There are numerous headline concerns ranging from high commodity prices to slowing economy and pessimism fueled by credit concerns. Similarly, there is a growing fear in the marketplace. Plenty of pundits continue to address worrisome issues. At one point this week, the ratio of analyst downgrade to upgrade stood at 3:1. Put/Call ratio increased as well, signaling an increase in negative sentiment.
Weakness in Financials, once again remains a dominant theme among participants. Following tremendous strength in the past few years, the current environment is least favorable from a business cycle perspective. Clearly, the sector underperformed and fundamentals are deteriorating. Although additional bad news lingers, stocks are becoming deeply oversold in the near-term.
Federal Reserve rate cuts sparked only a short-lived market reaction. Interestingly, the rate cut announcement received a tame response. Let's not forget, the $41 billion temporary reserve added to the US banking system last Thursday. Yet another example of Federal Reserves attempt to create liquidity with hopes of stabilizing credit risks.
Finally, most institutions closed their books on the year and sold their losing positions for tax purposes. Perhaps, this contributed to additional selling pressure resulting in a negative finish for the broader markets. (S&P -1.67%, Dow Jones -1.53% and Russell 2000 -2.87%).
Investment Strategy:
For those seeking to protect or grow wealth in the stock market, a systematic approach is much needed. At least one way to examine ideas is to review actionable global themes. Another approach is to make stock specific bets despite an eventful macro backdrop. Ideally, a balance of both can produce fruitful returns. In addition, investor psychology, seasonality and momentum are vital as well. The challenge is to construct a winning portfolio given the growing variables in the marketplace. On that note, here is a chart of sector allocation and stock specific ideas examined below.
Long: Technology (35%) and Healthcare (25%). Short: Financials (15%) and Energy (15%).
Technology:
Sector continues to work while displaying market leadership. Large Cap Growth Technology is an area of interest. Fundamentals remain strong for companies such as Microsoft, Cisco, Oracle and Intel. This sets a positive tone attracting investors towards the sector. These specific companies present further upside potential especially for longer-term investors. Of course, Google, Research In Motion and Apple have been the big winners, but at this point expect participation from other areas.
For broad sector exposure, consider the following funds:
QQQQ (Nasdaq 100 Trust Shares), IGM (Goldman Sachs Technology Index), XLK (S&P Technology),and MTK (Morgan Stanley Technology Index).
Technology Ideas:
SWKS (Skyworks): Improving margins and emerging strength bode well for this wireless chip maker. Buy point near $8.50-9 levels.
FFIV (F5 Networks): Appealing entry point above $34. Company should benefit from increasing demand for its advanced products as we approach an upgrade cycle in technology.
FDRY (Foundry Networks): After consolidating for 6+ years, company is benefiting from an increasing need for greater bandwidth. As a leader in its market, FDRY presents a sustainable growth. Look for near-term pullbacks as opportunity to buy.
Healthcare:
On a relative basis, several opportunities for those seeking a turn around in Pharmaceutical companies. For example, PPH (Pharmaceutical Holders Trust) is up 21% after bottoming in the summer of 2006. Also, on a stock specific basis, select names in Biotech and Medical Technology are favorable.
Healthcare Ideas:
SSRX (3SBIO Inc): A leading Chinese biotech company that remains profitable and a leader in its group. Given the 20% industry growth, 3SBIO presents attractive entry point despite near-term volatility.
ECLP (Eclipsys Corp): Attractive earnings and revenue growth for this healthcare software provider. Stabling around $25 and positive momentum remains intact.
CVTX (CV Therapeutics): Multi-month consolidation around $9-10 range. Promising product mix should contribute for an upside move from current levels.
Consumer Staples:
CQB (Chiquita Brands): Bottoming between $16-18 range. Timely entry point given managements revamped plans.
