What’s Driving This Market?

• June 10, 2002
• Peter Navarro

Market Trend:
Down

Sector Watch: “Ugh” across most of the board

Macroplay of the Week: Short GM and VOLVY

The Broad Market
Outlook

Nasdaq 1300?
Sorry for the bearish sentiment.
But please don’t shoot the messengers — or use us as a contrarian
indicator. It’s simply that we’ve
haven’t seen so many dark stars aligned against the bullish constellation
since 1975. To last week’s fearsome
foursome of war, a jobless recovery, a profitless recovery, and a weak dollar,
go ahead and throw in a fifth macrowave — the crisis in Wall Street confidence
featured nicely in Investor’s Business Daily. 

We don’t put quite as much stock in
this last macrowave as does IBD. On
the other hand, it is certainly true the ever-widening dose of Enronitis that
has engulfed not just the energy sector but corporations from Tyco to Merrill
Lynch does widen the band of uncertainty around
earnings. 

The bottom line: Just as cash was a
happy place to be last week, it will be nice to surround yourself with it again
this week. 

The Macro Data Market
Movers

A nothing week on the data front until
Thursday means no help from the economic data and more time for the market to
stew in its bearish juices.

On Thursday, it’s Retail Sales and
the Producer Price Index, neither of which is likely to offer good news. Risk on
the PPI is to the upside — sending a ripple of fear of Fed rate hikes through
the markets.  A budding softness in
the auto sector is likely to leak a little air out of this balloon — so it
will be interesting to watch whether the Retail HOLDRs
(
RTH |
Quote |
Chart |
News |
PowerRating) goes into the red
that day and maybe takes General Motors
(
GM |
Quote |
Chart |
News |
PowerRating)
and Ford
(
F |
Quote |
Chart |
News |
PowerRating) with it. 

On Friday, we triangulate the supply
side of the economy with news on inventories, industrial production, and
capacity utilization. This trio is
our best hope for a boost, as good news on the supply side front may lend
credence to the recovery theme. As
for the Michigan Consumer Sentiment numbers and the likely signal from the
demand side, it’s hard to imagine any upside surprise, so no bull juice there.

As for other possible macro movers,
watch carefully the Bush-Sharon summit and any sign of doves flying
from the White House. Good news on
this front may be the market’s best hope for relief — although I’d hate to
be long the oil services sector or gold if such news breaks.

Sector Watch

From a macrowave perspective, the
sector outlook is almost uniformly dismal. Semiconductors are in full retreat and
autos and
retail are weakening, as
prospects for an early bull phase vaporize. Housing has become a weird defensive sector, going up more often when the
market is going down — and its bubble is poised to burst.

Drugs is ordinarily a defensive sector
which would usually be attractive BUT the whole
sector is facing massive pipeline problems — no new promising drugs equal
dismal profits. 

Energy benefits from war jitters but
is being battered down by recession fears. 

Most other sectors are far outside
their “sweet spots” where they would ordinarily shine in the stock market
cycle. For example, capital
equipment won’t do well until at least the middle bull phase of the recovery
— and we are far from that. (See Raining
in Brazil 
for the patterns of sector rotation in the typical stock market cycle.)

What we are left with is slim sector
pickins’. That said, if you want to
move some cash off the sidelines, try this suggestion by technical analyst David
Aloyan: Go “long” the
Health Services sub-sectors:
Medical Practitioners, Health Care Plans, and
Hospitals. To trade this as a basket use the following
strong stocks representing each of their sub-sectors: Coventry Health Care
(
CVH |
Quote |
Chart |
News |
PowerRating), Oxford
Health Plans
(
OHP |
Quote |
Chart |
News |
PowerRating), and Tenet Health
Care
(
THC |
Quote |
Chart |
News |
PowerRating).

Art of the
Macroplay: Short GM
and VOLVY

Last week, the data gave us our first
glimpse of a significant slowdown in auto sales. This sector has been booming for two
reasons: The obvious is very low interest rates. The only slightly less-obvious is the role the auto sector normally plays
in leading the stock market cycle into early bull land.

Now, this
sector has had a good run so its momentum is a bit spent.
It is facing the twin prospects of higher interest rates and flagging
consumer confidence. And for the
European automakers like Volvo, a weak dollar works mightily against their
ability to export to the U.S.

Of the two
shorts, Volvo
(
VOLVY |
Quote |
Chart |
News |
PowerRating) is more
attractive both from a macrowave (weak dollar) and technical perspective. See chart below with Volvo, General Motors
(
GM |
Quote |
Chart |
News |
PowerRating), and Ford
(
F |
Quote |
Chart |
News |
PowerRating).

Recommended
stop for VOLVY is $20.89. Proceed
cautiously with both GM and VOLVY. This
isn’t a trade to necessarily jump right in today or this week. Rather, I’m suggesting that just as retail began to tank some weeks
ago, it may be the auto sector’s turn. Watch
it carefully for weakness and ye may well prosper.
 

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.