Chips Ahoy

• July 8, 2002
• Peter Navarro

Market Trend:
Onward and Upward?

Market Outlook: Short-term rally

Macroplay of the Week: Chip Basket

Position: Long into a broad rally

The Broad Market Outlook

“The market could very well see a nice little rally
this week on optimism that a bottom has been reached.”

That was our call for
last week
and last Friday’s
action certainly would seem to qualify as a “nice little rally.” Two big
questions remain, however: To bottom or not to bottom? To Bull or not to Bull.
And make no mistake about it: These are two very separate questions with
potentially divergent answers.

The “bottom issue” is a short-run one.
We think
we’ve likely found one for now — our warnings of Houdini bottoms
notwithstanding. The reasoning lies NOT on the basis of last week’s much-vaunted Friday rally. Look carefully at Friday’s action and know one thing:
The
VOLUME was significantly down even after accounting for the short day. Most
stocks moved smartly upward on only a half or a third of their average daily
volume. Instead, what was impressive was how the market immediately bounced
back after slicing through its September lows. This leads us to the assessment
that the probabilities lie more with a short-term upward trend, so that trading
to the long side will be a lot less risky than going short.

As for whether we can move from declaring a
short-term bottom to trumpeting a new Bull market, that, at this point, would be
highly premature. What we seem to have is Mr. Market settling in to the idea
that the economic recovery is here BUT that it will be modest — on the order of
2.5% to 3% GDP growth over the next several years rather than they heyday 4%-5%
of the 1990s. This is now soothing Mr. Market for two reasons.

First, such a moderate level of growth keeps the
Fed and its interest rate hikes at bay — always good news. Second, and more
important for the Nasdaq, with even such a moderate level of growth,
corporations will inevitably begin to ramp back up in capital spending and the
primary beneficiary of that will be tech — now starved by risk-averse CEOs.
And thus the seeds of optimism — and a short-term rally fueled also by short
covering — begin to sprout.

The Macro Data Market Movers

The Macroeconomic Calendar

* Potential major market movers in red

The calendar is light — with key
reports in red back-loaded at the end of the week. Thus, the data should keep
out of the way of a possible rally spurred upward by a combination of short-term
optimism based on last Friday’s action AND short covering. The short
covering will be important as it takes on a frenzied life of its own and can
create the appearance of a more bullish rally than may actual exist.

The first big report comes on
Thursday with the PPI. The market risk here is weighted to the downside — with
any jump in the core PPI above the consensus likely to dampen enthusiasm.

On Friday, we get a double dose of
consumer behavior. Mr. Market is looking for a nice jump in retail sales and
anything short of the consensus will likewise dampen enthusiasm. But the risk
here is symmetrical: An even bigger jump in sales to the upside could be a
legitimate market spark.

Macroplay of the Week: Chips Ahoy

On the assumption that economic
recovery is looking more likely, we have to play the chip sector as the lead dog
in the sled pulling us out of the Late Bear towards the Early Bull phase of the
stock market cycle. Of course, we’ve tried to make this turn once before —
only to have our hopes dashed by the Four Bears of the Apocalypse — Terrorism,
the Evil Less Twins (the Jobless and Profitless Recovery), the Weak Dollar, and
the Crisis in Corporate Confidence. Still and all, it’s time to test the Early
Bull waters once again.

To test the waters, consider a basket
of semiconductor manufacturing and semiconductor equipment manufacturing stocks.
In the equipment manufacturing basket, Asyst
Technologies
(
ASYT |
Quote |
Chart |
News |
PowerRating), Entegris
(
ENTG |
Quote |
Chart |
News |
PowerRating) and Speedfam-IPEC
(
SFAM |
Quote |
Chart |
News |
PowerRating)
look interesting. ASYT is the lowest-risk play, with solid technicals and
fundamentals, SFAM is the highest risk if for no other reason that it only
trades around 300,000 shares a day, while Entegris is interesting because it
just broke a double top. Note in the chart how all three have strongly
outperformed SMH, the Semiconductor HOLDR, over the last few months.

In the manufacturing basket, there’s
CREE, with the strongest technical
characteristics. Both ESS Technologies
(
ESST |
Quote |
Chart |
News |
PowerRating)
and Silicon Laboratories
(
SLAB |
Quote |
Chart |
News |
PowerRating) are showing nicely improving conditions but are more risky. Note
again how all three stocks have out-performed SMH — but
not to the same degree as our equipment stocks.

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

https://www.peternavarro.com. We’d love to hear from you.