Monday, April 20, 2009

Indexes

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Another positive week could be added to the recovery rally started on March 10, 2008. Now S&P 500 came closer to the sensitive threshold of 900 (see my "S&P 500 Volatility" post two weeks ago). Less than 4% is between the S&P 500 index and 900-line. The Stock market has been moving around the 900 level from the end of November 2008 until the beginning of January 2009. Furthermore, I would say we have increased odds to see market stuck around this level again.

At the same time the Nasdaq 100 index is already more than 10% above its December 2008 which I think confirms that the investors are disappointed by financial and automotive sectors and are now become attracted by hi-tech, computer, internet, biotechnology, pharmaceutical and other sectors that are traded on the Nasdaq Exchange and which were relatively stable during the stock market crash (by relatively stable I mean the stocks from these sectors crashed but not as hard as those who are more dependable on the banking industry). I think it is logical that investors are trying to avoid financial stocks - we saw bailouts, however we have not seen changes in the regulations that would prevent (eliminate) a possibility of the "quick backs" manipulations in the financial sector which may lead to the bubbles and crashes.

On the other hand we have DOW index (^DJI) that is still more than 10% below its December 2008 level. Again, DJI index is heavy packed with the financial, automotive companies (stocks). The DJI index covers biggest US companies and the bigger company is the more dependable this company is on the banks.

So, on one side we have more stable non financial companies and on other side we have risky sector which lead the economy into crash. Yet, keep in mind that the bigger risk the bigger potential reward is – just calculate how many percent Citi stock run from its lowest level??? The same as with options (you may lose everything, yet you can receive more than 100% in profit in short period of time) risky under evaluated companies (stocks) may deliver great returns if this is the end of the recession (if you believe that this is the end).

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