‘Only Go Long If You Don’t Like Money!’
The Big Picture Investor: From Breakout to
Fakeout….
Â
This week’s quote: “Only go long if you don’t like
money!    D. Aloyan
Navarro’s Broad Market Outlook: The China
Syndrome
Ever
since 9/11, U.S. fiscal, monetary, and trade policies have all been
over-stimulating the Chinese economy. In four short years, that economy has
morphed into a juggernaut that is driving up oil and commodity prices, punishing
the dollar, roiling the bond market, and putting hundreds of thousands of
Americans out of work. The latest indignity is revealed in the monthly trade
numbers, which rose solely on the basis of a flood of Chinese textiles that have
entered the U.S. after a relaxation of trade rules in January. It is now
inevitable that our economic jousting with China will become first intensely
political and, at some juncture, likely military as well. The first warning
shots are not now in the old Formosan Straits but rather in places as disparate
as Iran and Venezuela where the Chinese have now come calling for bi-lateral oil
for arms and technology deals. Inevitably, China’s economic imperatives will
conflict with U.S. foreign policies and lead to gridlock at the U.N. on any
further Bush Doctrine initiatives, e.g., sanctions on Iran or pressures on
Syria.  The bond and oil markets seem to understand all this — even if U.S.
politicians don’t.  Don’t count on any buy and hold strategy working any time
soon.
Hedging Your Bets With Matt Davio: Groundhog
Day
The
Breakout that came last Friday became this Friday’s Fakeout. So we are back to
the same area on the SPX, 1200, that we have been stuck in since Mid December of
04.Â
I have
slipped back into my Bill Murray, Groundhog day mode. I wake up every day
feeling like this market is stuck in time as it has been stuck in place for what
seems like an eternity. My hope is that we move, one way or another or that Mr.
Thain at the NYSE cuts our hours to 10-1 rather than expanding them to 8 to 5,
especially as the traditional slow summer months move ever so closer. What’s
the point Mr. Thain? The day’s are too long with no volatility anyways. Ah, the
brimrose of a volatility trader.
Oil
pushed higher, as high as it has ever been, before the boat was loaded with too
many players and a big seller on XOM decided to come in on Wednesday and end the
party. Not that I think it is over in Oil.  Matter of fact, I still think we
see 100 at some point in the near future.Â
So
I’ll buy the deep pullbacks in crude as they will be great opportunities for the
future. Energy still only makes up %8 of the SPX, I think before OIL is over
with its run, energy stocks will make up 15% of the SPX. Just like the
financials today, Oil will have their day in the sun!! Desert Sun, Texas Tea!!
Rotation well under way but the big piece of the move is still available in oil.
We are
under the school of thought that this is not a buy and hold or sell and hold
market. Rotations are important, and the money must be made quickly and smartly
in this no volatility environment. It’s tough out there as the SPX is now down
1% for 05 as we finish 2.5 months of the year.
Take
the money where you can and compound it and the short term gains make for the
returns that we are getting right now. Don’t be shy and bashful about booking
profits. They are difficult to come by, so please take them while we wait for
resolution of this trading range we are stuck within.
Idea for the Week: We believe another
sector whose rotation will come soon is the Medical Device Industry. Although
Pharmaceutical companies have been smashed in the past two years, the device
industry has held fairly solid and there is some room to run to the upside in
this sector, simply due to the increasing aging component that exists in the US
alone.Â
Two of
my favorite stocks that have been beaten down of late are BSX and ALGN. Two
totally different plays, but both we believe have limited downside exposure at
this juncture and their upside rewards outweigh the downside risks.
We are
accumulating both names with downside stops on ALGN near the $5 area and BSX we
will buy down to the 26$ area. BSX is involved with Cardiac Stenting and ALGN is
a premium dental device company that is growing smartly.
^next^
Aloyan’s Technical Take: Look Out Below!
The
Dow and S&P 500 experienced a failure from last week’s breakout, while the
Nasdaq had a bearish “outside reversal week down,†all on lighter volume,
all finishing the week in the red. Here’s the numbers: The Dow closed down 166
points (1.52%) at 10774, the S&P 500 was down 22 points (1.80%) at 1200, and the
Nasdaq was down 29 points (1.40%) at 2042. Resistance is around: 10867,
10984, and 11000 area for the “Dow,†1210, 1218, and 1229 for the S&P 500, and
the 2072, and 2100 area for the Nasdaq Composite. Support is at: 10600
area, 10471, and 10387 for the “Dow,†1196, 1181, and 1166 for the S&P 500, and
2020, 2000 level, and 1971, 1926 for the Nasdaq Composite. Â
My
sector breadth indicator turned very negative, with 84% of the sectors in the
red. As I had warned recently the commodity based sectors were way overdue for a
correction, and this week Energy, Real Estate, and Materials & Construction were
the standout worse performers, along with the Internet sector’s continued
weakness. Retail, along with the Gold and Silver sectors were amongst the few
winners. The dollar continues its slide, and is approaching its multi-year
December ’04 lows, coupled with the continued sell-off in bonds, with the 10Yr
Treasury Yield closing up at 4.54%. The yield curve flattened, with the 5s
outperforming the 10s, which outperformed the 30 Yr Treasuries in terms of yield
increases last week.
My
trend indicators are down for the S&P, Dow, and the Nasdaq. As warned of last
week, my breadth, momentum, and volume indicators were giving a correct
“bearish†signal, and continue to be bearish. My long, intermediate, and
short-term indicators are all turning down. My sentiment and
economic/fundamental indicators continue to support a defensive position.
Of Note:Â Much rhetoric has been thrown
about regarding the recent interest rate movements, spreads, and the slope of
the yield curve; especially if you are following a crackpot like Kudlow, who
will argue a bullish case no matter what the slope is! Well here’s some of my
analysis on the yield curve, and one of the reasons I continue to be bearish.Â
First of all, the start of the July ’53-May ’54, the July ’90-March ’91, and the
March ’01-November’01 recessions were not preceded by, what I term, a
“naturally†inverted yield curve (a negative spread between the 10Yr and 1Yr
Treasuries, a more natural measure of supply/demand), rather than an inversion
being driven by the “heavy hand†of the “Fed,†which forces the “Fed Funds†rate
to exceed the 1Yr Treasury yield as in the above recessions. Â In the above
recessions, the yield spreads were actually positive between the 10 Yr and 1 Yr
Treasuries, and averaged about 56 basis points at the peak of these business
cycles.Â
Here’s
what’s interesting:  In 1953 we were in a historically low interest rate
environment similar to today (the 1Yr Treasury in July ’53 was at 2.38%), we had
a positive spread, and it was a post-election year, with a Republican taking
office, which is historically negative for the stock market. What happened? We
entered a recession, and the stock market had a negative year.Â
There’s more. In March ’01 we were in a declining interest rate environment, we
had a positive spread, and it was also a post-election year with a Republican
taking office. What happened? Once again, we entered a recession, and the
stock market had a negative year!Â
Further, contrary to popular belief, the steepening of the yield curve does not
always suggest good times ahead for the markets. Case in point: in November ‘01
(the supposed end of the recession), the spread widened from 59 basis points in
March ‘01 to 247 basis points at the trough in November ‘01(with the 10 Yr at
4.65% and the 1Yr at 2.18%, close to current yields)—