Connecting Dots 6/4/2007

6/4/2007

• “Extended” charts versus high bearish readings
• Rising 10 year yield
• Inflation concerns versus attractive equity valuation
• Favorable entry point in US Technology

Quick Summary:

Markets might appear extended but investor psychology remains negative. There are opportunities to profit in select themes. While adding stocks on watch list and trimming in select areas. Rising yields is a key macro event and inflation concerns are worth tracking. Continue to favor Tech, Media, Telco, and communication related areas.

Equity Markets:

March 2000 highs in the S&P 500 currently stand at 1552.87, as we closed few points away at 1536.34. In one sense, we have recovered back to those highs after seven years and serves as a “resistance” level. On the other hand, positive influences in the market continue to emerge. Similarly, there are opportunities in areas that peaked in 2000 ie. Large Cap Technology. Once again from a cycle perspective – Technology offers attractive ideas.

Currently, one might assume that the bearish camp is “sick” of fighting the tape but that’s not the case when reviewing sentiment data. Surprisingly, the bearish readings (according to AAII) increased to 48%. Also, Market Vane data points out over 65% bearish reading vs. less than 25% bulls. Therefore, despite what appears to be extended levels, psychological readings have a significant negative bias. I would use this opportunity to buy attractive themes.

At the same time, inflation risks are in the market place. Cost of borrowing is relatively cheap and a stock market upswing with declining currency can taint the euphorically bullish market. These arguments have been laid out by bears for a while and only time will tell.

Historical Perspective: The first week of June during the 3rd year of the Presidential Cycle is the strongest part of a strong month.

Bond Yields / Currency:

In the month of May, the US 10 year yield recovered significantly. A strong run from 4.64% while closing Friday at 4.95%. Similarly, the Canadian dollar surge along with the 10 year yield. An interesting correlation that is worth tracking. Perhaps, foreigners are switching out of the US 10 yr driving prices higher. Also, the marketplace might suggest inflation with the rise of yet another asset class.

US dollar holding in above a key long-term support level. Further weakness in the Yen as it made new lows. In other words, the downtrend continues.

Commodities:

Crude: Continues to face a strong resistance around $65. Outside of geopolitical forces, maintain a negative/neutral bias going into this summer. Looking for a recovery closer to $60. (near 200 day mva.)

Gold: Near-term entry opportunity closer to 660. Oversold in the near-term but not sure on the upside potential. Poised for recovery in the near-term w/ next exit around 680.

Financials:

REITS last week surged higher driven by takeout events. Regardless, continue to have a negative bias given the run up and lack of sustainability ahead. The faith is tied to macro events.

Again, not favorable to add at this point of the cycle.

Technology:

CSCO- emerging here at oversold levels.

FFIV- With all time highs at $160, stock continues it uptrend from a long-term view. Accumulate closer to $80.

JNPR- Breaking above $24 with next resistance at $28. Attractive entry point.

NT- Climbing out of $24 range with positive momentum.

NTGR-Although extended in the near-term, the longer-term outlook remains positive. Accumulate on pullbacks.

FDRY- Similarly, strong run recently with further pullbacks offering attractive entry points

COMS-Part of the networkers theme. Positive trend building despite choppy trading patterns.

Interesting Take:

This is the very first time in modern history that we've seen a prolonged worldwide interval of equity arbitrage. That's where you borrow money to buy equity, earning more from the equity than you owe in interest on the borrowed money. The arbitrage comes in three forms: corporations buying other corporations for cash, corporations buying some of their own shares for cash and private equity investors buying corporations using mostly borrowed money. The arbitrage has to do with the fact that the earnings yield on equities (earnings divided by price) is often more than the after-tax cost of money (which is, roughly, two-thirds of whatever your long-term interest rate is).

Ken Fisher 05.07.07 Forbes.com

Summer Perspective:

Summer Perspective:

Supply of shares in the equity markets continues to shrink with increasing takeouts and buybacks. Clearly, not a new observation as stated several times before. Lack of supply causes markets to go higher and puts further pressure on short positions. Despite technically overbought markets, there is an upside bias from various angles. And mainly, no compelling reason for investors to cash out heavily. Earnings look good for the most part and sideline players are ready to add to long positions. Also, sentiments are not insanely bullish as the bearish camp maintains their view. For example, the NASDAQ short interest soared by22% this month. This displays that a negative market view is not that differentiated.

At the same time, the faith of private equity should take longer to materialize. This can be an additional hurdle for short positions. Regardless, there are theme specific opportunities both in macro and stock specific trends.

Given the difficulty of timing pullbacks, I continue to watch for a recovery in the US 10 year and US Dollar.

10 year yield: Continues to rise. Next resistance is 4.90 a peak level from January 26. Uptrend intact, and expect further upside move despite overbought conditions.

Crude: 3+ month trading range between $62-66. Outside of a geopolitical risk, I except prices to stabilize at current range.

Natural Gas: Narrow range 7.81 (15 day mva) and 7.10 (200 day mva). Expect further consolidation with heavy resistance at $8.

Gold: Near-term trend remains negative. Following the 691 highs in April. Looking for support around 640. (635-- 200 day mva).

Canadian Dollar: Strength continues with next resistance level at 0.95. Those were last visited in 1976 as the recovery continues from 2003 cycle lows.

Yen: Deeply oversold with lows closer to mid February.

AMD: continue to favor the recovery from oversold levels. Also, it is the 3^rd heavily shorted stock in the S&P with a 5% increase in short interest since April.

SNDK: Holding above support level at $40. Slowly, continue to build long position.

XLV: Healthcare ETF- Favor long position. On a relative basis, the index underperformed the S&P 500 and poised for a recovery.

A chart that stands out is the Powershare Nanotech portfolio. PXN - Lux Nanotech Portfolio In examining the components that make up the index, FLML stood out.

FLML: A French drug name with nanotech exposure. Recent surge took a slight breather, and offers attractive entry point.

Media: (From a long-term trend remain positive)

CMCSA :growing short interest. Accumulate closer to $26.

MCCC:Long-term trend remains positive. Continue to add on any weakness

CBS: Recent highs with positive momentum. Favorable part of a cycle recovery.

BLC: Again, weakness should create further buying opportunity. Despite recent gains on a realtive basis favorable upside outlook.

Market Observations

Market Observations:

Summary: 10 year yield rising slowly, as it sits around 4.80 range, perhaps a negative catalyst for markets. Select tech longs reviewed. Early signs of vulnerability in REITS.

Key level: SPX is approaching March 2000 highs of 1552.87. Few years ago, an illusive mark but here we are few points away. I am sure this will get press as a follow up to Dow Jones new highs. The overbought argument is becoming old news but charts illustrate something else. The NASDAQ, is more than 2X removed from 2000 highs. This makes a compelling case for underinvested technology stocks. Regardless, of broad market theories and hype, there is opportunity in technology. I suspect quality stock selection at current levels can be sustainable for year-end returns. (Healthcare as well). Unlike, other areas of the market, tech related stocks are relatively attractive to weather unexpected macro risks. Technology has become a broad sector therefore continue to favor niche areas within the sector.

CNTM (communication, Networkers, Telco and Media). Sticking to the 2007 game plan:

MOT: Slowly recovering, patience required for higher reward. Remains too removed from 200 day mva.

COMS: Strength continues to develop. Add on pullbacks.

SNDK: Holding above support level at $40. Slowly, begin to build long position.

SIMO: Oversold in the near term offers an attractive entry point.

AMD: remains positive and poised for near-term recovery.

In media, BLC and CMCSA. Add on any pullbacks. Continue to favor the media theme for the rest of the year.

MCCC bottoming from a long-term perspective.

Financials are a weak point in the market and this week the REIT short ideas began to materialize.

Reits: RWR: Wilshire Reits index: Stalling since mid February and struggling to recover. Least favorite REITS include, SPG, BXP, HST and VNO. From a cycle perspective the group is setting up for sharper corrections.

XBD: Stalling around 260 levels, a sign of slowing leadership in the group.

US 10 year yield – At a higher end of previous trading range. 4.40-4.80. After consolidating for several months upsides move developing. Currently removed from 5.25 level reached in the summer of 2006. Impact on equity markets: Keep an eye on this recovery and its sustainability as a macro catalyst. If yields recover accelerates, it might fuel a market downturn.

Crude: Tight trading range between $60-$65. Overall, uptrend remains in tact, given the run from Q1 lows of $50 to recent highs around $65. Perhaps further consolidation ahead with a positive bias.

Natural Gas: Slowly trending higher as it approaches key resistance level at $8. Next hurdle point is near the $10 range.

Dollar: Remains oversold, interesting to watch the relationship with 10 year yield in the near-term. Perhaps, both are poised to move higher from “dead” levels.

Gold: Near-term downtrend continues with further correction from overbought levels. Took out recent support level of 660.

Lesson learnt and further confusion ahead

Lesson learnt and further confusion ahead:

Quick summary: Looking ahead to second half opportunities, retail shorts, healthcare longs, macro influences and myths.

Equity Thoughts:

Given the elevated levels at current conditions, one has to readjust second half expectations. At this point, there are areas to add on pullbacks. In revising the 2007 thesis, I like communication, media, networkers and telco. Also, healthcare is an interesting play that can create upside potential with sustainability. As sated last week, there are opportunities in Healthcare – Continue to favor XLV. Consumer offers few trades, mainly focused on the short side.

So sticking with risk/reward here are few points.

Reits: RWR: Wilshire Reits index: Stalling since mid February and struggling to recover. Least favorite REITS include, SPG, BXP, HST and VNO. From a cycle perspective, a strong run and setting up for a sharper correction.

Retail: Continue to watch FDO as it faces heavy resistance around the $33 level. Following recent recovery stock is vulnerable despite net positive analyst view.

Other names to watch as short candidates --KSS, SHLD and TJX.

Healthcare: In terms of large cap names: AMGN, BMY and MRK – monitor for second half long ideas and enter on pending pullbacks.

Insurance: another area to consider given its recent pullbacks. – Specifically, the group has underperformed the S&P 500. An area to add, especially relative to other groups in financials.

Technology: Semi’s- AMD – deeply oversold with support at $15. It has been a value trap before but interesting comments from NVDA’s managment.

We are seeing the sell-through of AMD processors picking up significantly in this channel, and I am sure many of you see that as well. And it reflects the fact that it's replenished the channel with Athlon processors. It is now price positioned in the right place and it’s a great product. There is no reason why it went so, and so we are expecting the pick up again.

Chart attached below.

Energy: XLE- uptrend remains intact, strong run up in the past two months. Next resistance of 243.97 – May 4^th highs. OSX long –term strength continues- One can trim on pullbacks but above 180 – the long term cycle is intact.

Macro/Levels:

Crude: Key resistance at $66 level –momentum slowing. Range forming $62-66 levels. Expect down/pause action in the near-term.

10 year yield: Intermediate-term trading range between the 4.40-4.80 level. In recent near-term trading there is a close range 4.62 and 4.68. Lets not lose focus on the uptrend that started 4.00

DXY-Dollar index: Recovering from April 27 lows of $81.26. Next near-term resistance closer to $83. As stated before, I am expecting further recovery from deeply oversold levels.

Gold: Near-term downtrend continues with further correction from overbought levels. Next support rests around the 660 level with a momentum attempting to bottom. At early stages of a pair trade with declining gold and recovering dollar.

Commentary:

Despite growing bearish sentiment due to extended markets – the upside move has paid off for those who stayed long. Especially, a differentiated view from consensus. A study showed that 60% of individual investors were expecting a recession. Such a high number versus other periods and more than institutional participants. A lesson learned but does not deny the overbought levels.

Clearly, this “extended” market just keeps going higher as many don’t want to admit mistakes. Interestingly, the growing bearish sentiment has driven an increase into money market funds. With fewer participants in equity market, the market keeps going higher without the influence of net bearish “pundits”. Lets not confuse traders with media. The first quarter displayed the disconnect between noise and actual data.

From a macro level, oil stalled at $65 range, econ-talk is interpreted as positive news for markets, and overall net positive earnings. Important to watch a recovery in the dollar, 10 year yield behavior and cooling of emerging markets. Regardless, the simple question is profit taking versus adding on pullbacks. A global perspective offers the building bubble of credit and increase in major asset classes. Although, not actionable these points are accepted and as close to reality.

Group Ideas and Equity market review

Equity Markets: Supply of stocks in the marketplace continues to shrink. This week contributed to that theme as we saw further M&A announcements and takeout speculations. Also, better than expected earnings contribute to positive market action. This leads to additional buying or more of less compelling reason to sell.

Argument for an “overbought” market over recent weeks has left many wondering or giving up. SPX remains extended and poised for a pause around 1500. Given stabilizing geopolitical risks, neutral Fed stance and non-outrageous oil prices –these factors have been favorable for the markets.

In terms of stock behavior, an impressive rally (new highs) with consensus bullish agreement. Complacency can be a near-term concern, as the pull/call ratio retraced from overly bearish levels in February. Since 2005, we continue to make new highs according to NASDAQ new highs/lows data. This clearly coincides with the behavior of the most groups as participation across the board. Therefore, a very bullish run and euphoric self fulfilling upside move.

Dollar: On the radar once again. Same message as the last few weeks. Remains oversold and poised for a short-term recovery.

Gold: Approaching April 20^th highs of 691.40. A key resistance level while the all time highs remain at 725 reached last May. Expecting pullbacks in the near-term, even if Gold makes new highs for the year. Intermediate-term data appears stretched.

Yields: 10 year continues to trade in a close range between 4.60-4.80. Taking a step back, the uptrend remains intact since July lows of 4.00. Looking for further consolidation with an upside bias.

Crude: Near-term stretched with heavy resistance at $65 level. At this point, looking for a consolidation back to the $60 range.

Econ: Interpretation of markets remain positive but not clear if majority bulls understand or rank data outcomes towards decision making. Plenty of revised numbers, unclear interpretation and political related factors which are difficult to decipher. Federal Reserve developing a plan to control inflation.

GROUPS:

XBD: Broker/Dealer Index – recovering back to key resistance level of 259.23. Despite weak first quarter, the group has recovered previous losses and currently attempting to breakout. Watch resistance levels as indication of buyers or interest in this segment of the financials stocks.

In financials, REITS continue to make new highs and are elevated in the current cycle. It is difficult to deny the positive trend but from a cycle perspective, the group does not offer attractive entry points. Note: Dow Jones REIT index, has failed to recover back to February 2007 highs. It illustrates that buyers are staying on the sidelines and momentum is waning.

Stock Specific: vulnerable REITS: SPG: Watch the 115-110 range where momentum is slowing. BXP: Stalling 120-115 range with consistent low volume. HST: Slowing momentum with support level at $25. VNO: Attempting to breakdown around the 120 level.

Retail: RLX- Index pausing at current levels with two key resistance levels. First, 530 followed by 538.53 (Feb 20 highs). Failing to make new highs and displays vulnerability across the sector. Similar chart profile is seen in PMR (Dynamic Retail Portfolio). For example, KSS –sharp decline, SHLD- broke down, TJX –downtrend in tact.

Actionable Idea in the near-term

Family Dollar -FDO: Back to heavy resistance at $33. Double top to previous highs with weak momentum.

Groups/Stocks:

Technology: Few interesting charts: NVT-attempting to bottom, OTEX- uptrend intact, ULTI-positive uptrend since mid 2006, SMSI-consolidating around $14 and FLIR-on pullbacks.

Biotech: Continues to work and a strong run in the past two months. A stock specific play in general. Looking for pullbacks as opportunity to add. Stock speicifc names include: MYGN, ABI and TECH.

Healthcare Review: First quarter 2007, has seen a breakout in healthcare. Especially, pharma an area which has underperformed in recent market cycle. XLV- healthcare etf broke out recently. Chart attached below. (click to enlarge).

AMGN: Attempting to bottom while it remains oversold. Accumulate closer to $60.

BMY: Add on pullbacks closer to $29 range.

MRK: Among the top weights in the sector, MRK has established its leadership and that stands out.

Here are the top weights in the S&P healthcare.

	Name	Symbol	Index Weight
1	Pfizer Inc.	PFE	11.65%
2	JOHNSON & JOHNSON	JNJ	11.33%
3	Merck & Co. Inc.	MRK	6.83%
4	WYETH	WYE	4.69%
5	ABBOTT LABORATORIES	ABT	4.63%
6	Amgen Inc.	AMGN	4.52%
7	UnitedHealth Group Inc.	UNH	4.44%
8	Medtronic Inc.	MDT	3.77%
9	Bristol-Myers Squibb Co.	BMY	3.70%
10	Eli Lilly & Co.	LLY	3.57%

Macro Review -

Dollar: Looking for further recovery in the dollar --- especially at these oversold levels. Clearly, since last week, the dollar continues its weakness and remains a headline material. There are few US companies, mainly large cap which benefit on weakness of USD. The weak dollar policy has been implemented since 2002 and nearing a trend shift.

Gold: Facing resistance closer to May 2006 highs. Also, the gap between gold vs. dollar is widening. (Stronger gold / weaker dollar). This serves as an additional positive catalyst for dollar recovery.

Yields: US 10 yr- Further consolidation between a tight range of 4.40 -4.80. A waning momentum since mid July 2006 – as markets anticipated future rate hikes.

Crude: At this point, $68 remains a key resistance level. OIH strength is noteworthy as it approaches May 12 highs of 169.75. Surprisingly, following a sluggish start to the year, crude/energy related stocks continue to move higher.

Econ: Inflation, is not only in the US but globally continues to rise. The issue at hand is if markets are recognizing or looking past the issue. I continue to believe, outside of inflation, rates and liquidity risk as a threat to equity markets in the near-term. Overall, discussion of slowing economy and potential recession is on the table. Again, another lesson illustrating disconnect between the economy vs. stock market.

Markets:

Bottoms-up approach is a wiser move here given a broad market rise, as earnings season settles. Regardless, it’s hard to deny the strength of the broad markets. Positive signals seen across various sectors. I would take time to rotate into technology and healthcare groups as cycle favorites. Euphoric market highs continue but watching closely for panic selling in the near-term.

Groups:

Biotech: Attractive theme. Check out BBH index as a group indicator. AMGN- despite we start of the year caused on an overall drag to the index. At the same time, the group underperformed since October 2006.

Long Ideas:

ABI – offers entry point opportunity at current levels.

TECH- working, DNA- stabilization around the $80-82 range and AMGN-back to $63 level at previous support levels.

Sharing markets thoughts --4/19/2007

Sharing markets thoughts --4/19/2007

As the earnings season is upon us ....very difficult to make broad market statements. It is critical to have an understanding of Macro and Cycle trends. In the current environment, it is highly worthwhile to seek quality ideas in equities, (Top 5 names revisited from earlier this year) given the uncertain economic and credit picture. Also, one should look beyond earnings and decomposing macro themes into relevant actions.

Recovery in Dollar?: USD – is deeply oversold and plenty of headlines outline the weakness of the dollar relative to other currencies. Charts suggest to me, that a recovery bet is fairly attractive. In the near-term, I like a USD recovery corresponding with market and commodity correction. Chart attached below.

Weak/Neutral Gold: Long-term trend in tact but near-term breather needed. Commodities overall are extended.

Near-term extended Equity Market:

Continuing to focus on the macro’s as a guide for equity trading. Higher beta names have soared in recent recoveries. A weak dollar has driven equity markets higher. At this point, I am looking at reversion of the mean. (short equities/long dollar - A near-term trading idea).

Markets for the most part remain overbought in the near-term. Although, the positive trend is intact, don’t offer attractive entry points. From a cycle perspective, markets do need a breather following the bullish environment since 2003. But also, we have recovered and surpassed May 2006 highs. Certainly, bullish trend is in tact and next resistance is 2000 highs. That said, it is not an attractive entry point in broad market entry point.

Put/Call Ratio: Despite the environment that feels too bearish post housing slowdown, market participants are not too bearish according to this indicator. Pessimism is not at an extreme. This showcases that not an ideal entry point. Especially for a market that continues to edge higher.

Favorable Groups: Defensive themes that continue to produce cash flow. Importantly, from a cycle view – previous underperformance such as US technology, Pharma and Media are poised for recovery. As an example check out these five ideas that touch on attractive groups and via a stock specific play.

Five favorite stocks in 2007: GMST, SWY, LLY, TLAB and CRA. (Deatail Wirte up below)

http://markettakers.blogspot.com/2007_02_04_archive.html

Vulnerable Groups:

The weak part of the market is clearly in financials where credit risk is very difficult to ignore. Watching strength in those areas as opportunity to short. There is a takeout risk in many lender names. At times, rumors are just noise but a buyout risk is on the table.

XLF: ( AMEX Financial Index) Major upside ceiling at 37/38 range. Around those levels, looking to add short positions. Clearly, XLF since 2003 demonstrates a huge run up in a low rate environment.

Further Wisdom:

The risks for U.S. financial markets are not limited to the aftershocks of the mortgage earthquake. The massive foreign currency mismatch evident in the carry trade loans remains an overhanging danger to financial markets. Borrowing in one currency to invest in risky assets denominated in another currency is a sure way to ultimately destroy wealth. Gold is perhaps the only insurance against the financial agony to come from unwinding of the carry trade loans, and two decades of monetary mismanagement. (Safeheaven.com).

Managing controllable Risks: Inflation, Entry points in Biotech and Media.

FACTORS TRIGGRING MARKET DIRECTIONS:

Last summer markets anticipated a rate cut by the Federal reserve. At that time, the equity markets were oversold and 10 yr yield peaked on June 28, 2006 (5.75%). Of course, SPX rallied and began a strong uptrend on the back half of 2006. Today, markets are stretched and the 10 year yield stands at 4.76%.

It is becoming evident that previous interest rate assumptions are incorrect. It was a consensus view to anticipate rate cuts for the first half in of 2007. Clearly, that is not the case and there is a growing confusion in the interpretation of Fed’s message. Now that the equity markets are extended this macro uncertainty can highly contribute towards further fear. Inflation expectation is one key macro uncertainly which can ignite a downside panic. The possibility of a Fed rate hike is not out of the equation. As that fact becomes accepted by consensus that can have a troubling downside surprise.

Bottom-line: Inflation is a concern despite the calming language of the Federal Reserve. Consensus is underestimating inflation fears. The tone of the federal reserve illustrates the disconnect between expectations and reality.

Levels: SPX approaching resistance at 1461. I would use the 50 day mva as first support at 1426. Downside pressure on overbought momentum and its far removed from 200 day mva. Overall, looking for one more downside view.

Currency factor – recently there is a strong correlation between US Equity markets and Japanese currency behavior. In May 2006 – the market peaked driven by liquidity factors including rising rates in Japan. The peak caused sharp declines in the broad markets. Especially in the following areas: emerging markets, commodity and housing related.

Credit Risk: The self/defeating financial concerns:

Plenty of focus on econ data and upcoming earnings. Finally, the street is recognizing that the real estate concerns have not fully materialized. Again, lenders such as FED, CFC and BKUNA are few names that are at fundamental risk while currently offer a timely entry point.

Broad markets are overbought in the near-term, and financials appear to be the most vulnerable area. I rather trim profits or enter into ‘fresh’ shorts. (Especially in Financials). Brokers (XBD), Banks (BKX) and Insurance (KIX) indexes are overbought and remain fundamentally vulnerable. For several weeks, REITS appear extended as well. Maybe 1-2 quarters early but richly priced. Again, I sense one more downside to shakeout pessimists. This further illustrates credit risk which also seen in growing private equity and other sheer optimism of current environment.

Biotech: Attactive theme. Check out BBH index as a group indicator. AMGN- damage at the start of the year caused on an overall drag to the index. At the same time, the group underperformed since October.

Long Ideas: ABI, TECH, DNA and AMGN.

Media Review: Again continue to like the group as stated many times before. Last week focus on CMCSA- worked out triggered by positive news. Recent breakouts by TWX, DTV, VCLK and MCCC suggest early signs of strength and technical breakouts.

Long Ideas: CBS, IPG and CMCSA.

CBS: Facing near-term resistance around $32 but attractive on additional pullbacks. I am a buyer closer to the $28 range.

IPG: Multi-year trading range between $10-16 ranges. Poised for a recovery after the 4 year cycle of underperformance. Certainly, a value bet. A long-term chart illustrates the attractiveness – and looks beyond the 3% + gain on Friday’s close.

CMCSA: A longer –term play as demonstrated by recent strength. There is risk of overcrowded growth buyers but rewarding at current conditions.

Macro, Markets, Growth vs Value and Ideas.

General Comments:

In the near-term, US equities appear extended. Plenty of ideas, macro and cycle shifts reviewed. Crude finally slowing down with calming headline risks. Econ data unclear as markets looking ahead to econ / earnings. Any weakness ahead can create buying opportunities. Also, Growth vs. Value relationship showcases a rotation into Growth stocks.

(+) LONGS: S, MOT, IDCC, CMCSA, NTGR, CSCO, ABI, DNA, TECH, and PEIX.

Sector/Groups: Tech and Biotech.

(-) SHORTS: FED, CFC, SPG, BXP, HST, and VNO

Sector/Groups :Financials and Industrials:

Cycle Perspective -Growth vs. Value:

Since 2003, value is outperforming Growth in a bullish enviornment. The following chart illustrates the relationship between S&P Value vs. Growth. Notice: Growth ETF is dominated by technology (20%) and Healthcare(17%) as the leading sectors. Both sectors underperformed and are poised for a recovery. At the same time, value index composition is led by Financials (32%) and Industrials (11%). Interestingly, I continue to favor technology while trimming financials given this junction in the current cycle. Select industrials are showing sings of weakness. This style shift, lines up directly with sector rotation into tech and financials. Bottom-line, if growth stocks show strength, that should benefit select tech and healthcare.

Historical point to consider:

“A CSFB report late last year confirmed this view. The report concluded that on a price-to-cash flow basis growth stocks are cheaper than value stocks for the first time since at least 1977. The entire decline in the S&P 500’s p/e, since the bubble burst in 2000, is attributable to growth stock multiple contraction.”

Econ: #s appear solid and continued bullish interpretation (Non-Farm payroll included). Employment seems in tact and government data suggest inflation remains in check. Overall, the consensus view remains positive, which is reflected in the market behavior. Healthy tone is primary driven by gov’t data and Fed’s reassurance. The issue of rate hike vs cut is unclear – difficult to read. Currently, an edge to the 'rate cut' story, as pending economic concerns loom ahead.

All that said, I am looking for one more downside move in the general markets, which can surprise the market. I think that the housing data is underestimated and setting up for a surprise. Data watching will dominate headlines but I recommend staying focused on stock specific names.

Crude: After reaching a peak level at $66 – driven by Iran headlines which are slowly calming down. Near-term expecting further pullbacks. Reasonable support level at $60. (followed by $58).

US 10 Year Yield: Range bound in the last 7+ months. A tight range between 4.40 and 4.80. – This consolidation awaits fed policy or shift in economic climate.

Gold:remains in a tight range – not trending and actionable. There is a tug of war between buyers/sells as they await for a driving catalyst. Inflation is the assumed catalyst but yet to be resolved.

Investor Sentiment: Overall very neutral…argument for both taking holds and seen in the option markets. Not many extremes including VIX. In this environment, market can await headlines and on technical basis use Q1 highs as resistance level. Regardless, a difficult period to exploit extreme levels. Unless sector or stock specific calls. Also, money flow data

Growing confusion between slowing (Q4) earnings – especially in consumer related sectors vs. strong economy. Something has to give. In addition, the first quarter produced a correction and focus on weak housing. Also, a 4+ year uptrend in market calls for new trend to emerge. Hence, the argument for technology, Telco and media.

Looking Ahead:

Areas to buy on weakness: Again CNTM themes – Communication, Networkers, Telco and Media:

Communications:

IDCC: Attractive entry around 32 level, offers a short-term trading opportunity. (Tier 3- Idea).

Networkers: NTGR and CSCO to name a few – group setting up for an upside move.

Sprint (S): Turning around after a negative view and series of events. Climbing out of oversold levels but I do see further upside potential.

MOT: Continue to like the idea. And accumulate at current levels.

Media: CMCSA – worth a look above $25 where it is holding. Emerging ideas

Areas to sell on strength: Credit related themes –REITS –are vulnerable at current conditions. Short names to consider:

Watch list/Closely Monitoring: Retail recovery after an extended pause. GTRC – gaining some momentum as Q #’s are surprising the street. Also, declining oil can boost few retailers and consumer related space in the near-term.

Add to existing thesis: Alternative Energy: A growth area in energy – should provide additional lift despite crude performance.

Biotech looks attractive at current levels. Biotech powershare etf shows encouraging signs of turning. The group severely underperformed the rest of the market in 2006. It has been a difficult place to make money and poised for a turnaround. ABI – deeply oversold with a support level at $28.

Also, GILD, AMGN worth a look. Recent upgrades in other names in the group should trigger further investor demand. Actionable / early bet here. Other names to consider: DNA- multi-month trading range. TECH – strong volume as price increases. Buyers are stepping in, as ideas are worth a look on pullbacks.