The Technicals & Fundamentals of it
The Well-Timed Strategy for Week Ending April 24, 2009
by Peter Navarro, Ph.D.
April 20, 2009

Market Pulse

Six straight weeks now of gains for the Dow and we are now back to, and just slightly above, the magic 8,000 level of resistance. All technical indicators for DIA (the exchange traded fund for the Dow) reflect a bullish posture: The short term trend is up. The 10-day, 21-day, and 50-day moving averages are rising. The MACD is bullish, and DIA is clearly under accumulation. The only technical danger sign is an overbought condition.

The underlying fundamentals provide a least some reflection of the technicals. The most salient feature of the economy now is that it appears to be at least stabilizing. Whether this turns out to be a chimera and a feint for another leg down in the business cycle will depend heavily on two factors.

The first factor is a continued rise in the unemployment rate both nationally and in key states like my own in California. If the Golden State is the canary in that coal mine, you can see how this Second Leg Recession might develop.

In the Golden State, unemployment has reached the double digits and the state government is flirting with insolvency. If voters fail to approve a set of ballot measures that will further indenture their children to the childish overspending ways of Governor Schwarzenegger and his Democratic captors, the state will have to engage in further layoffs and forced “furloughs” which involve pay cuts. These layoffs and pay cuts will represent a further contractionary shock for the state, and plunge it deeper into the funk it is now in. Writ large across America, this is one danger, particularly since California represents about 15% of our national GDP and can take down other states with it.

The second factor that will weigh heavily on the global recovery is, as I have said several times in this newsletter, the fate of Europe. We hear less and less about Europe in the news, but troubles continue apace there and it is difficult to parse that situation.

For now, the markets continue to rise off the deck they had been knocked down to. My portfolio continues to be dominated by a coterie of 2011 in the money or near the money Leap call options involving Citigroup, GE, Delta, and Intel. This week, I also added Bank of America.

I’ve never been one to go for big name companies like these, but in these times, I believe they may represent historic value buying opportunities. Because of downside economic risk and to have more capital to deploy, I favor call options rather than the stock shares themselves -- focusing more on capital gains than dividend income. (The one position of the group I have the least confidence in is Citi, but I got the options cheap. I also believe the market got it wrong on Intel this last week.)

As a final note, I put about a decent chunk of my retirement portfolio in the Nasdaq several weeks ago and believe that tech will outperform the non-tech economy over time.

THE CHINA EFFECT

Please see my latest You Tube report.

© 2009 Peter Navarro

“Any trader or investor who ignores the power of macroeconomics over the world’s financial markets will, sooner or later, lose more than they should and if they are trading on margin, perhaps more than they have.”-- If It’s Raining in Brazil, Buy Starbucks

Peter Navarro is a business professor at the University of California and the author of the best-selling investment book If It's Raining in Brazil, Buy Starbucks and The Well-Timed Strategy. His latest book is The Coming China Wars: Where They Will Be Fought, How They Can Be Won.

Contact Information

Peter Navarro Irvine, California USA | Email | Website | Editorial Archive