Stock market trend: Market Remains in a Correction 

 Market Pulse 

The big news last week was the failure of all of the major averages to follow through on the impressive gains recorded the week ending 02/19/10. As noted in last week's Market Letter, all of the major averages with the exception of the DJ Transportation and the DJ Utility Indexes had broken out of their downward channels. Also, most of the majors had completed a 50% retracement of their declines from the mid-January 2010 highs to the early February 2010 lows suggesting that a complete retracement back to the January 2010 highs were in the cards. The negatives in the market out weigh the positives at this time suggesting that a pull back over the next three to four weeks is a good possibility.”

            Market Edge
 

This remains a market where it is very difficult to make any solid money in. The sideways pattern and weak technicals reflect the indecision about market participants about the strength, and ultimate direction, of the economy. Last week's plunging consumer confidence and abysmal new home sales data reinforce the fear, often articulated in this column, that the consumer may not follow through on the investment led recovery.

 

While consumer confidence and new home sales data grabbed the headlines last week, what caught my eye was the revision to the GDP growth rate. On the surface, a slight upward revision from 5.7% 5.9% seemed bullish. However, the underlying data more clearly indicated that the strength of the recovery is coming from an increase in business inventories as well as an improved export picture. Meanwhile, both consumer spending and state and local government spending were revised downward. Here's what that means to a macro geek like me.

 

GDP growth based on the inventory cycle is ephemeral. The export picture is likely to turn ugly again as the dollar has bounced because of the European sovereign debt crisis. Consumer spending is unlikely to step into the breach because of both confidence issues and ongoing unemployment woes. The fall in state and local government spending is only going to get worse as America's little "Greek problems" -- the budget woes of states like California, Illinois, Pennsylvania, Ohio, and so on -- will only get worse.

 

So it should not be any surprise that a sideways stock market is trying to sort this out. As world fundamentals deteriorate, stock market technical indicators reflect that. It's not voodoo. It's just logic.

 

The bottom line here is that in its current sideways pattern, the stock market is much more like a game of roulette than poker -- a 50-50 gamble rather than an intelligent speculation. I would laugh out loud at any TV talking head or newspaper columnist who tries to tell you right now that this is a great time to buy. While anybody says this may turn out to be right, it will only be by luck, not an intelligent reading of the data and trends.

 

Accordingly, I am mostly in cash. My one big macro bet remains CYB, which is a bet that the yuan will appreciate against the dollar over the next year. I like this that because there's virtually no downside risk -- that is, there is no scenario where the yuan depreciates against the dollar.  I also continue to hold a portion of my portfolio in small-cap biotech stocks like PBTH, CHTP, HALO, and DUSA. 

 

As a final comment, I set forth the case several months ago for shorting PALM. At the time, I indicated that this would be a long-term play based on a likely failure of the company's new iPhone wannabee to grab sufficient market share for the company to survive. At that time, the stock was around $13. The last week or so, it plunged below seven dollars on warnings from the company about its failure to hit its targets. Unless a buyer swoops in, the stock is likely to go lower. The big problem, however, with such a weak stock is that it is very difficult to find a broker with which you can short actual shares. That leaves the put option market and these are getting pricey reflecting the greed of the players and blood in the water.

  Navarro on TheStreet.com

Click here to review my videos on TheStreet.com.  

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Stock market trend: Market Remains in a Correction 

 Market Pulse 

The market action in the United States from last week provided some small encouragement that the stock market may be finding a new floor. That said, there remains significant cross currents buffeting this market which suggests continued caution.

 

On the bullish front, it is abundantly clear that the business investment driver in the GDP equation is hitting on all cylinders. The ISM Manufacturing Index continues to trend strongly upward and the ECRI Weekly Leading Index projects continued expansion. Meanwhile, the yield curve spread continues to show a steepening yield curve, which typically points to expansion. These are signs of recovery that should not be ignored by anyone.

 

That said, on the bearish front, there continue to be problems both in the three major other elements of the GDP growth equation as well as with issues beyond the United States border.

 

For example, consumer confidence remains in a sideways pattern and is anything but bullish while the housing market remains in a funk. This is important because one of the biggest question marks for long-term recovery is whether or not the consumer will step in and buy all of the inventory that businesses are now piling onto the shelves. And don't forget, unemployment hovers around 10% while the actual rate of unemployment is probably closer to 15% or higher. That's less wages and less purchasing power and less growth.

 

In the government element of the GDP equation, we are seeing a massive expansion of the government sector. While this may be bullish in the very short run, the rapidly rising debt burden will soon put upward pressure on long-term interest rates and likely crowd out business investment and hammer hard on me mortgage and housing markets.

 

Meanwhile, at the state government spending level, states like California and Ohio are facing insolvency. The likely result will be more government layoffs, reduced expenditures, and/or higher taxes. Regardless of your ideological orientation, it should be clear that the overall impact of the state budget crises will be contractionary.

 

Finally, the Greek tragedy in Europe, which is causing the euro to fall relative to the dollar, can only hurt US exports to Europe -- with exports being one of the few bright spots over the last several years in the US growth story.

 

As for Europe, the prediction I have made is that the euro is not dead. However, the growth of the euro beyond 16 countries in the European monetary zone is as dead as it can possibly be. Indeed, there is a high probability that within 12 to 24 months, Greece will bailout of the euro and readopt the Drachma. The reason: it will be a lot less painless for the Greek economy to recover by selling more exports to its neighbors than by going on an austerity kick to please Greece's German Masters.

 

Finally, finally, there is the big bad Chinese menace. China is desperately trying to control inflationary pressures in its economy, and if it contracts too sharply, that will send a contractionary ripple effect across Asia which will eventually hit US shores.

 

On top of this, the Chinese government is increasingly revealing its dark side to the world with its bullying and its threats to the United States over everything from Taiwan to Tibet and the Dalai Lama. My own theory here is that Chinese are doing this not out of passion but rather strategy. It is a way of misdirecting attention away from the number one issue between the US and China, which is China's currency manipulation. At any rate, at some point I hope the American people and the American government wake up to the fact that the greatest country in the world should not be in a position where a totalitarian dictatorship can bully us.

 

My bottom line this week is this: there are many months in any given year where the stock market trend is clearly defined and you can go either short or long with great confidence and thereby be an intelligent speculator. These last few months have not been such a time. While last week's market action provided some glimmer of hope that the market might resume its upward trend, I continue to hold most of my portfolio in cash amidst a sideways pattern in the market.

 

My one big macro bet remains CYB, which is a bet that the yuan will appreciate against the dollar over the next year. I like this that because there's virtually no downside risk -- that is, there is no scenario where the yuan depreciates against the dollar.  I also continue to hold a portion of my portfolio in small-cap biotech stocks like PBTH, CHTP, HALO, and DUSA. 

 

Stock market trend: Market Remains in a Correction 

 

Biotech Alert

Before I present my weekly stock market message below, I want to alert you to an event coming up this week in New York. It's a big confab between all of the chief executive officers in the biotech industry -- big and small.

 

I always keep about 20% of my portfolio in small-cap biotech because the fate of small-cap biotech companies is largely determined outside the business cycle and instead by the fate of their drug discovery trials.

 

You may want to watch my new video that appears at TheStreet.com on how to pick small-cap biotech companies. It features an old friend of this newsletter in the top biotech analyst in the country Andrew Vaino.  Click here to see the video.

 

Market Pulse

Last week's market action was typical of a stock market in a correction trying to find direction. Big gains at the beginning of the week rapidly turned into big losses towards the end of the week while Friday was a down and up elevator the likes of which we haven't seen for a while.

 

If you agreed with my cash call over the last several weeks, none of this market volatility would've bothered you in the slightest. The fact is the bullish upward trend set last March has been broken, the market remains in a correction, and any attempt to go long this market in the hopes of picking up some bargains is simply a reckless gamble rather than a careful speculation.

 

In this regard, I urge one and all not to be lulled into the siren song of TV pundits who want to lure you into this market. Last Friday, as I was getting ready to do a segment for CNBC one half hour before the market closed, I was astonished to see one of these pundits declaring that Friday's recovery from steep early day losses had somehow marked the bottom much like the March 2009 bottom. Based on that claim, this commentator was urging viewers to start running with the bulls again.

 

If it somehow it turns out that this commentator is correct and Friday marked the beginning of a new bullish uptrend, it won't be because of astute analysis but rather because it just simple blind luck. The technical condition of the market is a mess. Three big fundamentals also weigh heavily on the bulls:

 

First, the tightening of monetary policy in China coupled with an escalation of increasing trade and geopolitical friction between the US and China is likely to send contractionary ripples through the Asian supply chain -- from Japan and South Korea to Thailand and Taiwan.

 

Second, the sovereign debt crisis in Greece and Spain can end in either one of two ways -- both of them bad.

 

One way is through a wave of defaults, in which case a credit crisis in Europe will be triggered, the European already anemic recovery will stall, and European demand for exports from the United States will fall, softening the US economy.

 

A second  way Europe's crisis could end would be with a bail out of Greece, Spain, and maybe Portugal by the Euro zone. That would result in a significant expansion of the European money supply and a plunging euro. That's not good for the US export sector either.

 

The third bearish macro wave bearing down on the stock market is this: the Obama administration has clearly crossed a Keynesian Rubicon with its reappointment of Ben Bernanke of the Federal Reserve, with its support for Tim Geithner as the Treasury Secretary, and with the continued presence of the ghost of Lord John Maynard Keynes a.k.a. Larry Summers in the White House. From this Keynesian administration, we are now virtually guaranteed a "tax-and-spend" strategy far more likely to destroy jobs than create them.

 

This is not to say there are not some bullish tailwinds we must be mindful of. There is no question that the manufacturing sector of the US economy is steadily gathering strength. The only question, however, is whether consumers will eventually come to the party. We've talked a lot about this before -- the consumer is weak. If the consumer stalls, all that inventory on the shelves of American businesses will turn into more job losses and production cutbacks.

 

The broader point is this: why risk your money now when the market trend is so clearly undefined? I know this is a new way of thinking for some of you buy and hold investors; but this is the way of the new investment world and you better get used to it. The nice thing about it is that in times of turmoil like last week he won't be running around in a panic or like a chicken with your head cut off every time the market goes down.