The Earnings Votes Are In
Market Trend:
Still basing, Neutral bias
Sector Watch: Resorts and Casinos, Health Care Plans
Macroplay of the Week: NetScreen Technologies
Weight
towards Cash
The Broad Market Outlook
Energy,
earnings, and unrest in the Middle East continue to roil the market
waters.Here’s the deal: Pollsters can
sample a few thousand voters and predict with remarkable accuracy how hundreds
of millions of people will vote. If we
apply this same logic to the earnings news, a clear pattern is emerging.
Some companies are doing well and beating their estimates but others
aren’t. The question is, “Why?”
Looked at from at least one angle, we
might conclude that it is the better-managed companies that are doing well and
the more poorly managed ones that aren’t. From
that angle, a logical conclusion might be that the economy is actually doing
better than we thought — after all, a lot of companies are doing OK.
So what’s the point?
For the broader market, it would be to relax and get a little more
bullish. This is because based on the
earnings reports that have already come in, and applying our pollster logic of
predictability of the next round, we are likely to get the same mixed news in
the remaining reports — rather than any wave of purely bad news.
Therefore, the worst is over with regard to earnings season.
That still leaves energy to contend
with and the volatile situations in both Israel and Venezuela.
Both businesses and consumers are still saddled with a contractionary $5
per barrel war premium, while both Europe and Japan suffer even more than the
U.S. when oil prices spike. The global
danger here is weak demand for U.S. exports and a weakening world economy that
might really lead to the double-dip recession that remains everyone’s last
short-term fear.
The
conclusion: Use this time to scout your next moves, stay in cash, and
then POUNCE if and when we get a strong upward
trend signal, OR view this time as a basing period
where the downside risk is relatively low so it’s safer to begin building some
positions in your core portfolio.
The Macro Data
The calendar is packed but with few
reports of meaning. The market cares
little about durable goods on Wednesday and there should be few surprises in the
new and existing home sales numbers on Wednesday and Thursday. Â
Friday is the big day.
Consensus estimates put the GDP coming
in at a robust 5%. Anything significantly
less, and the market tanks. My BIG
SLEEPER this week is the Michigan Consumer Sentiment.
The consensus estimate has it rising, but don’t be surprised if it goes
the other way and the market reacts badly. So
watch your portfolio very closely Friday a.m.
Sector Watch
Chips have done well over the past few
months but are showing weakness. Still,
unless they have a lot more run in them, the broader market won’t either.
Really hot sectors right now are: health care plans, a sub-sector of the
Health Services sector, and resorts and casinos.
Keep in mind, however, that resorts and casinos are particularly prone to
any new terrorist shocks so they entail more risk.
Macroplay of
the Week: NetScreen Technologies
(
NSCN |
Quote |
Chart |
News |
PowerRating)
This company is featured positively in
the lead article in this week’s Barron’s, but it’s got more than
just that going for it. Its new
NetScreen-5200 and NetScreen-5400 platforms allows businesses to consolidate
their network security onto one multi-tasking server.
It looks like a better mousetrap and the only question is whether the
tightwad CFOs in corporate America will start spending tech dollars again.Â
Here’s the chart of NetScreen
(
NSCN |
Quote |
Chart |
News |
PowerRating), matched with chief rival, Check Point
(
CHKP |
Quote |
Chart |
News |
PowerRating).
 
Note the recent divergence.
Note also that both relative strength and momentum may be about to turn
positive. IBD has it in the top
third of its sector — but the sector is near the dead bottom of all sectors.
A high-risk play but a potential high payoff.
(Last take: In June, a huge
number of shares will be free of the six-month IPO lockup, so be careful if you
build a position of this date.)
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.
I would love to hear from you.