Crosscurrents
Market
Trend: Cautiously Up — Early Bull
Market continues to establish a base
Best
Sectors: Semiconductor Manufacturing, Defense, Advertising, Gaming and Leisure
Macroplays
of the Week:
(
HDWR |
Quote |
Chart |
News |
PowerRating),
(
VRST |
Quote |
Chart |
News |
PowerRating)
Best
Longs:
(
ATML |
Quote |
Chart |
News |
PowerRating),
(
ATVI |
Quote |
Chart |
News |
PowerRating),
(
ENTG |
Quote |
Chart |
News |
PowerRating),
(
GRMN |
Quote |
Chart |
News |
PowerRating),
(
ROXI |
Quote |
Chart |
News |
PowerRating)I
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),
(
MTN |
Quote |
Chart |
News |
PowerRating),
(
ADVN |
Quote |
Chart |
News |
PowerRating)
The Broad Market Outlook
Last
week’s action — or inaction, as the case may be — was damn near perfect. A nice short week of more basing with low volume and volatility. Let’s continue to settle in, shall we, to the Early Bull phase of the
market — cognizant that there will be no rocket ship rushes skyward like the
ones that some of you veteran traders may recall with nostalgia from the
pre-March 2000 Nasdaq.
As I
said last
week, but it worth repeating, this current “crosscurrents†market
will look a lot like the one we experienced for many months when the market was
in its Late Bear stage. The key
difference, however, is that the downside risk is considerably less, so this
provides an opportunity to start building positions. It also allows you to set looser stops so you don’t get stopped out of
an otherwise nice play.
The Key Dangers
The
meltdown in Israel coupled with the ongoing speculation of whether the Bush
Administration orders an invasion of Iraq have slapped a “war premium†on to
the cost of a barrel of oil. Higher
oil prices act as a “tax†on both consumers and business and are
contractionary/recessionary. They
also push up the trade deficit and put downward pressure on the dollar. At this point, there is also no upside for the economy with a war in the
Middle East because the stock market has already priced in huge defense spending
increases that have been put in motion by 9/11.
On the
subject of the dollar, it may be time to start thinking about how a weakening
dollar can have a multitude of sector and market trend effects. For starters, as the dollar weakens, foreign investors will begin to pull
their capital out of both the stock and bond markets, driving both down. As the markets fall, more foreign investors pull more money out, along
with domestic investors, so that one clear danger of a weakening dollar is a
downward market spiral.
On the
other hand, U.S. exporters will benefit from the weaker dollar so that key
export sectors like aerospace, agriculture, autos, industrial equipment, telecom and pharmaceuticals will benefit. Plus, some of the large
multinationals like Procter & Gamble
(
PG |
Quote |
Chart |
News |
PowerRating), IBM
(
IBM |
Quote |
Chart |
News |
PowerRating), and
McDonald’s
(
MCD |
Quote |
Chart |
News |
PowerRating) will benefit from favorable currency risk. BUT a weakening dollar will be inflationary and may force a move by the
Fed to raise interest rates.
Okay,
so it’s a little complicated, but the thing to glean here is that it may be
time to start looking at some offshore investments like exchange-traded funds
that do Asia or Europe baskets. Just
be ready if the dollar does a swoon.
The
third danger continues to be the Fed and how the markets will react to any move
to raise rates. The Bears say that
any increase in interest rates must necessarily halt any bull market recovery in
its tracks. The alternative, and I
think correct, view is that interest rates are a bit too low now and at some
point need to be restored to a normal range. Still, I could be very right as an economist and Wall Street may still
react very negatively to such a Fed move.
Finally,
we reiterate that this is earnings season. But my advice is to watch these earnings announcements from a sector
rather than a company perspective to see which sectors are likely to lead the
recovery. For example, software is
probably going to move faster than hardware.Â
Sector Watch
The
three best sectors are chips, chips and chips. But forget about the big boys like
Intel
(
INTC |
Quote |
Chart |
News |
PowerRating) and Texas
Instruments
(
TXN |
Quote |
Chart |
News |
PowerRating). The really big moves will come from the sub-sectors that serve the sector
and from smaller caps that have honed a technological edge. MKS Instruments
(
MKSI |
Quote |
Chart |
News |
PowerRating) is such a company and was featured in an earlier
column. Verisity
(
VRST |
Quote |
Chart |
News |
PowerRating) is another featured below.
Aerospace
and defense will show strength for an extended period. Again, fish around the edges rather than with the
Northrops
(
NOC |
Quote |
Chart |
News |
PowerRating) and Lockheeds
(
LMT |
Quote |
Chart |
News |
PowerRating) of this world. Herley
(
HRLY |
Quote |
Chart |
News |
PowerRating) was one
example offered last
week. Â
Alternative
power is also always a nice shorter-term play when the oil markets are roiled
— with Headwaters
(
HDWR |
Quote |
Chart |
News |
PowerRating) featured below. And
as an old-economy cyclical play, look at companies that play in the advertising
space. As the economy recovers, so,
too, will advertising as companies will up their advertising budgets to both
seize and protect market share.
The Macro Data — The Coming Week
The
big news this week will be the Purchasing Manager’s Index, renamed now as the
Institute for Supply Management, or ISM Index. It will come out on Monday, and it will set the tone for the market week
until the Jobs Report flies on Friday.
Indeed,
the ISM Index is THE most important indicator to gauge the journey out of a
recession. The consensus estimate
looks for a very modest rise from 54.7 to 54.8. Note, however, that I see a significant likelihood of a sharper rise. This, paradoxically, might not be very good news for the markets since it
would put further pressure on the Fed to raise interest rates. That’s why I’m hoping for the number to meet consensus, but have
hedged for a surprise.
As for
the Jobs Report, at this stage in the game it will have less impact than its
800-lb. gorilla status usually warrants. Again,
however, any surprise showing unemployment falling rapidly would likewise light
a candle to the Fed interest rate rocket.
Sell Signals
Freemarkets
(
FMKT |
Quote |
Chart |
News |
PowerRating) got clobbered for reasons that are not immediately obvious — which is
always the worst danger sign of all. This
latest setback will make it difficult for the company to climb the wall of
worry.
Macroplay of the Week: Verisity (VRST) and
Headwaters (HDWR)
Verisity
(
VRST |
Quote |
Chart |
News |
PowerRating) is an
example of a small cap feeding around the edges of the semiconductor
manufacturing sector. It’s a
software company that makes tools to check the design of computer chips in an
automated fashion — and note that over half of the time that goes into chip
design now is dedicated to such verification. Â
VRST
is making a nice move having just had a P&F Double Top Breakout. But note first that its earnings will fly on April 22 — so don’t get
caught in the earnings trap if you go long. Another caution is that while its executive offices are located in
California, its research and development operation is in Israel. The technicals look good, EXCEPT that the stock is showing signs of
distribution rather than accumulation. If
you go long, do so with extreme caution.
Â
Headwaters
(
HDWR |
Quote |
Chart |
News |
PowerRating) is a much less volatile play that capitalizes on oil price spikes. Technicals
look very good. IBD gives it a B-
on fundamentals, but otherwise rates it best in its group.
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.  Â
Â