A Time For Basing
Market
Trend: Cautiously Up — Bull
Market establishing a base
Best
Sectors: Semiconductor Manufacturing, Defense, Biotech
Macroplays
of the Week:
(
FMKT |
Quote |
Chart |
News |
PowerRating),
(
HRLY |
Quote |
Chart |
News |
PowerRating)
Best
Longs:
(
ENTG |
Quote |
Chart |
News |
PowerRating),
(
GILD |
Quote |
Chart |
News |
PowerRating),
(
GRMN |
Quote |
Chart |
News |
PowerRating),
(
MKSI |
Quote |
Chart |
News |
PowerRating),
(
ROXI |
Quote |
Chart |
News |
PowerRating)
On
the Radar Screen:
(
JDEC |
Quote |
Chart |
News |
PowerRating)–
(
HYSL |
Quote |
Chart |
News |
PowerRating),
(
ISLE |
Quote |
Chart |
News |
PowerRating)–
(
MGAM |
Quote |
Chart |
News |
PowerRating),
(
OCLR |
Quote |
Chart |
News |
PowerRating)
Sell
Signals:
(
ALKS |
Quote |
Chart |
News |
PowerRating)
The Broad Market Outlook
We
have likely made the transition from Late Bear to Early Bull. However, a high level of uncertainty means that the market will have to
undergo a fairly lengthy process of establishing a solid base before enjoying
any sustained upward movement. This,
then, will look much like the “crosscurrents†market we have been
experiencing for many months in the Late Bear stage. The key difference, however, is that the downside risk is considerably
less, so this provides an opportunity to start building positions.
Remember
the Golden Rule of Macrowave Investing: Buy Strong Stocks in Strong Sectors in
an Upward Trending Market. That
said, there still looms a number of key dangers that could knock the market
back into Bear Land.
The Key Dangers
In the
near term, the biggest danger facing the markets is how the collective Wall
Street consciousness is going to accept the now almost inevitable rate increases
by the Federal Reserve. There are
two schools of thought:
The
first is old-style thinking. Any
increase in interest rates must necessarily halt any bull market recovery in its
tracks. As this perspective goes,
higher interest rates will reduce business investment and the purchase of
interest-sensitive durables like autos and housing by consumers. Higher interest rates will also lead to a rotation of funds into the bond
market. The result may well be a
double dip recession and a new bear market.The
second perspective takes into account the unique situation that Sept. 11
has put us in. Because of the
terrorist attack, Alan Greenspan and the Federal Reserve have had to sharply
lower interest rates well below what might otherwise have been considered
“normal†in the interest rate cycle. Accordingly,
in this view, it will do no harm — and may actually be good for the economy
— if the Fed raises rates slightly and restore rates to a normal range.
At the
trader’s level, it doesn’t really matter which perspective is “right.â€Â It only matters which one Wall Street votes for with its money. That “election†is an ongoing process, and every good technical
analyst will be able to discern the answer soon enough.
As for
other dangers, the fear of an invasion of Iraq seems to be receding in the wake
of widespread criticism of the Bush Administration in both the Arab world and
Europe. This is evident in the air
leaking from the oil and gas services price bubble as oil jitters ease. Still, the drumbeat for an invasion continues to be pounded out in the
editorial pages of the Wall Street Journal, Investor’s Business
Daily, and
other conservative publications.Â
Note
that an invasion may well be the right thing to do given Saddam’s grand
plan to use weapons of mass destruction on Israel and the U.S. That’s certainly not my call to make in this column — only to point
out that war in the Middle East would indeed be a huge macrowave that would wash
over the markets in a largely negative way.
A
third key danger is the global economy itself. The U.S. economy and stock market cannot prosper unless Europe and Asia
come along for the ride. The jury
is still out on this — particularly on the weakest link in Asia, namely,
Japan.
Fourth,
we live in a world now where any new terrorist act will throw the markets into
turmoil. We must be prepared for
another such act. The only surprise
will be if it never happens.
Finally,
this is earnings season. The danger
here is that all the bean counters across Corporate America may have gone back
to the drawing boards in the wake of the Enron scandal and re-jiggered their
numbers under a set of more conservative assumptions. To the extent that this results in companies not meeting the consensus
earnings estimates (based on the old accounting principles), this could hit
specific stocks and sectors hard.Â
Sector Watch
Semiconductor
manufacturing remains the bellwether for tech. It’s hanging in there nicely. Defense
remains strong, particularly in the higher tech sub-sectors. (Lockheed,
Northrop,
et. al. having already priced in much of the expected gain.)Â Biotech shows growing strength.
Meanwhile,
the housing sector made a remarkable rebound at the end of last week, but this
is likely a dead cat bounce. This
is a sector that is richly valued now and looking down the muzzle of higher
mortgage rates as the economy recovers.
The Macro Data — Last Week
It was
a quiet week on the macro data front. The
key news was the Fed’s announcement that it would move from a bias of easing
interest rates to one of neutrality. This
marks a very significant turning point in the interest rate cycle and further
confirmation of the movement from Late Bear to Early Bull.
The Macro Data — The Coming Week
It
should be an equally quiet week on the data front this week — particularly with
the markets closed on Good Friday and a lot of money going on early holiday.Both
the Conference Board and the University of Michigan will come out with their
latest data for consumer confidence — one on Tuesday, the other on Thursday. The
big difference is that now the market will be skittish about this rise because
of concerns about rising interest rates. Also on the demand side,
existing and new home sales should shed additional light on the consumer’s
psyche.
The
GDP numbers on Thursday should confirm that things were not as bad as we thought,
while the Chicago Purchasing Manager’s index on that same day should signal a
supply side that continues to strengthen. And
don’t get sucked into the durable goods numbers. They are notoriously volatile and unreliable — but the press still
loves them.
Sell Signals
Alkermes
(
ALKS |
Quote |
Chart |
News |
PowerRating) took a nasty spill after it announced a key acquisition. The analysts loved the move, but the markets didn’t. Go figure.
Macroplay of the Week: Freemarkets (FMKT) and
Herley Industries (HRLY)
Freemarkets
(
FMKT |
Quote |
Chart |
News |
PowerRating) was featured in an
earlier column. It’s got a strong
niche in online auctions for supply chain management. It faded, but has now made a nice comeback and may be positioned for a
move.
Herley Industries
(
HRLY |
Quote |
Chart |
News |
PowerRating) sits in one
of the high-tech sub-sectors of the defense industry. It uses microwave technology to provide components and systems for the
defense, satellite launch, and the commercial market. It also makes flight instrumentation products. Adopting a “sticking to its knitting philosophy,†it also just
jettisoned its wireless biz so it can focus on defense applications.
As the
chart below will show, HRLY has enjoyed a decent run since Sept. 11 along
with other defense stocks. But it
may have more upside than behemoths like Lockheed
(
LMT |
Quote |
Chart |
News |
PowerRating) and Northrop
(
NOC |
Quote |
Chart |
News |
PowerRating). The stock is a point or so off its 52-week high and looking for a
breakout move.
IBD
rates it only so-so on the fundamentals, but it is in a strong sector with solid
technicals. The 10-, 21-, 50-, and
200-day moving averages are all stacked up nicely one above the other, and the
stock is under accumulation. Recommended
sell stop is $17.44.
If you
have a favorite macroplay or stock you would like us to consider in this column,
send an e-mail to peter@peternavarro.com
or go directly to my web site https://www.peternavarro.com. We’d love to hear from you.