Rally Interruptus

  • August 26, 2002
  • Peter Navarro


Market
Outlook:
Neutral w/ Bearish bias


Sectors Long:
None

Sectors Short:
None


Peter’s Picks:
Maalox, Beach Blanket


  • The last two days of August
    have been bloody five years in a row (    Stock
    Trader’s Almanac 2002)


  • September has been the
    biggest % losing month for the S&P 500 and the Dow Jones 30 in the last 51
    years (    Stock
    Trader’s Almanac 2002)


  •  Nasdaq has 30 losing years
    in a row for the month of September. (    Stock
    Trader’s Almanac 2002)


  • The Sept. 11 anniversary is
    coming — along with heightened uncertainty


  • The earnings warning season soon begins
    — with the downside likely greater than up


Make sure on Labor Day
you’re at
the B.B.Q., not on
it!


The Broad Market Outlook:
It Was Fun While It Lasted

We hope you enjoyed the rally over the last several weeks. It really was
refreshing to have almost every sector moving up smartly in a way that made the
stop loss temporarily obsolete. The party ended on Friday, however, as both the
Nasdaq and Dow fell back through key resistance levels of 1400 and 9000,
respectively.

About Friday’s mini-crash: Commentators tried to put lipstick on that piglet by
pointing out both indices rose for the week anyway. But the fall was important
because, stripped of all the TV commentator chatter, the several-week rally was
much more a technician’s oversold reaction than the beginning of a
fundmentalist’s “the economic recovery is nigh” bull market. 

The fact is, kind friends, the macro fundamentals remain weak; we’ve got the
consensus now of the economic forecasters showing us a much slower recovery and
a slower growth rate that previously forecast.

So here’s what we see as the most likely scenario this week: the Fat Cat Wall
Street money managers are already in Southampton and the rest of Wall Street
that bet long on the tech wreck (most mutual fund managers) will be pinching
their vacation pennies on Coney Island.

Volume will be incredibly light, and the
mood will be increasingly sour because of bad macro data
OR concerns over bad macro data. A gaggle of nervous nellies will decide
that they should have sold last Friday and will start to do so on Monday,
Tuesday, Wednesday and Thursday. By the end of the week going into Labor Day,
most of the last several week’s bullish air will be sucked out of the market
balloon. 

Of course, we could
be wrong, and the market could reverse from Friday and continue on it’s latest
mini-bull run.  BUT the odds simply don’t favor
that scenario. So why gamble the long side — at least until this market
re-declares itself?  Instead, intelligently speculate, which is to say
either stay in cash
or, if you got into the short side of the Cubes as we did towards the end of
last week, stay there until your stop loss is triggered.

Last take: We’re are loath to do much of anything until after Labor Day and we
see whether September is likely to once again earn its reputation as the
market’s “cruelest month.”


The Week’s Macro Data
Market Movers: Consumer Confidence Game

Look for a Wild West week on
the macro data front, with home sales and consumer confidence leading the way on
Monday and Tuesday and the usually irrelevant but potentially market-moving
durable goods numbers on Tuesday as well.

We have no priors on which side of the fence that home sales will miss the
consensus estimate — although with the housing sector very frothy, a downside
surprise could trigger a more of a lurch than any really good news.  

HOWEVER, we do believe that there is
much more downside market
risk to a lower-than-expected consumer confidence report
than there is to a higher one — at least in this week when there will be little
volume to float the boat and a lot of people nervously eyeing the exits.

As for durable goods, it is notoriously volatile and usually ignored by the Wall
Street pros (if not wide-eyed journalists). BUT
this week, Wall Street will be grasping for some straws of a business investment
recovery so a weak number here would likewise exert downward pressure. 
We can’t imagine any good news coming from the GDP report on Thursday — which
will remind us of the thick soup we are in. And, continuing our theme of bummer
at the end of the summer, look at Friday’s trio of reports for any further sign
of weakness in the consumer while also watch the Chicago PMI as an early warning
of any weakening on the supply side.

The
Macroeconomic Calendar


DAY


EVENT


Monday


  • Existing and New Home Sales


Tuesday


  • Consumer Confidence


  • Durable Goods


Thursday


  • GDP


Friday


  • Personal Income and Consumption


  • Consumer Sentiment


  • Chicago PMI


* Potential major
market movers in red


Peter’s Picks:
Maalox, Beach Blanket

If you persist in being long
over the next likely bearish week, I recommend buying 100 shares of Maalox (Nasdaq
symbol
(
PUKE |
Quote |
Chart |
News |
PowerRating)). Otherwise, your purest macroplay is a beach blanket to sit
on, as you count your cash.

I myself will use the next ten days to reexamine all of the leaders that have
popped up on my stock screens. I cashed out some very nice positions with
reluctance on Friday, including:
(
CELG |
Quote |
Chart |
News |
PowerRating),
(
CHIR |
Quote |
Chart |
News |
PowerRating),
(
CSTR |
Quote |
Chart |
News |
PowerRating),
(
CYTC |
Quote |
Chart |
News |
PowerRating),
(
DOCC |
Quote |
Chart |
News |
PowerRating),
(
GENZ |
Quote |
Chart |
News |
PowerRating),
(
HYSL |
Quote |
Chart |
News |
PowerRating),
(
ISLE |
Quote |
Chart |
News |
PowerRating),
(
NSCN |
Quote |
Chart |
News |
PowerRating),
(
NXTL |
Quote |
Chart |
News |
PowerRating),
(
ORCL |
Quote |
Chart |
News |
PowerRating),
(
SABB |
Quote |
Chart |
News |
PowerRating),
(
PENN |
Quote |
Chart |
News |
PowerRating),
(
CHKP |
Quote |
Chart |
News |
PowerRating).

I want to go back and revaluate each one for possible re-entry points after the
expected choppiness this week and next (and possibly next month) subsides.

Note:
If our forecast is dead wrong, and the rally resumes this week, we will neither
kick ourselves in the butt for being wrong or try to scramble back in at
overbought prices. Rather, we shall conclude that we intelligently speculated
with the odds in our favor, but the longer shot won. So be it.

In the meantime, I’ve put on my Grim Reaper macrowave cap and am looking for
some inspiration as to how to play the West Nile virus macrowave. This
VERY ugly little virus is going to sweep through
the Americas and take a significant bite out of tourist areas with heavy
concentrations of the mosquitoes that carry the virus.

So far, I’ve look at mosquito-repellant manufacturers but many are privately
owned or small subsidiaries of very large companies so there is no pure play.
I’ve also tried to find some biotech firms trying to develop a response to the
bug — but still looking.

If any of you have any ideas, I’d love to hear them. 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.   

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