — is unlikely. Fears over the dollar often surface during times of fiscal stress, only to fade when conditions ease. As a Goldman Sachs report recently noted, "fears over demise of the U.S. dollar seem to resurface every 10-15 years." And here they are again. Indeed, we've been hearing for years the dollar is already in crisis. But as the chart shows, the trade-weighted dollar index shows the greenback is actually higher than during the 1990s Internet boom. Foreign investors hold trillions of dollars in U.S. debt. They could decide to dump them, putting severe pressure on our currency. But that would also do damage to their own balance sheets.” (Investors Business Daily, January 15, 2010)
“The 50 biggest stocks in the S&P 500 are up an average of 2.4% year to date. The 50 smallest stocks in the index are up an average of 6.5%. In general, the bigger the stock, the smaller the gain so far in 2010.” (Bespoke Investments, January 14, 2010)
Levels:
S&P 500 [1136] is recently showing signs of stalling around 1150 and is due to pause closer to the 10-day moving average of 1140.
Crude [$78.00], retraced from January 11 highs of $83.95, highlights the recent peak. Multiple timeframe analysis suggests increasing odds of pending pullbacks.
Gold [1128] is trading between a defined trend of around 1100-1150. Long-term trend is positive but not a favorable entry point.
DXY– US Dollar Index [77.32] is attempting to maintain its recovery around $77. In the next few weeks, events should determine the strength and legitimacy behind a stronger Dollar.
US 10 Year Treasury Yields [3.67%] is slowly declining after a strong run in late December. In the past 8 months, yields have failed to surpass the 3.80% range. Once again, a similar set up is taking hold. Next key support levels reside at 3.60% and 3.40%.
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.
Current Feel:
At this stage, US markets appear extended after a strong multi-month run. In the near-term, a bumpy road is ahead with technical pausing, upcoming decisions by the Federal Reserve, and quarterly earnings results. The current bullish bias remains feasible from a cycle perspective. Now this long-term view will be challenged as participants become overly sensitive to the bad news affecting day-to-day trading. Options expired last Friday and showcased a slight increase in volatility. For the most part, it was inevitable and to be expected. Of course, volatility has remained low, nearing levels that were last seen before the crux of the financial crisis. In addition, stocks and commodities are moving lower as tightening liquidity is becoming an interest for global policymakers. For example, China is increasing its bank reserve requirement as another tool of easing the ongoing bubble of overheating assets.
The US 10 Year Yields recovered recently, but the sustainability of rising rates remains doubtful. Interestingly, there is anxiety in regards to rising interest rates. This behavior is visible as investors rush to raise money from bond markets. This panic-like response towards rates might be an overreaction and worth watching closely. That said, more attention will focus on macro inflection points where, collectively, investors await catalysts to result in a trend shift. Similarly, at this junction, investors are realizing that timely entry points are tricky, versus spring 2009.
Big Picture Trends:
Trends are favoring small cap and innovative based areas in the past few weeks. Non large cap themes were showcasing a positive momentum, mainly at the end of last year. Beneficiaries of this strength include Technology and Healthcare, which require company specific picks for fruitful outperformance. In addition, multi-year cycle favors these sectors, despite a pending broad market correction. Similarly, small to mid size companies are subject to consolidation, especially with increasing talks of Merger & Acquisitions. Therefore, at the end of earnings season, observers can distinguish leaders and reposition into companies, gaining fundamental strength. Innovative companies within smaller caps can be attractive, especially with solid earnings growth. Selecting ideas that fit these themes might be favorable in Biotech, Semiconductors, and Communication based areas.
Vulnerable areas:
Decade long winners are highlighted by emerging markets and commodities, which are not cheaply valued in traditional measures. Adding these ideas into portfolios has greater risks and the fear of limited upside moves. Some observers are noticing that these escalated levels present a fragile point with rising expectations. However, given the 2007/08 correction, it paints a picture that we’re still removed from all-time highs. In other words, optimists believe that previous highs will be revisited and potentially surpassed. As usual, investors need more confirmation, mostly for psychological comfort. And, certainly, government intervention will play a big role as investors react based on news flow, government policies, and regulatory events. In terms of stocks, fundamentals for Energy related areas are expected to decline, and, if that materializes, it can then trigger a market sell-off. That said, in the days and weeks ahead, material and commodity based companies can lead on downside moves.
Article Quotes:
“Even so, we believe a full-blown dollar crisis — involving a collapse in our currency and an inability to pay our debts — is unlikely. Fears over the dollar often surface during times of fiscal stress, only to fade when conditions ease. As a Goldman Sachs report recently noted, "fears over demise of the U.S. dollar seem to resurface every 10-15 years." And here they are again. Indeed, we've been hearing for years the dollar is already in crisis. But as the chart shows, the trade-weighted dollar index shows the greenback is actually higher than during the 1990s Internet boom. Foreign investors hold trillions of dollars in U.S. debt. They could decide to dump them, putting severe pressure on our currency. But that would also do damage to their own balance sheets.” (Investors Business Daily, January 15, 2010)
“The 50 biggest stocks in the S&P 500 are up an average of 2.4% year to date. The 50 smallest stocks in the index are up an average of 6.5%. In general, the bigger the stock, the smaller the gain so far in 2010.” (Bespoke Investments, January 14, 2010)
Levels:
S&P 500 [1136] is recently showing signs of stalling around 1150 and is due to pause closer to the 10-day moving average of 1140.
Crude [$78.00], retraced from January 11 highs of $83.95, highlights the recent peak. Multiple timeframe analysis suggests increasing odds of pending pullbacks.
Gold [1128] is trading between a defined trend of around 1100-1150. Long-term trend is positive but not a favorable entry point.
DXY– US Dollar Index [77.32] is attempting to maintain its recovery around $77. In the next few weeks, events should determine the strength and legitimacy behind a stronger Dollar.
US 10 Year Treasury Yields [3.67%] is slowly declining after a strong run in late December. In the past 8 months, yields have failed to surpass the 3.80% range. Once again, a similar set up is taking hold. Next key support levels reside at 3.60% and 3.40%.
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.
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