Stock Market Trend, the Gold-Plated Economy

By: Peter_Navarro

The stock market continues to show technical improvement – even as the economy continues to exhibit fundamental deterioration. On the technical front, Market Edge has its Strength Indices showing improvement while its Momentum Index remains very strong. At the same time, 81 of the 91 Industry Groups followed by Market Edge are rated either strong or improving. This all adds up to a stock market that continues to inch up on weak volume.

Because the economic fundamentals do not yet support this early cyclical uptrend, I continue to think it may simply be a sideways market trap. Two things that caught my eye last week included an unexpected drop in Consumer Sentiment and a fallback to zero for the core inflation rate is measured by the CPI. Both are recessionary signals. On the other hand, the ECRI weekly leading index has stabilized and resumed a modest upward trend, which is bullish news.

Of course, the big macro puzzle right now is why gold is hitting an all-time high even as deflation continues to loom is a real possibility. My favorite explanation, which I have offered to you before, is that because of the large budget deficits both Europe and the United States are running, gold as slowly and quietly becoming the de facto reserve currency of the world.

On other macro notes, we had yet another round of sparring over Chinese currency manipulation, this last week on Capitol Hill. Treasury Sec. Timothy Geithner continues to maintain the untenable position the Chinese currency is grossly undervalued but that China is not a currency manipulator. The only thing clear about the situation is that China continues to benefit from its undervalued currency and its economy booms while America goes bust.

The other big news that has important implications for the American economy on the currency question revolves around the manipulation of the Japanese yen by China through its large bond purchases in Japan. These purchases are now forcing Japan to once again intervene in its currency market to weaken the yen – and thereby gain back some advantage against countries like America in China.

Given the economic uncertainty, I continue to hold significant fraction of my portfolio in cash while focusing on small-cap biotech stocks for returns based on science rather than the economic cycle. Over the next week or so, one of those stocks – Chelsea Therapeutics – will have its day of reckoning with the FDA regarding the viability of its hypertension drug Droxidopa. As I discussed on CNBC, Roth Capital’s Andrew Vaino is handicapping the odds of success at about 75%. Stay tuned.

On CNBC, also said it was time to take your profits in Savient Pharmaceuticals as, after its FDA victory, it has now risen to fair value – and will only rise further if there is a bidding war over the company. While this is a possibility, it may be better to deploy capital elsewhere.

On the other biotech fronts, LPTN saw a slight uptick in volume and price for a stock that is incredibly thinly traded. Translation: risk is extremely high but there appears to be some movement on no news. When I see such movement, it often means that something's going on within the company that may soon come to light. Stay tuned.

Last take: Be on the lookout this week for my latest video for the Street.com where I will rate Nokia short or long.

(My small cap biotech portfolio --   CHTP, CLDA,DEPO, DUSA,LPTN,NRGX,SNTA,SNT)

Question for my readers: If any of you have any information about a penny stock called Savi Media (SVMI) please send me an e-mail. The company makes a valve which claims to provide significant fuel efficiency and environmental benefits. If true, this two cents stock should shoot to the Moon. However, that clearly has not been the case. Anybody who can solve this SAVI mystery for me – is a fly-by-night pump and dump company or a misunderstood genius? – I’d love to get your thoughts.

Navarro on TheStreet.com
Click here to review my videos on TheStreet.com.
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Professor Navarro’s articles have appeared in a wide range of publications, from Business Week, the Los Angeles Times, New York Times and Wall Street Journal to the Harvard Business Review, the MIT Sloan Management Review, and the Journal of Business. His free weekly newsletter is published at www.PeterNavarro.com.

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