Ignore The Market Trend And Find Story Stocks

• February 28, 2005
• Peter Navarro

Navarro’s Broad Market Outlook: Déjà vu All
Over Again

Does
anybody but me remember that the prelude to the March 2000 market collapse was a
big run-up in oil prices, rampaging oil price stocks, and rate hike after rate
hike by the Federal Reserve?    This is the typical pattern — energy stocks hit
their peak in the late stages of an expansion.  Then, a combination of high
energy costs and Fed rate hikes bring the whole house of cards tumbling down. 
Still, there is no sign of the tumbling yet if one is to believe the latest GDP
numbers and ECRI weekly leading index.  Yet, I can’t excited enough to do
anything but find “story stocks” and ignore the broad market trend.

Let’s
see if this week’s jobs report confirms the strength of the GDP numbers and take
this market one week at a time….

Hedging Your Bets With Matt Davio: Texas
Tea! 

 Another week floated by and if you had went on a trip to Venezuela last weekend
and returned this weekend, it would have felt like the major US indices hadn’t
moved much.

In
reality, the markets took a major clubbing on Tuesday and then came roaring back
by Friday and close near the breakout levels of 1220 on the SPX and 10855 on the
INDU. 

This
“roar” is pretty simple to understand.  With oil and energy stocks make up 9% of
the SPX currently, and they are on a rampage. With Exxon overtaking GE as the
largest market cap company in the US and all other oils running like momentum
darlings, it was oil — in the strangest of ways — that saved the markets this
week.

This
is very odd indeed.  If you throw out deflation this week, inflation looks to be
in the lead.  So with a lower dollar, it takes more of them to buy up other
assets and oil prices rising makes the indexes go up as oil and housing take the
continuous lead. 

Should
you throw out all of what you have learned about higher oil being bad for the
markets?  This market certainly shrugged it off this week and again showed no
signs of concern over inflation in oil, and, for that matter, in most
commodities.  Still, I lean on the worry button in the long run.  This is
because at some point, higher oil prices MUST be felt in the consumers’ pocket
books and that does not portend for corporate profits.   

My Trading Idea for the week:  Have you
noticed how tech outside of the chips continued to get crushed while we were
reaching for the new highs in the indices?  I am willing to bet on a small trade
on the tech side of an old high beta favorite of ours.

RIMM has been crushed the last few
weeks and looks ripe for a bounce.  I’ll buy in the 65 area down to 61, and risk
the 60 level as a fail safe bail point.  With the SOX rallying and oil seemingly
“expensive,” money may rotate into some of the old high beta names and see a
follow thru on the rally next week if we get it. If we get a continuation, the
high beta names should rally soon.  If not, RIMM is just a trade with a short
loss leash. 

More
broadly, remember to carefully define your timeframe and risk levels in your
investing/trading and follow the plan.

One final note: I finished an
outstanding read this past week, that I would highly recommend, Confessions of
an Economic Hitman, by John Perkins.  Pick it up at Amazon or your library. 
Fantastic reading!

^next^

Aloyan’s Technical Take: A Conundrum Redux!

The
short trading week started off on a bad note, but all three major indices
bounced off the support levels that I gave last week, and finished the week in
the green.  The Dow closed up 56 points (.52%) at 10842, the S&P 500 was up 10
points (.81%) at 1211, and the Nasdaq was up 7 points (.33%) at 2065. 
Resistance is around: 10867 for the “Dow,” 1218 for the S&P 500, and 2075,
2100 and 2150 areas for the Nasdaq Composite.  Support is around: 10600
area, 10471, and 10387 for the “Dow,” 1196, 1181, and 1166 for the S&P 500, and
2048, 2020, and 2000 level for the Nasdaq Composite.  

My
sector breadth indicator was positive, with 64% of the sectors in the green. 
Energy, Metals & Mining, Chemicals, and Materials & Construction sectors
continue remain strong.  In the “tech” sector, Semiconductors are holding up the
best, while the Internet sector continues to be the weak link.  The dollar
continued its decline last week along with Bonds, with the 10Yr Note Yield
closing at 4.27% for the week. 

My
trend, breadth, momentum, and volume indicators started to turn up, but no
buy signal yet–the best readings remain in the S&P and “Dow,” with the
overall Nasdaq still looking the weakest.  My sentiment and economic/fundamental
indicators continue to support a defensive position. 

Bottom Line:  The main sectors driving
the strength in the markets have been the Commodity based stocks (Energy, Basic
Materials etc.), and these are well overdue for a correction.  Geo-political
risk remains high, along with equity, real estate, and long bond valuations. 
The main contributor to GDP` (the consumer) is stretched to the limit with their
borrow-and-spend (not save) methodology in the face of rising short-term
interest rates, slow wage growth, and inflation in their basic necessities
(insurance, healthcare, food, fuel, and housing).  Despite just these few
prevalent concerns, positive equity fund money flows continue, and “care-less”
trend traders will bid the market higher given half a chance.  Is there a real
conundrum here?  Bet on it!

Peter’s Portfolio: EDGR Redux, WMB, TPE and
SNG

Continuing to hold Sinotech
SVA as bird flu concerns continue to heat up in Asia, particularly Vietnam. 
This stuff is absolutely scary — 70% mortality rate…..

Last week’s starlet EDGR went
on a nice little mini-tear.  I layered furthered into the position.  This looks
like a nice long term buy and hold.

My WMB calls rallied in front
of — and after — the earnings call.  Now that it’s cleared its 52-week
high, will it go beyond $20 to $25ish?  Will hold further until any signs of
weakness.  (Barron’s did a feature on it and suggested taking some profits. 
That seems dumb to me on a stock that just finally got above its major
resistance level.  We’ll see who is right.)

Too late for last week’s
newsletter, I opened two penny-pick positions in Teton Petroleum (TPE) and
Canadian Superior Energy (SNG).  TPE took off like a gusher…. Showing overbought
conditions now but the price and volume actions is good while SNG technicals
look very sound.

Saw my Lennar short go from
in the red briefly down in the green.  Had a mind to quit it, waited, and then
watched it tear off six points on me.  He who hesitates is lost.  Housing stocks
make cats look like 9 lives is a small number…..

David’s Pick: Favor Cash.

           

Peter Navarro is a business professor at the
University of California-Irvine (www.peternavarro.com). 
David W. Aloyan is a managing member of Platinum Capital Management.   Matt
Davio is a managing partner at the hedge fund, Infinium Partners.

For general money management services, contact David
at

platinum@peternavarro.com.   If you are interested in hedge fund services,
contact Matt at

infinium@peternavarro.com.

For investment
management, analysis & insight, seminars, books, plus much more…visit our new
website at:

https://www.platinumcapitalmanagement.com

 

 

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