Why I Like The SMH

• January 18, 2005
• Peter Navarro

 

The Big Picture Investor: Signs of Hope???

 

Navarro’s Broad Market Outlook: Rally Me This,
Fedman

“Another sell-off in higher
volume pounded the final nail in the dying rally’s coffin Tuesday.”

IBD’s Big Picture, Weds. Jan.
12, 2005

Okay.  So I was two weeks
early calling the end of the Xmas rally and now IBD is about two weeks too
late.  Anyway, it’s over. 

Or is it?  The soft jobs
report a week ago Friday and the latest soft as an egg yolk PPI now suggests
that inflation is more benign than the Fed would have us believe.  Could this
reassessment of the inflation terrain be enough to turn last Friday’s up day
into this week’s turn a corner rally? I think the possibility is strong enough
to stay away from the short side for now.

More broadly, an army of
earnings reports will be on the march next week, including Yahoo, eBay, and
IBM.  And the Consumer Price Index will also be of interest to see if it
corroborates the good news of last week’s PPI. 

Of course, none of these
musings deal with the ticking time bomb that is the trade deficit — which hit a
jaw-dropping 60 billion last month.    The big concern: This jump in the trade
deficit was due to a fall-off in U.S. exports as the world economy has slowed. 
That frankly spells disaster for the greenback — and an eventual inflation and
higher interest rates.  But that is the longer time horizon.   This week,
traders might do well to stay on the long side.

  

Hedging Your Bets With Matt Davio: Year of the
Drip

2005 continues to be the year
of the drip. The markets have slowly sold off from the Santa Claus rally that
came at the end of 2004. But there is still no fear in the markets as there has
been no real climax in the volume to the selling. Will it come this week on the
first options expiration week of 2005?

I doubt it.  I think we could
see a relief rally this week, although I thought it might come in the past week,
so let’s just see where the market wants to go.  I must respect the big old
market as usual and let it show us the means of its ways. 

On the technical front, the
broader market SPX tested the 1176.5 gap that lingered from late Fall and now if
that can hold, I would suspect a rise in the SPX to 1195 to 1205 range. 
Otherwise there is support around the 1135 as a real bottom. I still believe
there is more risk to the downside vs. the upside over the next part of quarter
one, 2005.

With that in mind, the chips
continue to report mixed messages as AMD and CREE came out with brutal numbers
and got slaughtered this past week.  Of course, INTC massaged again and said
things were peachy and the price action continues to chop around in the chips.

I am willing to go out on a
limb and take a small risk on the long side of the chips by buying the SMH ETF,
risking 7-10% on the trade as we leg in starting here in the 31’s.  I would buy
another chunk near 30 and then one more leg in the 28 range.

The key to our positioning
is always leg into our trades whether long or short and define the risk at the
onset of the trade. With that being said, if we leg into a long SMH at these key
spots, and define the risk to stop out with a close below 27 on SMH, we are
comfy fading the negativity on the chips as they have been outperformed for a
long time vs. the SPX.

Compared to the SPX since Jan
04, the SMH has been a laggard and I believe this reached a near term crescendo
in the divergence in September of 04, when the SMH was performing well below the
SPX at over 35% in absolute terms. 

Let’s get long a little bit
of the semis and roll them out for a trade on the long side for 5-15% gain over
the next few months.  I would define my risk on the downside by no more than 10%
and I would give the trade about 3 months to pan out.  (If the trade doesn’t
work over the next quarter than I would stop out if neither objective hasn’t
been hit.) 

Options expiration week is
upon us, let’s see if we can get some movement going one way or another this
week as the market continues to be stuck in a tight range the last 7-10 trading
days. 

Last take: The momentum
darlings, if you haven’t noticed, such as TASR, NGPS, TZOO, ANTP, SIRI et al,
continue to break down. That is the danger of the trying to be the last one
standing when the music stops, and that is why I would never recommend being
anything more than a renter if you want to play in those names. 

The volatility is damning as
we see by the many 2 for 1 splits some of these names have incurred the past
few days the hard way. By that, I mean they did not announce a formal two for
one split — rather the market took them to the wood shed for the half split. 
Until next week, be safe out there.  And remember: the market doesn’t care if
you don’t book your profit or loss so take your profits and respect your
stops.   Matt.  Out.

 

Pete’s Portfolio:

Pickings are exceedingly
slim.  I’m now officially stuck with my NWAC 2006 10 calls, which went all too
quickly under water.  But I’ve got til Jan 2006 to get back in the green. 

Ditto with my 2006 WMB $15
calls, which are still comfortably in the green — but the stock is
deteriorating.  I’m going to wait for earnings announcement next month and cut
and run if the announcement doesn’t reflate the stock.

CPTC cleared $5 again and is
consolidating.  Looking to add to what is a relatively small position now —
although my trip to the facility wasn’t particularly inspiring.  (Great products
— still uncertain about business model and marketing.)

Dabbled last week into penny
stocks VASO and FCSE on technical momemtum — and VASO promptly went down.  I’ll
give it another few days and then cut small losses if need be. 

Took a cautionary walk on the
short side last week — ALTR in chips and LFUS in the smokestack economy.  Will
likely cover this week as neither is going anywhere…

David:  Is off this Week

Peter Navarro is a business professor at the
University of California-Irvine (www.peternavarro.com). 
David W. Aloyan is a managing members of Platinum Capital Management.   Matt
Davio is a managing partner at the hedge fund, Infinium Partners.

For general money management services, contact David
at

platinum@peternavarro.com.   If you are interested in hedge fund services,
contact Matt at

infinium@peternavarro.com.

For general investment
management, e-mail david at

platinum@peternavarro.com.   If you are interested in a hedge fund, e-mail
Matt at

infinium@peternavarro.com.

DISCLAIMER:
This newsletter is written for educational purposes
only.  By no means do any of its contents recommend, advocate or urge the
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investing involves high levels of risk.  The authors express personal opinions
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