This Week: Just a Bad Day or a Bearish Beginning?
The Well-Timed Strategy for Week Ending January 22, 2010
by Peter Navarro, Ph.D.
January 19, 2010
Stock market trend: Uptrend Remains Intact
The stock market finished last Friday on a decidedly bearish note – big drop on heavy volume. The question for this week is whether this was simply an aberration attributable to an options expiration day or the beginning of some kind of market correction.
If you take both the economic data and the technical condition of the market at face value, then there is nothing to worry about. The upward trend seems firmly in place, and the evidence continues to suggest an expanding economy -- with the latest such evidence being an uptick in the consumer price index in the ongoing steepening of the yield curve.
On the other hand, reputable economists like Mark Zandi and Martin Feldstein are forecasting a double dip recession. While the slowdown hasn't showed up in the daily yet, these economic bears are looking ahead to an end to help for the mortgage market, continued massive budget deficits, and persistently high unemployment. From that, they tease out a recessionary scenario which would be clearly bearish for the stock market.
Here is where I stand on the debate. I am in the Zandi-Feldstein skeptical camp. As loyal readers will remember, my skepticism dates back to my "market top" call in mid-October. Since that time, the Standard & Poor's 500 index has tacked on an additional 6% to the 61% gain between the March low and mid-October.
I continue to ponder whether my market top call was simply premature or just plain wrong. Either way, I don't regret called yet at this point. I'd rather lose 6% on a wrong market top call than give away 10% to 15% quickly in a sharp market correction. That's why, while I made a ton of money like most people between March and September of 2009 in the market, unlike most people, I have grown more and more cautious.
My caution is now reached the point where I prefer cash to even dabbling on the short side. Of course, as I said in an earlier missive, I also only enter stock positions if I have a long-short pair that I want to use as a hedge.
I know this approach won't have a lot of appeal to a lot of investors. However, my philosophy is to make most of your money in the market in the meat of the move when the trend is clearly defined. Although we have a clearly defined trend now, my view is that the meat of the move is already passed us and any further gains at least over the next few months are likely to be relatively small -- while the risk of a correction steadily increases. This is the kind of macro trading that is the antithesis of the buy-and-hold investor.
Haiti Buries Huge China News
While a real earthquake hit Haiti last week, a virtual earthquake with far greater implications for the global economy hit American business enterprises in the form of a massive cyber attack by agents of the Chinese government. Please read the op-ed that follows below carefully. It appeared last Friday in the San Francisco Chronicle.
One of the great flaws of the American media is that a tragedy like that of the Haiti earthquake can completely knock a story like the Chinese cyber attack completely off the front pages. I see, however, China's cyber attack on American enterprises as a significant historical event. That's why would ask you read the op-ed carefully below and then forward that op-ed to anybody you can, including your elected representatives. In my book The Coming China Wars, I describe in detail China's strategy to become the world's greatest military and economic superpower at the expense of countries like America and countenance like Europe. These damn well time for working Americans to become as well versed in the matters of China as they are in NASCAR and NFL football. It's also long past time for our myopic, money-grubbing politicians to wake up and understand that the greatest job program we could adopt right now in Congress would be trade reform.