Yesterday's Market Action, Short Chips, Long Oil and Gold

The tech mania is back. And you can thank the analysts for producing it. But it is giving us more proof that even if you have the right idea at the right time, investing in single stocks is riskier than your exchange traded fund alternatives. A fuller article on “market timing” is in the works. But first the numbers and an idea. The top ten most active stocks on the market yesterday were, with one exception, all retreads from the last bull market. Take a look: 1) Intel (INTC), up 1.12% 2) The Q’s (QQQ) up 0.80% 3) Oracle (ORCL) up 0.08% 4) Cisco (CSC), down 0.47% 5) Microsoft (MSFT), down .0.56% 6) JDS Uniphase (JDSU), up 3.24% 7) Sun Microsystems (SUNW), unchanged 8) Applied Materials (AMAT), 3.34% 9) Pfizer (PFE), down 0.33% 10) Qualcomm (QCOM), up 3.90% Lots of chipmakers. And not by accident. You have to wonder if all the chip analysts called each other on Tuesday night and decided to be wildly bullish on Wednesday. Brokerage firm Harris Nesbitt Gerard raised its forecast for chips from “negative” to positive. Merrill Lynch “reiterated” its positive forecast. Bear Stearns chimed in by upgrading Fairchild Semiconductor to “outperform” from “peer perform.” Stocks rising on analyst ratings. Who woulda thunk we’d see that again after the last two years? But rise they did. In fact, the Nasdaq hit a new 16-month high. The Philly Semiconductor Index (SOX) was up 2.96%. The Morgan Stanley Internet Index (MII) was up 2.93%. And the AMEX disk drive index (DDX) was up 2.22%. There are two investment conclusions you can draw from this action. First: during secular bear markets, it’s the most speculative stocks that lead the rallies, hence techs leading the way. Second: if you’re going to speculate, as either a bull or a bear, it makes a lot more sense to do it with exchange traded funds and the whole new breed of index, geographic, or sector specific funds that I’m calling PGIs. Case in point, a would-be tech bull trying to figure out how to play a rally could have picked the biggest, baddest, tech stock in the bunch and gone long or bought calls. But if you had picked Microsoft, you would have missed the rally. If you’d picked JDSU, you were in luck. That’s not very efficient risk management. And it’s totally unnecessary these days. For example, the MII is made up of 25 Internet-related stocks, including MSFT, ORCL, and CSCO. Had you bought each of those stocks individually, you would have been up modestly in ORCL and CSCO, but down enough in MSFT to lose it all--this on a day when the Nasdaq reached a 16-month high and the MII itself went up nearly 3%. Even if you had the right idea for the day (bullish tech) you’d have the wrong strategy and probably the wrong individual stocks. Your best strategy is to own the type of investment that gives you the best chance to profit from your idea with the least amount of risk. INVESTMENT IMPLICATION: Take a look at IAH, the Internet Architecture HOLDERS. This gives you exposure to, among others, CSCO, DELL, SUNW, and 3COM (COMS.) I’m looking at it on the short side, sitting on its 50-day moving average, holding on for dear life. MARKET IMPLICATION: It’s a speculator’s market right now. Look for in-the-money puts on indexes that are overextended. And on the long side, look for calls on gold, gold indexes, and gold stocks. In particular, look below for OIH, the oil service holder, to break out above 61 on both escalating geopolitical tensions and the new contract awarded to Halliburton for rebuilding Iraqi oil infrastructure. Even HAL calls don’t look like such a bad idea. But why take the risk on HAL when you can own it as part of OIH and get the rest of the sector too?