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Beware of Bullish Pundits

Posted February 8, 2010

Topics: Global Business, Finance & Investing

Stock Market Trend: Market Remains in a Correction 

Biotech Alert

Before I present my weekly stock market message below, I want to alert you to an event coming up this week in New York. It's a big confab between all of the chief executive officers in the biotech industry -- big and small.

I always keep about 20% of my portfolio in small-cap biotech because the fate of small-cap biotech companies is largely determined outside the business cycle and instead by the fate of their drug discovery trials.

You may want to watch my new video that appears at TheStreet.com on how to pick small-cap biotech companies. It features an old friend of this newsletter in the top biotech analyst in the country Andrew Vaino.  Click here to see the video.

Market Pulse

Last week's market action was typical of a stock market in a correction trying to find direction. Big gains at the beginning of the week rapidly turned into big losses towards the end of the week while Friday was a down and up elevator the likes of which we haven't seen for a while.

If you agreed with my cash call over the last several weeks, none of this market volatility would've bothered you in the slightest. The fact is the bullish upward trend set last March has been broken, the market remains in a correction, and any attempt to go long this market in the hopes of picking up some bargains is simply a reckless gamble rather than a careful speculation.

In this regard, I urge one and all not to be lulled into the siren song of TV pundits who want to lure you into this market. Last Friday, as I was getting ready to do a segment for CNBC one half hour before the market closed, I was astonished to see one of these pundits declaring that Friday's recovery from steep early day losses had somehow marked the bottom much like the March 2009 bottom. Based on that claim, this commentator was urging viewers to start running with the bulls again.

If it somehow it turns out that this commentator is correct and Friday marked the beginning of a new bullish uptrend, it won't be because of astute analysis but rather because it just simple blind luck. The technical condition of the market is a mess. Three big fundamentals also weigh heavily on the bulls:

First, the tightening of monetary policy in China coupled with an escalation of increasing trade and geopolitical friction between the US and China is likely to send contractionary ripples through the Asian supply chain -- from Japan and South Korea to Thailand and Taiwan.

Second, the sovereign debt crisis in Greece and Spain can end in either one of two ways -- both of them bad.

One way is through a wave of defaults, in which case a credit crisis in Europe will be triggered, the European already anemic recovery will stall, and European demand for exports from the United States will fall, softening the US economy.

A second  way Europe's crisis could end would be with a bail out of Greece, Spain, and maybe Portugal by the Euro zone. That would result in a significant expansion of the European money supply and a plunging euro. That's not good for the US export sector either.

The third bearish macro wave bearing down on the stock market is this: the Obama administration has clearly crossed a Keynesian Rubicon with its reappointment of Ben Bernanke of the Federal Reserve, with its support for Tim Geithner as the Treasury Secretary, and with the continued presence of the ghost of Lord John Maynard Keynes a.k.a. Larry Summers in the White House. From this Keynesian administration, we are now virtually guaranteed a "tax-and-spend" strategy far more likely to destroy jobs than create them.

This is not to say there are not some bullish tailwinds we must be mindful of. There is no question that the manufacturing sector of the US economy is steadily gathering strength. The only question, however, is whether consumers will eventually come to the party. We've talked a lot about this before -- the consumer is weak. If the consumer stalls, all that inventory on the shelves of American businesses will turn into more job losses and production cutbacks.

The broader point is this: why risk your money now when the market trend is so clearly undefined? I know this is a new way of thinking for some of you buy and hold investors; but this is the way of the new investment world and you better get used to it. The nice thing about it is that in times of turmoil like last week he won't be running around in a panic or like a chicken with your head cut off every time the market goes down.