08/13/08   Bulls: Not Dead Yet

Editor’s Corner

Bulls: Not Dead Yet

Ron Rowland

Domestic markets continue to advance from the July 15 low. Day-to-day volatility remains quite high, with the direction reversing every day or two. These quick swings tend to hide the underlying trend that is now developing. That trend is bullish for many market segments, especially outside of the Large Cap arena. Unfortunately, the same is not true for international markets, where the July 15 lows have not held up, caused in part by a strengthening U.S. dollar.

Crude oil is getting a respite from selling today. So far, it’s just a one-day pop, and there have been other one-day pops over the past four weeks. Commodity markets have also seen large daily price swings lately. Unlike the equity markets, those swings have resulted in negative trends for commodity prices. The recent actions between commodities and equities are related. However, this inverse-correlation is not a permanent thing. Correlation levels are not static and can change on a dime. It is possible for equities and commodities to move in the same direction, just like they have done for most of the past five years.

Once again the bond market is shrugging off the action in other markets. Bonds did not give in to the fear of inflation when commodity prices were rising, nor are they benefiting from the current decline in commodity prices. The supply and demand factors in the bond market are being driven by the year-old credit crunch. Treasury securities remain in high demand while lower-quality debt issues are struggling.


The recent bounce in Financials is looking more and more like a quick bear market rally than the start of a new bullish trend. The largest one-day gains often occur in the midst of a bear market, and this time appears to be no exception. Given that scenario, it is prudent to be skeptical when a sector that has been in a bear market suddenly pops into the top-half of our momentum rankings. Financials and Consumer Discretionary are two recent examples. Both are in bear markets, enjoyed nice rallies, popped up in our rankings, and now appear to be resuming their downtrends. Their short-term success was fleeting. Health Care and Consumer Staples are operating under a different scenario. They are at the top of our rankings because of their defensive nature. While these sectors are far from risk-free, investors tend to think of them as safer alternatives during times of economic uncertainty. Then we have Technology, a relative newcomer to the top-half of our rankings which is currently showing positive momentum. Technology does not fit either scenario described above. It lies somewhere in between.


Small caps had a superb week. The daily moves have been volatile, but the intermediate-term trend is bullish. Even though all our style categories showed improvement over the past week, the gap between Small Cap and Large Cap performance continues to widen. Small Cap strength during a recession may be counterintuitive, but investors need to keep in mind that the reasons for strength or weakness in a specific investment category may not always be obvious in real time. If the strength continues, the reasons will likely be more apparent a year from now. Those reasons might include the tendency for Small Caps to lead out of recession, to perform better in a strengthening dollar environment, or their ability to distance themselves from the financial crisis.


The U.S. dollar continues to gain strength, which places a strong head-wind on most foreign investment returns when converted back into dollars. As a result, the U.S. market remains atop our global rankings. International markets are getting hurt by the contagion from U.S. credit problems and decreasing demand from U.S. consumers.


The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.

“Innovation is everything. When you’re on the forefront, you can see what the next innovation needs to be.”

Robert Noyce (1927-1990)
Intel Founder & Co-Inventor of the Microchip


Semiconductor Play in Graphics: NVDA

Brandon Clay

Pick-of-the-Week:NVIDIA Corporation

This is a difficult environment for short-term investors. When the Dow jumps up 200 points one day, and crashes 200 points the next, it’s hard to tell where to turn. Calling bottoms is nearly impossible. Every week brings more bad news in financials, which trickles into almost every other area. At present, Healthcare is the best place to put your money, but will it be the same next week? Stay tuned.

As for other opportunities, this week we turn our attention back to technology. Not in the broad sense, but with laser-focused precision. In this market, we have become value investors — seeking an inexpensive company that’s almost-undiscovered by mainstream investors — classic Warren Buffett-style investing. We’re not claiming his foresight, but we’re giving the Oracle his due. Value investing can be very successful, even in bear markets.

Technology is not typically known as a place for value. In fact, quite the opposite. Since the Tech crash, a shift has happened. Certain semiconductors have been hammered over the past several years — especially in the last 12 months. One of those, a leader in graphics chips, has been especially beaten down. NVIDIA Corporation (NVDA) fell from a 52-week high of $39.67 last October. The Santa Clara-based chip designer is now trading around $12.00 today. Did it really deserve the punishment the market delivered? We don’t think so.

In 2007, Forbes Magazine declared NVIDIA the Company of the Year. Understanding the hyper-competitive tech market, Forbes praised NVDA’s management for never becoming complacent. They bought out once-rival 3dfx in 2000 to strengthen their offering. This helped NVIDIA dominate competitors like ATI. In February, they purchased Ageia Technologies for an undisclosed sum. This acquisition continues to position NVIDIA as the leader in the gaming graphics market. As an aside, the video gaming industry is nearly $30 billion strong, and NVIDIA is a key participant in this industry’s success.

Yesterday, NVDA released 2nd quarter earnings. The numbers were less than stellar as they lost $120.9 million or $0.22 per share after some charges. CEO Jen-Hsun Huang blamed a weak PC market and pricing problems. But one quarter does not make a company. The market was pleased with the guidance as investors awarded NVDA with a gain of +10.9%. There’s good reason why.

NVIDIA is sitting on $1.62 billion in cash. That gives them almost $3 per share, with no debt. Moreover, the charges from last quarter are behind them. Instead of picking up another company to strengthen their position, they’ve decided to buy back $1 billion more shares of their own company — a sign they sense their own value. If you notice our sector rankings above, Technology just turned green and may be heading to the top. NVIDIA should play a part in Tech’s rise. To play the classic semiconductor-cycle (buying on a down-cycle and selling after an up-cycle), go with NVDA.

All the best.


Keep in mind, the Pick of the Week is usually intended for aggressive investors. Don’t risk money you can’t afford to lose. You will need to decide when (and if) it is time to sell.

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