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2011 BigTrends Market Outlook


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Price Headley and his team of Options

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2011 BigTrends Market Outlook

  1. 1. 2011 Market Outlookwww.BigTrends.comservice@bigtrends.com1-800-244-8736
  2. 2. 2Thank YouThank you for downloading the 2011 BigTrends Market Outlook. In the next33 pages you will find our analysis of the world financial market and how itwill impact your investments throughout 2011.In keeping with the tradition of our annual market outlooks we will reviewhistorical patterns of significance, interest rates, international trends, aswell as a detailed look into the world of volatility.I invite you to review our specific stock and ETFrecommendations that we believe are poised forgrowth in 2011.While this report will yield valuable long-terminformation we believe that active management ofyour capital is paramount to passive managementso we would like to offer you 30 days of ANYBigTrends recommendation service for $30!BigTrends 2011 Market Outlook |
  3. 3. 3Table of Contents2011 Market Outlook……………………………………………………….4by Price Headley2011 BigTrends Outlook for Option Volatility and the Markets………..7by Moby Waller2011 BigTrends Fed and Economic Outlook……………………………15by Bob Lang2011 BigTrends Top Stock Picks and Market Overview……………….20by Scott Downing2011 BigTrends International & ETF Outlook…………………………...26by Andrew HartBigTrends 2011 Market Outlook |
  4. 4. 42011 BigTrendsMarket OutlookBy Price HeadleyLooking Forward to MarketAction in 2011As the market finishes off a relatively impressive 2010, where the stockmarket shook off a barrage of bad news to see the major market averagesall finish up over 10%.The most encouraging aspect of the relative index performance is that theleadership to the upside was led by the Russell 2000 (RUT) and then theNasdaq 100 (QQQQ), compared to the S&P 500 (SPX) and DowIndustrials (INDU). That tells us that the fund managers are still playing“offense” as they prefer to buy the more aggressive smaller-cap RUT andtech-heavy Nasdaq names, which means money is still flowing into stocks.And with a reported $1.9 trillion in cash on thesidelines, there‟s no reason to think that can‟tcontinue.As you‟ll see later in this report, the 3rd year of thepresidential election cycle is known to be the mostbullish of the 4 years, with historical gains in the DowIndustrials of more than 10% since 1950. But as webreak it down for you even further, the quarterly gainssuggest the first half offers the best 2 quarters in theentire four-year cycle.BigTrends 2011 Market Outlook |
  5. 5. 5The chart outlook shows that the Nasdaq‟s move to a multi-year high givesus more upside potential, as once the Q‟s cross 55, potential exists to 70on the long-term charts.The S&P has retaken the critical 1200 level with potential to 1400, anencouraging sign. The Dow is running into multi-year resistance around the11,700 mark, though if we can get through that area, the upside potentialappears to be to 12,500 at least and 13,000 next.Dow Jones Industrials (INDU) Weekly ChartIf there are concerns, I have two major ones. First, expectations for apositive year for stocks are relatively high, meaning the bar is raised andthe potential for negative surprises exists. One recent “bell-ringer” was thecover of USA Today, where all 5 market strategies projected gains of 10%or more for 2011. This smacks of too much optimism, as usually there willbe at least one dissenter in the mix. Ultimately, the stock market is all aboutexpectations, and they are too high currently.BigTrends 2011 Market Outlook |
  6. 6. 6One of the best times of the year to gauge these expectations is duringquarterly earnings season, as if you see strong reports (better thanexpectations) but stocks tend to fall, that would be a sign a correction iscoming. But for now, the reaction to recent quarterly earnings has beenrelatively positive, with the last quarter seeing some 78% of companiesmeet or beat expectations and stocks had a superlative quarterly advance.My other main concern is Federal Reserve policies. The second round of“quantitative easing” or QE2 that was announced officially on November 3rdas a $600 billion infusion into the Treasury Bond market over the next 9months did not have the desired effect, as bond prices tanked and ratesrose on fears that the Fed‟s printing presses were getting cranked up tospark future inflation.I‟ve agreed for quite a number of years that the real inflation rate is a lotmore than the government-reported CPI and PPI numbers, which has keptme bullish on gold and the metals, which should do well again in 2011 butalso now suffer from high expectations (like the stack of gold coins on the2001 Forecast issue of Fortune magazine recently – magazine covers tendto be good contrary indicators looking back 1 year later, so don‟t besurprised to see a selloff in metals be potentially violent when it finally kicksin, likely in the 2nd half of 2011).BigTrends 2011 Market Outlook |
  7. 7. 72011 Outlook forOption Volatilityand the MarketsBy Moby WallerFibonacci Retracement HasGuided the WayAs they say, “those who forget the past are doomed to repeat it”. With thisin mind, let‟s take a look at what we told our clients back inlate-2009 in our 2010 Market Outlook regarding the long-term Fibonacciretracement charts of the S&P 500 Index (SPX) (SPY) and the CBOEVolatility Index (VIX).The results are impressive, to say the least:We‟ve been on top of the big picture market retracement rally that‟s been inplace from 2007 stock market highs to the 2009 panic lows. On the SPXWeekly Chart below, a Fibonacci retracement was pasted on these keylevels, and it gave us clear targets for 2010 in terms of the longer-termranges. The volatile price action we‟ve seen over the past few years gainsclarity and has been very accurate when you examine it with thesemethods.The bottom line is the bottom line, and we anticipated a range on the SPXof 1,014 to 1,228 based on the Fibonacci retracement patterns – the actualrange of the SPX this year has been 1,010 to 1,250!BigTrends 2011 Market Outlook |
  8. 8. 8So what does this long-term Fibonacci chart tell us is in store for 2011?Well, you can see below that we‟ve had 2 weekly closes above the key61.8% retracement level of SPX 1,228 this month. This looks to be a clearconfirmed upside breakout of a range that had contained the market forabout 1.5 years. You can see that we had remained nicely within the38.2% to 618% retracement range (yellow trendlines) from mid-2009 to theend of 2010. Now the market is poised for a higher move.How high will we go? Well, the next logical target is the 76.4% retracementlevel of 1,361 on the SPX (aqua trendline). That‟s about 9.1% higher thanwhere we are currently. How long will it take us to reach that level? In myanalysis, 6 months at the most, see the next passage for more detail onthis. Overall, the anticipated SPX range for 2011 from this chart is 1,100 toBigTrends 2011 Market Outlook |
  9. 9. 91,400 – with a possible outlier upside run to test 1,500 and the highs of2007.Historical Calendar Election Trends Are on theMarket‟s SideCombined with the above Fibonacci breakout, we also have a stronghistorical calendar trend in place that makes the first 6 months of 2011poised for gains. This is the 3rd year of a mid-term election cycle, and thedata shows that the first 2 quarters of the 3rd year are historically verystrong for the stock market. See the table below:BigTrends 2011 Market Outlook |
  10. 10. 10This data from the past 60 years shows that the 4th quarter of a mid-termelection cycle what we are currently in Oct to Dec 2010 has a very bullishbias for stocks. However, what many investors and traders don‟t realize isthat this follows through for the next 2 quarters of the next year! Thishistorical data has been accurate thus far for 2010‟s 4th quarter, as we‟veseen a strong market – so that is even more reason to anticipate that it willhold true for the next six months. Beyond the first half of 2011, I‟m not aspositive on the markets in the second half of the year – I wouldn‟t besurprised to see us have some volatile moves in a sideways type tradingrange.Volatility Will Head Lower, But How Much?BigTrends 2011 Market Outlook |
  11. 11. 11Now on to the VIX, market volatility and option volatility. We‟ve beentracking and trading options for over 20 years and have been utilizing theCBOE Volatility Index (VIX) since its inception in the 1990s. This is a greatmeasure of the sentiment and fear level of option traders, as it basicallyshows exactly what volatility expectation they have for the market in thecurrent environment. We‟ve seen some unprecedented volatility in themarkets since 2007 in both directions. What did we say last year at thistime about the VIX outlook for 2010? Take a look at the chart below:And what did the VIX do in 2010? Take a look below. We anticipated alower range on the VIX of 15 to 30 in 2010 – and it basically moved withinthat range for the whole year, barring a couple of spikes higher (which isexpected from unusual news events, even in a bullish market). And the lowBigTrends 2011 Market Outlook |
  12. 12. 12on the year for the VIX has been 15.23 … basically exactly where we saidthe bottom would be.And now we move into 2011, what lies in store for this measure of indexoption volatility? In my view, and this combines nicely with the forecast of abullish 6 months ahead, we‟re likely to see a lower VIX range throughout2011. The important low should be 12.5, although we potentially could testthe 10 level. On the upside we largely will be contained by the 25 level,although there always is the possibility of short-term VIX spikes. Thedifference for 2011 is that I anticipate that VIX upward spikes will be milderand shorter-lasting than in previous years – basically more similar to thequieter volatility moves we saw in the pre-2007 years. Of course, there arealways can be the unexpected major event that shakes up the world‟sBigTrends 2011 Market Outlook |
  13. 13. 13markets and jacks up volatility much higher. But bottom line, the 12.5 to 25area will be the range for the VIX throughout 2011 in my analysis.Bottom Line And Additional Trading Insights For2011So we‟ve mentioned the bullish setup for stocks in the first half of 2011 –this indicates traders should buy dips in that time and also be prepared tojump on board and profit from upside accelerations that may not give muchof a pullback. The VIX will have a lower range, but won‟t drop below12.5/10 – and upward spikes are likely to be shorter-lived and less volatilethan in the past couple of years. Here‟s a couple of other forecasts andBigTrends 2011 Market Outlook |
  14. 14. 14insights I wanted to pass along to our clients:As far as Index ETFs and Index Options, the Russell 2000 (RUT) (IWM)and Nasdaq 100 (QQQQ) (IWM) outperformed the other broad marketindices this year. This is generally an underlying bullish sign of strength forthe markets when these types of indices outperform, as they are moregrowth-oriented and a bit smaller-cap. Should the market upside continueinto 2011 as we expect, then these Indices/ETFs should continue tooutperform.Regarding the Dow Jones Industrial Average (DJIA) (DIA) – be cautiousdepending on your risk level when trading the DIAmonds and its options,when compared to the S&P 500 Index (SPY) (SPX) for example. The DIAis comprised of much fewer stocks, and this lack of diversification cancause more volatile moves (in both directions). To some degree this canincrease risk due to the influence that 1 individual company can have onthe fortunes on the DJIA. Something to keep in mind for your trading in2011.On the international front – I like the India market(PIN) ETF to continue to be strong in 2011. Andfrom a contrarian perspective, the relativeunderperformance of the Brazil (EWZ) and China(FXI) ETFs leads me to anticipate that they willoutperform in 2011.Regarding Gold and Commodities – although we‟vebeen bullish on Gold and many Hard Commoditiesfor some time, the overwhelming bullish sentimentamong many novice investors and the generalpublic for Gold in particular is raising alarm bells tous as contrarians. Hence, I anticipate that the longbullish run that many commodities have been on willhave a pause in 2011.BigTrends 2011 Market Outlook |
  15. 15. 15And finally, keep an eye on the Financial sector (XLF), which seems togrowing more and more influential in both the U.S. economy and on thestock market. It‟s always been considered somewhat of a leading group,and this seems to be becoming more and more so in the currentenvironment. Strength and strong earnings in financial stocks will bodewell for the markets in 2011.Have a great and highly profitable New Year!2011 BigTrendsFed and EconomicOutlookBy Bob Lang2010 RewindThis was one of the most bizarre years that I could remember. Not only didthe equity markets suffer from the anguish of higher volatility and fear, butalso the bond market became the safe haven of investors. This while thetreasury issued bonds at a record pace and the Fed bought them up just asfast! The call this last act Quantitative Easing (QE), or keeping ratesartificially low in order to stimulate business and hiring. It is not new nor isit unhealthy but the magnitude of Fed easing is unprecedented. The firstround of QE seemed to be ineffective at best, so in late 2010 ChairmanBernanke announced another dose of QE, affectionately known as QE2.Could 3, 4 or 5 be far behind? This latest move by the Fed signaled theywill buy 600 billion worth of bonds in the short term and may increase thatamount. Fed policy remained unchanged the entire year, no increase inshort term rates. Make no mistake, the Fed is on a mission – and that is tostimulate the economy via easy money to get the jobs market in betterBigTrends 2011 Market Outlook |
  16. 16. 16shape and provide stable pricing. As of this writing the jury is still out onthis self-imposed mandate.Bond Roller Coaster RideIn 2009 bonds had a terrible run, yields on the 10 yr bond climbing from alow level of 2.2% to just over 3.8%. It‟s no wonder stocks enjoyed a niceride. Last year fell sharply until mid-year, bond bulls enjoying a nice rally.Late in year bonds started to take a hit as the reality of Fed easing finallykicked in, bondholders preferring not to have long duration in theirportfolios. Bonds may eke out a slight gain for the year but will trailequities, see the chart below. Perhaps the Fed is being taken seriously atleast from the standpoint of fixed income holders. Or, maybe the economyis actually growing with little inflation. To be sure, Chairman Bernankewould like to avoid the disaster of the Great Depression, when prices fell sofar that it caused a swirl of deflation that took over a decade to overcome.BigTrends 2011 Market Outlook |
  17. 17. 17The Fed‟s ChallengesThere is an old saying coined by famed investor Marty Zweig in the 1980‟s– Don‟t Fight the Fed. Those words ring as true today as back then. Fightthe Fed at your own peril. In fact, that was truly the case in 2010 andshould be thought of in 2011. When the Fed is in easing mode, it‟s time togo along for the ride. Nothing in their current playbook suggests anythinghas changed and probably won‟t until the job market normalizes. ChairmanBernanke is on record as saying the unemployment rate is far too high, andhe‟ll keep monetary policy accommodating until such levels are acceptable.Their dual mandate – price stability and low inflation – seem to be working.In 2011, the Fed may face some headwinds of inflation, which may requireeasing off the pedal, perhaps a rate hike or two later in the year, see thefollowing chart. Existing troubles overseas, especially in Europe also couldderail the economic recovery. I suspect the Fed‟s medicine to the economyBigTrends 2011 Market Outlook |
  18. 18. 18will work this time around, and later in the year we‟ll see robust growth withfirms hiring for the next economic and business cycle.WildcardsIt is no secret that gold/silver have broken out to new relative highs. Thereare many dynamics that have driven higher prices in the precious metalsbut the most important is the deteriorating fiat currency, otherwise knownas the US dollar. See the chart below. China, a big supporter and buyer ofUS debt and assets has made it public they are displeased with the USdollar policy. While the jawboning happens there is risk that our biggesttrade partners will stop buying our debt – they have been the biggestpurchasers for several years now. The Euro currency is another excuse todiversify out of dollars, which is a competitor to the greenback. Back to themetals, other countries (China, India, Russia) may look at the hardBigTrends 2011 Market Outlook |
  19. 19. 19currency equivalent as more stable than the buck. Geopolitical issues arealways a consideration, and that often brings some interest in the dollar.Economy Bottom LineThe jury is out on the economic recovery. Everyone seems to have anopinion, and most arguments are compelling. However, there is but ONEcaptain steering the ship, and the man at the controls is ChairmanBernanke. He holds all the game pieces and moves them aroundwhenever he wants them – Fight the Fed at your own risk. I suspect theeconomy can continue its healthy recovery in 2011 and beyond, putting thenightmare of recent years in the distance.2011 Stock PicksBigTrends 2011 Market Outlook |
  20. 20. 20I had an excellent trading year in 2010 for our BigTrends clients, as thiswas a great stock picker‟s year. For 2011, here are a couple of longer-termbullish plays for you:Oracle (ORCL)Citigroup (C)Potash (POT)2011 BigTrends TopStock Picks andMarket OverviewBy Scott DowningKeep an Eye on Valuationsand the Economy2010 has been a year of varying emotions as investors have been put tothe test from start to finish. There are still many concerns about the globaleconomy and where the next major issue will arise (Europe is still theleader), but the potential for economic prosperity in the future continues togrow. So what can we expect from the stock market in 2011?As we do at the end of every calendar year, we need to take a step back toreview the past before we can accurately predict the future. 2010 broughtupon the „flash crash‟ in May as investors saw the Dow fall 992 points intra-day, and this event scared retail investors so badly that some might notreturn to the market for another couple of years. Despite that panic selling,reasonably strong corporate earnings and continued improvement ineconomic data slowly helped the market to recover those losses plus somemore.BigTrends 2011 Market Outlook |
  21. 21. 21Even though we are not known for fundamental analysis at BigTrends,there is a significant fundamental number that needs to be in the spotlight:the S&P 500 P/E Ratio. The S&P 500 closed out 2009 with a P/E ratioaround 20, which was right around the median for a healthy markethistorically.We have now seen valuations rise back to near 23 which teeters on theedge of an extreme. For this reason, markets are likely to stay rathervolatile into 2011 as investors struggle to buy stocks given the highvaluations. I expect the market to close out 2011 flat to lower as findingtrends to trade becomes more challenging with most stocks having highmultiples again.The two key buzzwords that are likely to dominate the headlines in 2011are jobs and rates because the health of the economy is likely to begauged by those two metrics. Unemployment in the US remainshistorically high and will eventually have to come down if the economy isgoing to grow through the recession. The market is likely to over-reactinitially to jobs data both positive and negative. Consistent job growthcoupled with a slowly declining unemployment rate is what is needed toextend the recent rally.BigTrends 2011 Market Outlook |
  22. 22. 22Then there are rates, as every trader will be focused on the Fed and theiractions, specifically in the first half of 2011. Many believe that we arealready starting to see the signs of inflation take root in the United States,while others contend that the economy is so weak that interest rates mustremain at zero to promote a culture of financial growth. It seems plausiblethat the most likely scenario for interest rates would be a period ofstagflation for the US if problems in Europe and Asia continue to pressurethe global economy further.With all of this said, there are still going to be some great tradingopportunities for those who are knowledgeable in 2011. Next year could bea true stock-picker‟s dream as sector rotation will be critical. There will betrade-able trends that develop, but they will not be as broad based as wehave seen the last two years, so being able to find and trade specific out-performing stocks will be paramount to success in 2011. IT and HealthCare are poised for big gains next year, so two of my three favorite stocksfor 2010 come from those sectors. My third pick is a sturdy industrial thatshould benefit from any growth globally.3 Top Stock Picks for 2011:BigTrends 2011 Market Outlook |
  23. 23. 23Danaher Corp (DHR)BigTrends 2011 Market Outlook |
  24. 24. 24Fiserv (FISV)BigTrends 2011 Market Outlook |
  25. 25. 25Varian Medical Systems (VAR)BigTrends 2011 Market Outlook |
  26. 26. 262011 BigTrendsInternational & ETFOutlookBy Andrew HartSuccess Breeds Success –A Look Back At 2010 ETFPicksWith my focus on short-term trading it can be quite the daunting task topredict an entire year‟s worth of market action. Despite this being outsidemy forte I do thoroughly enjoy writing down ideas and researching longer-term charts to gain a better perspective. I enjoy it because it works. Infact, my previous outlooks have been surprisingly successful and haveoutperformed the market each year. We will look at these selections later.This will be my third year disclosing my own 12 month outlook so let‟s getstarted. In this year‟s statement I will focus on Exchange Traded Funds(ETFs) and international opportunities and believe it or not 2010 was anodd year for those well-known emerging markets.Against all odds US equities actually outperformed many emerging marketsin 2010. It is a surprise to many that Chinese and Brazilian equitiesactually underperformed the S&P -- a quick check on the associated ETFsshow that the S&P500 (SPY) has never outperformed Brazil (EWZ) andChina (FXI) in a bullish year. I looked back to the inception of EWZ andFXI - 2000 and 2004, respectively. That being said, should you invest inany emerging markets this year? For that matter should you risk yourcapital in the Euro zone? Whether the BRIC (Brazil Russia India China)superstars or the developed economies in Europe there are definedlocations that you should avoid and others that are showing a lot of promisefor 2011.BigTrends 2011 Market Outlook |
  27. 27. 27In the last two years I‟ve recommended 6 ETFs that I believed wouldoutperform the market in those respective years. This year I willrecommend my top three. In reviewing my 2009 selections, 3 out of 4outperformed the NASDAQ 100, which was the leading index in 2009 up43%. In 2010 we recommended two ETFs and both outperformed themarket. Here‟s a quick synopsis of my top ETFs for previous years:Andrew‟s 2009 International & Sector ETFRecommendationsName Ticker 1 Year PerformanceProgressive Energy PUW 50.89%PortfolioSteel Index SLX 79.54%Telecom & Wireless PTE 16.55%Latin American 40 ILF 69.92%Andrew‟s 2010 International & Sector ETFRecommendationsName Ticker 1 Year PerformanceSmall Cap Brazil BRF 18.19%BigTrends 2011 Market Outlook |
  28. 28. 28Middle East & Africa GAF 22.37%The Top 2011 International Opportunities:As you can see, we have been fortunate enough to significantly outperformthe market with our selections in recent years and plan to continue ourstreak with this year‟s international highlights. The selection process isbased on technical analysis and primarily trend based (not value orreversals) so it should not be surprise that China or Brazil will not be in therunning since they underperformed in 2010. Note that I still like BrazilSmall Caps (BRF) into 2016, which is discussed in detail here.In my preliminary research for choosing my favorite three for 2011 I cameacross a core theme that I had not recognized. The major emergingmarket „brands‟ like the BRICs were not performing well. This made theselection process more daunting - it was my general assertion that certainsectors within these emerging giants would be strong. This was simply nottrue.Based on my analysis I found seven international leaders for the next 12months and it was hard to initially concentrate that list down to three. Thefull list of the strongest areas is below:Name Ticker Price 52 Week 52 Week High LowThailand Index THD 63.05 68.70 37.65Chile Index ECH 79.85 80.38 27.27Singapore Index EWS 13.41 14.56 10.37BigTrends 2011 Market Outlook |
  29. 29. 29Indonesia Index IDX 83.80 92.75 21.53Turkey Index TUR 63.16 79.00 44.40Malaysia Index EWM 13.93 14.41 10.18Emerging Mkt EMB 106.36 114.14 97.08BondIn order to select the best-of-the-best international ETFs I began with thislist and started pairing it down based primarily on the criteria below. Youwill notice that I did not use many fundamental factors (if any) into myconsideration. For those of you that would like to see those statistics Ihave included an additional chart for your reference.Core Factors ● Monthly/Weekly Trend Strength ○ William‟s %R ○ Bollinger Bands ○ Acceleration Bands ● Average Daily Volume ● Expense Ratio ● Diversification of holdingsBigTrends 2011 Market Outlook |
  30. 30. 30Comparison SheetOverall, I am very encouraged by the final selections - after carefully siftingthrough hundreds of ETFs here are my top three international ETFs for2011.BigTrends Top 3 International ETFs for 2011:BigTrends 2011 Market Outlook |
  31. 31. 31iShares MSCI Chile (ECH)Most of us think of the miners‟ survival story that made headlines when wethink of Chile, but they can do a lot more than mine. EWM is incredibly welldiversified, which shows the breadth and depth of the Chilean economy.As one of the strongest leaders in recent months I believe this will continueto lead over the next several months. It won‟t be without volatility but thefundamental base of strength is evident for market outperformance.BigTrends 2011 Market Outlook |
  32. 32. 32iShares MSCI Turkey (TUR)Surprisingly, the Turkey ETF is heavily weighted in Financials - somethingyou would typically find in a more developed country. Many emergingmarkets are heavily dependent on materials and agriculture for growth sothis is one of the bright spots for TUR. Of course, the second largestholding is materials so the expected growth in that sector will also benefitthis selection. It‟s an ironic twist on fate, but to the bureaucratic messassociated with Turkey‟s future inclusion to the European Union may wellmake it a stronger country for investment purposes. Without being directlyhampered by Ireland, Spain, Portugal and others Turkey has set itselfapart.BigTrends 2011 Market Outlook |
  33. 33. 33iShares MSCI Malaysia (EWM)The Malaysian ETF is also well diversified, although the largest sector isfinancials. I expect many countries in the Pacific Rim to outperform in2011. Singapore, Vietnam, Indonesia to name a few. In the chart EWMmay look overextended but taking a step back to the 10-year horizonMalaysia is actually underperforming the S&P500 so if you‟re looking forshorter-term strength and longer-term value EWM is a balanced selection.BigTrends Wrap UpThis report should be used as a valuable tradingtool throughout 2011 but we also believe that activemanagement of your trading is necessary in today‟smarket so we are offering you 30 days of ANYBigTrends recommendation service for only $30!Call 1-800-244-8736 to speak with your BigTrendsTrading Consultant for more information.Trade Well,BigTrends 2011 Market Outlook |