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Friday, March 26, 2010

No Mas
  Stock market trend: Market in Upward Trend   Market Pulse

I do not usually go to cash when the market's bullish trend is still in place. However, this last Friday morning, as the market opened up, I decided that it was time to take a breather. As I promised I would on the Kudlow Report the evening before, I cashed out for all of my business cycle-sensitive positions except that in CYB. I even cashed out several of my small-cap biotech stocks, including Chelsea Therapeutics, Halozyme, and Dusa. I did, however, maintain my large position in Prolor (PBTH) -- the stock had a great week as it went from over-the-counter to the Amex, which should give it a huge lift over time.


I want to be clear here. I'm not recommending this kind of cash-out strategy to anyone other than myself. My thinking is this: There is an upward trend in place now. However, the trend is weak and the risk of a downside move has been steadily increasing as volume has been low. In addition, there has been a lot of short covering, which hasn't been sufficient to propel market upward. At some point, the shorts are likely to regain the upper hand.


What I'm seeing, then, is an interval in which the market is once again more of a roulette wheel than a poker game -- a gamble, rather than an intelligent speculation. In such times, I would rather lose a few percentage points of upside by staying out of the market than lose as much as 5 to 10% in a pullback or correction. And for the record, I don't mind being in cash for weeks and months at a time. I prefer to make my money and big chunks rather than small; and to do so, patience is the most important quality.


In the coming week, we are going to see the end of the quarter where I expect a lot of mutual funds will be closing out positions to take profits and make themselves look good. That's downward pressure on the market. We've also got the jobs report at the end of the week -- that's uncertainty for the market. In addition, tax day is coming up and it is always kind of funky for the market. So my strategy now will be to wait and watch -- at least for a bit.


On the whole, I favor macro trades. At this point, what I will be watching very closely for is any sign that the long end of the yield curve starts to resume its upward movement. I continue to think that shorting the long bond is eventually going to be one of the great trades of this decade.  TBT is the instrument. I will be ready to play it, when the inflationary music begins.

   Navarro on TheStreet.com

Click here to review my videos on TheStreet.com.  

Peter Navarro is the author of the best-selling The Coming China Wars, the path-breaking The Well-Timed Strategy, and the investment classic If It's Raining In Brazil, Buy Starbucks. Peter’s latest book is Always a Winner: Managing for Competitive Advantage in an Up and Down Economy.

Peter is a regular CNBC contributor and has been featured on 60 Minutes.  His internationally recognized expertise lies in his "big picture" application of a highly sophisticated but easily accessible macroeconomic analysis of the business cycle and stock market cycle for corporate executives and investors. He is a Professor at the Merage School of Business, University of California-Irvine and received his Ph.D. in economics from Harvard University.


Professor Navarro’s articles have appeared in a wide range of publications, from Business Week, the Los Angeles Times, New York Times and Wall Street Journal to the Harvard Business Review, the MIT Sloan Management Review, and the Journal of Business. His free weekly newsletter is published at www.PeterNavarro.com.

6:51 pm edt 

Sunday, March 21, 2010

The Greek Correction Chorus

Stock market trend: Market in Upward Trend 

 Market Pulse

Seems like all the talking heads are calling for a market correction.  The basis argument is that the market has moved up plenty, that volume is low, and yes, now that everybody thinks they are a technical analyst, that the market is “overbought.”


I’m an agnostic on this correction issue.  What I know is that an upward trend is in place on a strengthening – as opposed to a strong -- economy.  I also know that this economy remains vulnerable to a number of shocks, including the Europe morass and a possible negative reaction this week to any passage of Obamacare.


I don’t know whether the health care bill will pass tonight.  I do know that it will be electoral suicide for a lot of democrats.  There is simply not enough to brag about in the bill to make it a “plus” come November if one votes for its.  There is just too much in the bill that is a “negative” to want that baggage.


I also am tired of having Don Quixote in the White House.  First, it was Bush in Iraq dragging us down.  Now it is Obama and health care when, as Bill Clinton once famously said, “it’s the economy, stupid” we should be focusing on.


And for those of my readers who want health care reform, well me too.  But boy did the Congress go out of its way to screw up this piece of legislation.

12:06 pm edt 

Sunday, March 14, 2010

Time to Out Michael Santoli's Mystery Broker

Stock market trend: Market Resumes Upward Trend 

 Market Pulse

This week I would like to pick at least a small fight with one of my favorite columnists, Michael Santoli of Barron's magazine. In his March 15, 2010 column, Santoli used his so-called Mystery Broker to predict a market pullback in the range of about 10%.


This use of an unnamed second party all seems kind of cheesy to me. The stock market isn't Watergate and Michael Santoli doesn't need Deep Throat to reveal secrets about its direction. To Mike, I say if you want to predict what would be a rather significant market correction at this point, then have the chutzpah to do it yourself -- don't rely on some unnamed ghost whose performance your readers cannot evaluate themselves because he chooses to go nameless.


As for the prediction of a 10% pullback (actually Mike indicated about 9%), I'm on the other side of that call for now. The only two technical analysis signs that any type of pullback or profit-taking might be in the offing include a fairly significant overbought condition for the market (cited by Santoli) and relatively low volume as the market has ground its way up over the past several weeks.


The problem with relying on an overbought condition signal, however, is you almost always see such signals when the market achieves new highs and is trying to establish a new leg up on a recovery. So all that really leaves us with from a technical perspective for the bearish case is low volume. That's a concern -- but hardly a trend breaker on its own.


Now, on the other side of the technical analysis ledger for this market, what Michael Santoli failed to mention are these facts:   As Market Edge notes, both the momentum and strength indices for the broad market are positive while sentiment is neutral. Regarding broader market strength, of the 91 industry groups tracked by Market Edge, fully 83 of them are rated either strong or improving.


My bottom line on my Michael Santoli beef is that in presenting the case for a pullback, he only told you half of the technical story and used an unnamed cipher to do it. It's a weak case when you look at the bigger technical picture, which is perhaps why he may have wanted to hide behind his ghost – if the pullback doesn’t happen, it’s no ding on his reputation.


Of course, loyal readers know that while I always use technical analysis as a tool to evaluate the market trend, I also only see technical analysis as a reflection of underlying fundamental conditions. These fundamental conditions currently make at least a decent case for being cautiously bullish.


The fundamental case begins with the observation that the stock market is a leading indicator of the economy. The economy of the US appears to be gathering strength right now; and this strength is being driven both by the inventory cycle fueling business investment in the GDP equation and a sustained and massive government stimulus (both monetary and fiscal policy). In addition, despite high unemployment and low consumer confidence, consumer spending remains above expectations. The only big cloud in America's GDP equation picture right now is the net export driver, which is likely to fall off because of the recent strengthening of the dollar.


For now, then, I see the broad technical strength of the stock market reflecting optimism about the improving US economy. That means, at least for now, that the upward trend remains intact and there is little sign of the kind of major pullback that Michael Santoli's Mystery Broker (and Santoli himself by implication) are predicting.


As for my trading strategy at this current juncture, I'm using a five-pronged approach. I am trend trading the Russell 2000 with a long position in IWM -- I prefer the Russell 2002 to the S&P 500 because there is more volatility and potential upside reward. Second, I'm using a sector rotation strategy, with long positions in transportation (IYT), materials (XLB), and oil (DBO). Third, I am using a geographical diversification strategy, with long positions in Mexico (EWW) on an improving US economy and Australia (EWA) as a hat trick play on commodities, China, and exchange rates.


My fourth strategy is my big macro trade of the year. I have a relatively large position in CYB, which is a bet that the Chinese yuan will appreciate over the next 12 to 24 months. The beauty of this trade is that there is virtually no downside risk because there is no imaginable scenario in which the yuan would actually depreciate.


Finally, my non-cyclical hedging strategy involves a perennial commitment of 20% of my portfolio to small-cap biotech stocks, typically under 5 to 10 bucks. I like biotech because stock prices are driven far more by the drug discovery process than by the business cycle -- ergo, the hedge. I like small-cap biotechs under 5 to 10 bucks because I can essentially trade them like options and clearly define my losses -- which is critical for very high risk biotechs. My current holdings include: CHTP, DUSA, HALO, LPTN, PBTH, SNT, SNMX, SCMP, and SVNT.

2:57 pm edt 

Saturday, March 6, 2010

This Week: Some Cautious Bull

Stock market trend: Market Resumes Upward Trend 

 Market Pulse 

Is the economy progressing beyond its policy- and inventory-led surge toward persistent, demand-driven growth?

                                                                                           -- Dismal Science 

Last week's action marks a pivotal point in the stock market cycle.  Both improving fundamentals and technicals have shifted the risk/reward ratio towards the long side while IBD has officially called a resumption of an upward trend.


Fundamentally, as the above quotation from Dismal Science suggests, we are getting a surge in economic activity both from a business sector rebuilding inventories and from a massive fiscal and monetary stimulus.


Certainly, it is easy to see trouble ahead -- a potentially faltering consumer, a Greek tragedy in Europe, and a bubble bursting in China. However, at this juncture, market participants are discounting these risks and as a forecaster and trader, it would be irresponsible of me to ignore the market’s collective judgment.


At this juncture, then, what the market is telling us is that the U.S. remains in the early stages of a recovery and this recovery is likely to continue to expand without significant inflationary pressures over the next several quarters. 


In moving my cash off the sidelines and into the market, I am using a blend of five strategies that includes sector rotation, geographical diversification, and straight up trend trading combined with a small cap biotech hedging strategy and a Soros-style macro currency play.


A sector investment strategy at this early stage of the cycle favors oil, energy, materials, and transportation.  I play these with sector ETFs such as DBO, XLE, XLB, and IYT – all are technically bullish.


Internationally, two of the strongest country ETFs are Australia (EWA) and Mexico (EWW).  I see Australia as a hat trick commodity, currency, and China play.  I believe Mexico will trade well because of the improving U.S. economy.


My favorite broad index play to trade the trend is the Russell 2000 – symbol IWM.  It is the strongest of the major U.S. indices right now from a technical perspective and has the most volatility.


I might add here that there is a lot of chatter on both CNBC and in the blogosphere about how gold is a great buy. Commentators point to the massive fiscal stimuli and easy money awash in the world and point to an inevitable inflation. Some commentators also point to what must be the inevitable decline of the dollar given America's budget and trade deficits and bloated Federal Reserve balance sheet.


I agree with all that, but good trades are a matter of timing. So I say stay away from buying gold for now and keep away until either inflationary pressures build or the dollar resumes its long term decline. 


In that same vein, although both sectors are showing bullish signs, stay away from homebuilding and consumer discretionary spending for just a bit longer to see if the consumer finally declares him or herself into the recovery.


Perhaps surprisingly, most of Asia remains relatively unattractive for now on a technical basis because of  question marks related to the tightening of Chinese fiscal and monetary policies.  So I am avoiding Asia exposure for now, except for Australia.


Finally, I continue to hold 20% of my portfolio in biotech (CHTP, DUSA, HALO, PBTH, SNMX) and continue to have a big macro bet on the Chinese yuan appreciating over the next 12 to 24 months. On my biotech holdings, this is the fourth part of my blended strategy approach to the markets.


In particular, I favor small-cap biotech for two reasons. First, small-cap biotech stocks are driven far more by the drug trial cycle than the business cycle. This makes such docs a good hedge against business cycle risk.


Second, I hardly ever buy any small-cap biotech stocks that are more than a few bucks a share. For me, the penny stock biotech stocks are more like call options without an expiration date in actual stocks because my downside risk is clearly defined and limited.


It will be interesting to see if my bullish call at this time turns out to be a bunch of bull. If I'm wrong here, we have been set up for one of the biggest bear traps ever. Given the massive uncertainties out there in the macro world, I wouldn't be surprised if this trap is sprung -- and I will be ready to try to evade it as much is possible with trailing stop losses. However, for now, I see the coast as clear.

12:15 pm est 

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DISCLAIMER: This newsletter is written for educational purposes only.  By no means do any of its contents recommend, advocate or urge the buying, selling, or holding of any financial instrument whatsoever.  Trading and investing involves high levels of risk.  The authors express personal opinions and will not assume any responsibility whatsoever for the actions of the reader.  The authors may or may not have positions in the financial instruments discussed in this newsletter.  Future results can be dramatically different from the opinions expressed herein.  Past performance does not guarantee future performance.

DISCLAIMER: The newsletters and blogging on this page are written for educational purposes only.  By no means do any of its contents recommend, advocate or urge the buying, selling, or holding of any financial instrument whatsoever.  Trading and investing involves high levels of risk.  The authors express personal opinions and will not assume any responsibility whatsoever for the actions of the reader.  The authors may or may not have positions in the financial instruments discussed in this newsletter.  Future results can be dramatically different from the opinions expressed herein.  Past performance does not guarantee future performance.

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