Make Hay While the Sun Shines

  • March 18, 2002
  • Peter Navarro

Market
Trend: Cautiously Up — Looking
for Early Bull Confirmation


Best
Sectors: Semiconductor Manufacturing, Biotech

Macroplay
of the Week: Infineon Technologies
(
IFX |
Quote |
Chart |
News |
PowerRating)
 

Best
Longs:
(
ABF |
Quote |
Chart |
News |
PowerRating),
(
CEFT |
Quote |
Chart |
News |
PowerRating),
(
ENTG |
Quote |
Chart |
News |
PowerRating),
(
MKSI |
Quote |
Chart |
News |
PowerRating),
(
ROXI |
Quote |
Chart |
News |
PowerRating)
 

Best
Shorts: Watch the housing sector for increasing weakness
 

On the
Radar Screen: Biotech basket trade —
(
ALKS |
Quote |
Chart |
News |
PowerRating),
(
AMGN |
Quote |
Chart |
News |
PowerRating),
(
DNA |
Quote |
Chart |
News |
PowerRating),
(
GILD |
Quote |
Chart |
News |
PowerRating),
(
IDPH |
Quote |
Chart |
News |
PowerRating),
(
MLNM |
Quote |
Chart |
News |
PowerRating)
 

Barron’s
Watch: Earthlink
 

Sell
Signals:
(
FLIR |
Quote |
Chart |
News |
PowerRating),
(
PEET |
Quote |
Chart |
News |
PowerRating)
 

The Broad Market Outlook


The market trend is cautiously up,
and the Stock Market Cycle has now likely made the transition from Late Bear to
Early Bull — although final confirmation must be forthcoming.

In a new bull market, to “make
hay when the sun shines” means taking a discerning sector rotation-based
approach to your trading. In a bull
market, you can throw darts at the stock charts and come up with winner after
winner. The trick is to pick the
stocks that will rise RELATIVELY FASTER than all those other ones going up.
That means finding the key sectors with a momentum derived from their
place in the cycle of sector rotation. (For
details, see Chap. 14 — “Stocks to Peddle During the Business Cycle” in the

Raining in Brazil book.)

The Key Dangers



The Interest Rate Cycle has
completed its downward slope and is flatlining. The
first step may come this week when the Fed goes from a recession bias to a
neutral bias. Tuesday’s Fed
meeting will be very closely watched and promises to be the macrowave data
highlight of the week.

The oil markets remain in a twit
about the possible invasion of Iraq by the U.S. Any disruption to Iraqi supplies — not to mention a possible boycott
reaction by the Grim Reapers of Libya, Iran, and yes, even Saudi Arabia —
would quickly put a damper on the world recovery. It doesn’t help that George W. keeps sticking his foot in his mouth —
with the latest revelations about preemptive nuclear strikes on even Russia
being an example.

From a technical perspective, the
vexatious VIX is worrisome. This
market volatility index is flashing a lot of optimism, which usually signals a
sell-off.

Sector Watch



The key tech sector right now has
to be semiconductor manufacturing. It
is the font from which all else flows — from consumer electronics, DVDs and
PDAs to computer boxes. Focusing
one’s attention on this sector and the chain of sectors it is related to may
be a winning strategy.

While oil and gas is hot for the
reasons cited earlier, it is a sector that is too unpredictable for my tastes. The best plays here may be very long term in the areas of alternative
fuels and energy conservation.

The hottest sector of the week is
biotech and drugs. In fact,
there is an ongoing convergence between the pro-cyclical biotech sector and the
counter-cyclical or defensive traditional drug sector as more and more drug
companies acquire, or establish relationships with, the go-go biotechs. A targeted approach would be to include some or all of the following
in a basket trade:The housing sector would otherwise continue its
strong upward movement in an Early Bull phase of the market.
But it’s been on low interest rate steroids for lo these many months
and many of the high flyers like Beazer Homes are showing technical weakness. The underlying problem may well be fear of the Fed raising rates sooner
rather than later — never happy news for the mortgage markets. 

The Macro Data — Last Week



As stated in last week’s
report,
“If the consumer sentiment numbers show a stabilization of the falling trend
OR an uptick, look for another very nice Friday.” Got that right! 

The U. of Michigan Consumer Sentiment
Index came in with blow-out numbers and saved the week. The subtext, of course,
was the allaying of fears over a consumer-driven, double-dip recession.

The Macro Data — The Coming Week



As indicated, the Fed’s Tuesday
meeting will be the market’s focal point in the early part of the week. Rising interest rates slow business investment and the purchase of
consumer durables. But don’t look for
the Fed to do anything foolish at this stage.

The other big number to watch is
the Consumer Price Index. No sign
of inflation on even the distant horizon — but let’s keep it that way. Remember: Inflationary fears triggered the Nasdaq
sell-off that began back
in March of 2000.

Finally, Applied Materials meets
with analysts on Thursday. [AMAT|AMAT]
is the 800-lb. gorilla in the semiconductor equipment space. AMAT may tell us how much later — and therefore drive chip
manufacturing stocks UP orSell Signals



Thermal imaging play Flir
(
FLIR |
Quote |
Chart |
News |
PowerRating) took an
unexpected and nasty little hit from the Securities and Exchange Commission —
a civil injunctive action — and promptly lost more than 10% of its value. If you’re in, you might hang on, at least for another point or two. If you’re out, set an alert to $52.50 and don’t go near the water
until it clears it.

Peet’s Coffee
(
PEET |
Quote |
Chart |
News |
PowerRating) is having
trouble getting over its resistance point and year high of $16.70 despite some
very favorable news coverage. Not
quite time to sell if you’re in, and if you’re not, go the alert path at
$17.

Macroplay of the Week: IFX



Semiconductor
chips are cut from silicon wafers. The
new technological wave is to move to “jumbo wafers,” which are 50% bigger. Bigger wafers mean production efficiencies that compute to about a 30%
reduction in costs. German-based Infineon Technologies
(
IFX |
Quote |
Chart |
News |
PowerRating) has invested
heavily in jumbo wafer technology and is poised to grab market share as a low
cost producer as the chip cycle swings upward.


This
stock runs against both my fundamental and technical rules. IBD rates this company a lowly D+ and only 109 out of 124 stocks on its
fundamental scale. IFX has dipped below its 10-day MA and remains below its 200-day MA, but
with the stochastics flashing an oversold condition, it may be worth a look. 
 


This
chart shows IFX against the semiconductor holder
(
SMH |
Quote |
Chart |
News |
PowerRating).
The jumbo wafer macrowave should allow IFX to outperform the SMH over
time. A HIGH RISK PLAY
given the weak fundamentals and very good, but not great, technicals!


 





 


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.

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the Art of the Macroplay, I’ve decided to simply offer this free to all
Tradingmarkets.com subscribers. Have
at it: https://www.peternavarro.com/macroplay


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