Buy China Energy Technology
Dow Jones Industrial Average 10,558
Value Line Arithmetic Index 1,864
30-Year Treasury Index 4.41%
Gold 1/10 Ounce $44.34
The Big Picture for Stocks
The 4-year cycle is negative into 2006.
Technical Trendicator (1-4 month trend):
Stock Prices Down
Bond Prices Down
Gold Price Up
There have been two earnings announcements in the last week that have very bearish implications in my opinion. Dell guided lower, as did Wal-Mart. These two stocks are the kingpin companies of the technology sector and retail sector. If these two industries falter, the rug is pulled out from under the economy.
You might say, "Well, so what. The lower guidance seemed almost insignificant." But I remind our readers that if the economy is headed into a recession, it would begin with seemingly insignificant changes at the margin - just like we have begun to see.
We have discussed the over-leveraged consumer often in these pages. The technology sector is a less obvious problem, but a minority of analysts are saying that there is overcapacity and high inventories in technology versus demand. This sector may well be at risk also.
Accordingly, we are adding another short sale recommendation to our Special Situations list. Sell short the S&P 500 equal weight index (RSP, 161.60). I see many categories across the entire S&P spectrum that could weaken fundamentally. In addition to the consumer and tech sectors, the financial sector is also at risk, especially with rising interest rates. There are too many banks and brokers and insurance companies in America. There is just too much competition. I think you will begin to see lower guidance in this area also. And if oil prices pull back, the energy stocks will also pullback. These four sectors make up most of the economy, and thus most of the S&P stocks.
On the other hand, I am finding opportunities on the long side in beaten up Chinese companies. Here is another one we can add to our list on the long side - China Energy Technology (CESV, 9). This company provides energy saving products to industry in China. Revenues are just beginning to explode (http://yahoo.investor.reuters.com/CompanyFinancialHighlights.aspx?ticker=CESV.O&target=%2fstocks%2ffinancialinfo%2fgrowth%2frate). And the stock has been building a technical base pattern that looks good to me.
I also think that there is very big upside potential in junior gold stocks. While the metal is moving ahead, and I think made a break-away gap on August 11, small gold stock are still languishing. Buy all of the mining stocks on our Special Situations list.
Notice that we have now separated out the open positions and the closed positions in our Special Situations list as shown in the Archives and Performance section of our site. Note that our closed positions remain comfortably above a 100% per annum rate of return.
Note: We are long CESV and long puts on RSP in accounts we manage.