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Stock Market Trend Remains in a Correction

Stock-Markets / Stock Markets 2010 Feb 28, 2010 - 10:12 AM GMT

By: Peter_Navarro


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.”

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.

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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

© 2010 Copyright Peter Navarro - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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