Article – BusinessDesk

Jan. 31(BusinessDesk) – For financial markets, the unexpected political developments in Egypt might turn out to be fortuitous.

World Week Ahead: Take a deep breath

By Timothy Moore

Jan. 31(BusinessDesk) – For financial markets, the unexpected political developments in Egypt might turn out to be fortuitous.

The reality is that political and social unrest is inevitable in many countries around the world. People want more freedom. People want more opportunities to do what they want with their lives. And change rarely is simple.

For investors, the chaos in Egypt comes at a time when even optimists are starting to suggest it’s time for a pause.

For six weeks, Wall Street tacked on gain after gain. The Dow Jones Industrial Average powered through the 12,000 mark last week shortly after the Standard & Poor’s 500 broke through 1,300. Stocks are now generally back to where they were two years ago.

As a measure of the size of the advance: the S&P 500 has risen 22% since late August.

Some stocks have rocketed ahead. Shares in Apple Inc have tacked on another 30% in the last six months. Social media phenomenon Facebook Inc has a valuation of US$82.9 billion.

In a review of some key technical indicators, markets appear overdue for a pause, a pullback or perhaps a short and sharp correction.

More than 80% of stocks traded above their 200-day moving average this week, according to Birinyi Associates Inc. Bloomberg News says the last time that many were so high was in April, before the S&P 500 began a decline in which it lost as much as 16%.

A measure of the degree to which S&P 500 gains outpace losses, known as the relative strength index, jumped to 71.8 this week, Bloomberg added. The RSI exceeded 70 for five straight days through April 15, before the S&P 500 peaked.

And then there is Egypt and what it means for the rest of the Middle East. It seems unlikely that Hosni Mubarak will remain president for much longer. Will the military push him out, throw him out? Will the transition be smooth?

Volatility surged in New York on Friday. No surprise.

The Chicago Board of Trade Options Index, or VIX, spiked 24%. Perspective is important. It’s a huge increase and yet the VIX remains near its lowest level in about 18 months. It probably will spike again this week.

“When everybody is scared, it is maybe a good time to take on risk,” Robert McKinnon, ASAS Capital chief investment officer, told Reuters. Though he was wary of advising people do so because of the level of uncertainty about what lies ahead in Cairo.

Matt McCormick, portfolio manager at Cincinnati-based Bahl & Gaynor Inc, which has US$3.2 billion in assets, told Reuters that he’s recommending clients who have seen prices in lower-quality shares rise to take profits now and look at reinvesting in blue chips that haven’t yet gained as much.

The reality is that the global economy is moving forward and the pace of growth is expected to accelerate, especially in the U.S. this year.

The majority of U.S. companies reported fourth-quarter profits that exceeded expectations, despite some disappointments at the end of last week including Ford Motor Co.

Many market watchers are seeing more upward revision potential for the U.S. economy in 2011 and for good reason. The Federal Reserve is going to complete the second round of asset purchases and interest rates remain at record lows. American consumers are shopping again and even the U.S. housing market is flickering back to life.

There are still key challenges for the world’s biggest economy. The jobs market isn’t expanding fast enough and as officials have repeatedly said, don’t expect that situation to change dramatically. The labour market will improve incrementally at best.

Later this week, the January payrolls report will show that U.S. employers remain reluctant to hire new workers but they are hiring again and that’s a first step.

According to a Bloomberg survey, employment in the U.S. will have increased by 140,000 in January, after a 103,000 gain in December. Anyone betting on a faster turnaround is best called a speculator.

Investors have had a great run the last five months. So take a deep breath. It may be time to reposition a few investments.

(BusinessDesk)

Content Sourced from scoop.co.nz
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