Don’t Chase This Market! Here’s Why…

• March 7, 2005
• Peter Navarro

 

 

Navarro’s Broad Market Outlook: One-Two
Bullish Punch

First
came the upside GDP surprise several weeks ago.  Then, on Thursday and Friday of
last week, a one-two bullish punch with BOTH productivity and jobs turning in
impressive upside surprises.  That job creation would go up so robustly WITH
productivity is hardly the norm as higher productivity usually means less need
for new hires.   But because it did, both the bond market AND stock market got a
boost — again items that do not usually positively correlate.

But higher productivity and
lower unit costs curbed inflation concerns for the govvies even as more jobs
suggested more growth and earnings for the equity corps.  Of course, the big
question is whether the market can parlay that into the next leg of last year’s
Nov.-Dec. rally.  If you think I have an answer, you’re wrong.  I’d just prefer
to wait for some kind of confirming trend — and stick with my energy and story
stocks for now.

Hedging Your Bets With Matt Davio

We
finally got the “breakout” everyone was looking for in the markets.  SPX closed
@ 1224.5, which is the first close over 1220 of the year. The INDU and the TRAN
both confirmed higher highs for the year and all the weak shorts covered on the
“great jobs” report yesterday and the jailbreak of Martha took the markets to
new heights. But, we did get the technical breakout, whatever that means, and
look primed to go higher in the broader indices. 

I’ve
kept the champagne on ice, however, as I continue to believe that once this
technical hump is broken, there is not a lot of reward left on the upside, as
1260 on the SPX remains my upside target. 

One
reason is that oil continues higher with many pushes over 55 this week. It is
unbelievable to me how the price of oil does not seem to give the pundits any
pause at this point.  I project a mid 60’s per barrel on the black gold within
the next 3 months.  I also see possibly 3 figures print within a year — yep,
$100+ for a barrel.  That has to put a crimp on the economy. 

The
key thing to this market is the continuing rush of liquidity Greenspan has
provided. He has another 9 months left at the post and I think the “conundrum”
for him is to get out of his illustrious position as the Fed Chairman without
rocking the boat and raising interest rates too quickly.  So if you follow that
playbook, rates will be gradual in their ascent and the market will rise
accordingly as rates float on the low end. At some point, however the rates have
to fill the divergence gap between the reality that exists with true
inflationary costs existing and the falsely pegged low interest rates.  Adjust
your risk accordingly.

Interesting to me how the Nasdaq continues to languish as oil and energy is
pervasively leading this market higher.  2 and 3 symbol names continue to lead
the new highs list although it is declining new highs.  Just another reason why
this market to me shows more overbought tendencies versus true breakout action.
Time will tell as risk still seems heavy on the downside and reward limited on
the come.

TRADE IDEA. The Ten-year took a step
back from its push above 4.4% last week. Ultimately it goes higher in rates.  I
think if the TLT (20year T bills) continue to rise in price, say 92 as an entry,
you can sell up to 94 and I think that will be a great short moving into the end
of the year. It closed @ 90.51 after its recent fall from the low 94’s. Look to
get short the TLT as the interest rates will be going higher. 

^next^

Aloyan’s Technical Take: Awaken the Bear!

The
“Dow” and S&P 500 broke out of their “cup and handle” consolidation patterns on
Friday, setting multi-year highs, which by my analysis, suggests a possible 4%
upside target from current levels if this breakout holds.  Small and Mid-cap
stocks broke out to historic highs, and the CNBC cheerleaders went nuts!  The
commentators were so bullish, horns were coming out of their heads. 
Meanwhile, the Nasdaq was the weak link; barely positive on the week. 

Shades
of 2000, as the S&P 500 and “Dow,” (accompanied by small and mid-cap stocks)
became the relative strength leaders, Energy stocks were soaring ( with Enron
touted as the stock to own) while the “tech” laden Nasdaq was the weakest link. 
The “Fed” was raising rates, while warning of “irrational exuberance,” and cash
was said to be trash.  Déjà vu? 

  
Here’s the numbers:  The Dow closed up 99 points (.91%) at 10941, the S&P 500
was up 11 points (.89%) at 1222, and the Nasdaq was up 5 points (.25%) at 2071. 
Resistance is around: 11000 area, 11096, 11365 for the “Dow,” 1250 area,
and 1265 for the S&P 500, and 2075, 2100 and 2150 areas for the Nasdaq
Composite.  Support is at: 10867, 10600 area, 10471, and 10387 for the
“Dow,” 1218, 1196, 1181, and 1166 for the S&P 500, and 2048, 2020, and 2000
level for the Nasdaq Composite.  

My
sector breadth indicator was very positive, with 82% of the sectors in the
green, and 45% making historic highs.  Some of the standouts continue to be the
commodity based sectors (Energy, Metals & Mining, and Chemicals), while the
“tech” sectors continues to lag.  The dollar had a bearish “outside
reversal week” down, while Bonds rallied on Friday, but were down on the week
with the 10Yr Note Yield closing up at 4.31%. 

My
trend indicators are up for the S&P and “Dow”, but flat on the Nasdaq.  However,
my breadth, momentum, and volume indicators have formed “negative divergences”
from the upward price action in the indices–bearish.  My sentiment and
economic/fundamental indicators continue to support a defensive position. 

Bottom Line:  Do not chase this
market!  We are in the late stages of the 4-year cycle, and a historically
negative post-election year.  My technical and fundamental indicators are
signaling a major top is imminent.  End-user demand is stalling, so don’t be
fooled by any positive spin on the upcoming “tech” company mid-quarter updates. 
This is not the time to worry about missing out on something, but rather,
something not missing you! 

Peter’s Portfolio: Hold Fast

At
this point, I’m holding pat with very, very green WMB calls and nice EDGR move
and believe both will continue to move higher.  Still underwater with NWAC and
frankly see little hope for it.

Masochist that I am, I continue
to hold my Lennar housing short and down five points or so with a very small
position.  Two high hope, long term buy and holds are likewise underwater — ZILA
and ALTI — but like both of their prospects.

            Finally, a couple
of energy plays — TPE and SNG — sit well in the portfolio while I continue to
hold SVA for the long term (and hope it never goes anywhere like bird flu).

David’s Pick: Short the Nasdaq (QQQQ’s), and
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 investment management services, contact David at

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

infinium@peternavarro.com.

 

DISCLAIMER:
This newsletter is written for educational purposes
only.  By no means do any of its contents recommend, advocate or urge the
buying, selling, or holding of any financial instrument whatsoever.  Trading and
investing involves high levels of risk.  The authors express personal opinions
and will not assume any responsibility whatsoever for the actions of the
reader.  The authors may or may not have positions in the financial instruments
discussed in this newsletter.  Future results can be dramatically different from
the opinions expressed herein.  Past performance does not guarantee future
performance.