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D Fry Market Outlook 01 02 2007

He's smiling today, so let's give the man his due. Every asset class had a rally of sorts today. It's the end of January and everything is perfect. Or, is it?

The trouble today was in China, where authorities are suggesting there's a stock bubble and perhaps they'll try to cool things down there. A "cool down" in China markets can be like a panic in U.S. markets. Here's a report, and a snippet of a report here from the Emerging Markets Monitor in London:

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For investors this could be a very dangerous and volatile situation.

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Returning to U.S. markets, I sense a lot of nervousness stemming from 1) Portfolio manager performance anxiety [trying to keep up, especially at month's end]. 2) Commodity price confusion and volatility [energy market craziness will probably leave casualties that we'll be reading about]. 3) Gold nearly breaking out of the trading range we and many others have cited [although the week's not over] may be tied to energy and currency issues not to mention a hedge against the Fed, China and a falling dollar. 4) Tomorrow's employment numbers. 5) The continuing underperformance of tech relative to other sectors.

In energy markets, as suggested, there may be some casualties with leveraged natural gas market players leaning the wrong way. Losses can wipe-out many--just look at the Amaranth Hedge Fund disaster. Today the weather bureau suggested that colder northeastern weather can linger throughout February. That got all the markets going again today despite neutral to bearish inventory data.

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In major markets every sector saw good upside action.

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South of the border, more sensitive to commodity prices, everything except Venezuela moved higher.

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So January ends on a high note. That's not a surprise given performance anxiety noted earlier. You must think I'm worried about China markets and another round of Asian Contagion a la 1998. Well I am.

As for the Fed they did exactly what was expected, and the markets positive reaction was more surprising. It must be the kind "tentative" words about the housing situation that got everybody's juices flowing. Then again a falling dollar and rising gold price shouldn't make investors too sanguine.

Have a pleasant evening.

Disclaimer: Among other issues, the ETF Digest maintains positions in: iShares Trust FTSE-Xinhua China 25 Index Fund (NYSEARCA:FXI), First Trust DJ Internet Index ETF (NYSEARCA:FDN), NASDAQ 100 Trust Shares ETF (QQQQ), streetTRACKS Gold Trust ETF (NYSEARCA:GLD), PowerShares DB Precious Metals Fund (NYSEARCA:DBP), PowerShares Aerospace & Defense (NYSEARCA:PPA), PowerShares Water Resources ETF (NYSEARCA:PHO), ,S&P 500 Index (NYSEARCA:SPY) MidCap SPDRs ETF (NYSEARCA:MDY), iShares Russell 2000 Index ETF (NYSEARCA:IWM), PowerShares Zacks Microcap Index (NYSEARCA:PZI), iShares S&P Latin America 40 Index Fund (NYSEARCA:ILF), iShares MSCI Brazil Index ETF (NYSEARCA:EWZ), iShares MSCI Mexico Index ETF (NYSEARCA:EWW), iShares MSCI Emerging Markets ETF (NYSEARCA:EEM), iShares MSCI Malaysia (NYSEARCA:EWM) and iPath MSCI India ETN (NYSEARCA:INP).

Source: David Fry's Daily Market Outlook