Stradegy and Thoughts Q1 focus

Market Commentary:

Despite a short week to start the year, commodity related areas failed at a fast pace. There is no reason to panic given the start of the year, a new month and plenty of ambitions, expectations, desire to trade and other news factors. Even a week ago, few noticed the fading rally in energy and gold. More importantly from a cycle perspective energy was sluggish as crude consolidated most of 2006. Key sign of shift in leadership took place this summer and that trend should not be taken lightly.

My 2007 outline included two points just a week ago:

Somehow rates and commodities are interlinked and will be monitoring on a weekly basis. First, sub prime and housing stocks, might offer a shorting opportunity. Mainly a fed and 10 year yield call. Secondly, select commodity run-up can be tested, inflicting pain on commodity bulls. Therefore, one more correction in commodities awaits, but wiser to focus on unripe places.

I did not waste any time to take profits like GoldCorp Tuesday, as an exit of commodity related run because the sell-off demonstrated more panic than substantial new market material or evidence. Of course the extra day-off might have contributed towards panic trading but importantly the warm weather continues to dominate general news even driving the downside energy move.

Not surprising that the lagging sectors this week focused on energy related areas:

Coal -5.0%
Oil Service -6.4%
Gold & Silver -6.4%

Trading view: Some want to buy these oversold names for a trading recovery, which should offer a bounce. But from an investment standpoint, I am not thrilled on sustainability of a recovery bounce. Interestingly, I like to chase oversold extremes and part of a buying screen. Given the long-term data, it is not appealing for the first quarter if not the first half of 2007. Crude offers a strong support around the $55 level. Also start of the month balancing can bring back prices back to norm, thus its longer term contracts worth watching.

I think the marketplace is accustomed to getting a sharp rally and energy being a portfolio saver. But after a 3+ year run, I am not convinced that old groups can offer same upside results using general tactics. Therefore, play the trades with cautious and think ahead.

Communication and Networking: Themes and stocks of Interest:

Telecommunication themes like S (sprint) positive here, street has a bearish outlook, relative strength turn pending. Accumulate closer to $18.50, might be ahead, and use near-term consolidation to enter long ideas.

TLAB (Telllab), following a sharp summer decline, an attractive group but negative outlook. Looking for a surprise upside move while using the $10 as an exit level. Potential upside move closer to 12+. Worth a shot given a positive theme outlook.

NTGR: Also worth a look with positive trend remains in tact.

In healthcare: Those interested in growth can build on BLUD strength. For those seeking value check out PPCO – bottoming above $16. Other medical products include: PSSI and VAR.

Themes for 2007

Few thoughts the last day of 2006:

Themes pay off than trades. I am seeking topics in areas of healthcare and telecommunication. Those areas have shown early sings of recovery.

Task #1 finding a positive healthcare theme, with less volatility and more sustainability. In other words, more equipment based than biotech. Medtech can offer that sustainability theme but other emerging areas as well. Of course large cap pharma is another space which is relatively known and highly discussed on the street.

Task #2: Communication related technology:

It is a global theme many can understand but applying ideas to the right group/stock is not simple. Looking internationally for attractive momentum, growth potential. Fired up to convert on the theme.

Task #3 - Similarly, media themes specifically US based. Also, other areas of upside potential. Media can range from, internet to tv or even both. Regardless, I continue to like this theme and will continue to follow up.

Looking for names with core business advantage and upside move. Even conglomerates appear attractive despite a positive performance in 2006. In this case two steps await 1. Differentiating the leading group and 2. Finding areas of high investor demand. - These steps can maximize gains.

Task #4: Macro Trades

Pending corrections are difficult and at times not worth betting on timeframe.
Two appealing trades are worth noting for the appropriate time.

Somehow rates and commodities are interlinked and will be monitoring on a weekly basis. First, sub prime and housing stocks, might offer a shorting opportunity. Mainly a fed and 10 year yield cal. Second, select commodity run up can be tested, inflicting pain on commodity bulls. Therefore, one more correction in commodities waits, but wiser to focus on unripe places.

All that said, looking to short housing and oil on next correction. Following a multi-year run these names are at risk and would play them at signs of first correction. Select housing shorts might have longer downside duration.

Finally, something new. Would like to find a "cool" theme ahead of the street. Let's just call it desert. And once found it will be posted.

Start of 2007 looking for select behaviors but letting the market react before implementing any game plan.

For example, HGX (Homebuilder Index) 240 remains a key resistance level. With rate and consumer concern that would be a key indicator. This observation is to creating a shorting opportunity of sub prime lending related names or a recovery in the 10 year yield. Perhaps, making this correlation is not too sharp but at least it’s a view. Previous charts of us 10 year illustrate that point of a recovery odds becoming attractive. At least, on the near-term charts.

Finally, a theme in tech and media will continue to offer some rewarding stock picks.

Technology and Media themes are attractive and TIVO, DTV along with GTW. But new names like SVVS and other Telco groups are worth noting.

Similarly, in Healthcare the early Q4 recovery should have some follow through even outside of biotech.

Commodity related – not the same juice but plenty to trade.

Happy New Year! Let’s do it again with Health for a fruitful year.