Today’s breakout over 1395 (finally!) should mark the beginning of the big move to 1440, and then on to new highs over 1555. For most of this week, it looked like the S&P 500 was determined to go back down to 1326 for one last test of that major support level. It is still possible that this could happen, because in order to be sure we are off on another upleg the index now has to survive a test tomorrow or early next week back down to 1395 from above, and then rebound from that area to close above today’s close. That would indicate a very strong buy signal.

If 1395 does not hold, a drop to 1326 would ideally be driven by some bad news related to the problems we already know about, and would push the VIX Fear & Greed Index up to touch its broken trendline at 25. That combination would make me very confident that the “sell in May and go away” crowd will come back after Labor Day to a market substantially higher than it is today, no matter whether we go straight up from here or visit 1326 first. Either way, there will be no graceful way to get in. We will know soon which scenario will play out.

I wanted to talk about two stocks this week that have been doing very well for us, namely Sequenom (SQNM) and Energy Conversion Devices (ENER). Sequenom ran up almost to my $12 target price and then pulled back. Then, just yesterday, they had an analyst meeting that was so positive the stock jumped almost 22%. Our other winning stock, Energy Conversion Devices, jumped over 43% on May 8, then ran over my $55 target price and is hanging up there, but some little-noticed bad news that I’ll discuss in a minute is making me more nervous about the stock.

I also want to discuss a Harmonic (HLIT) announcement that reminded Wall Street of the unpredictable Harmonic of old. I’ll tell you exactly why this is an unfair characterization.

There’s a bit of other news to share, but things are surprisingly quiet for this time of year. Perhaps the Texas Instruments mid-quarter update call will provide the fireworks for the week.

But first, I want to revisit our winning stock Sequenom, which I recommended last June 14 at $4.50. It hit $11.63 last October, after I raised the target price from $8 to $12, but then backed off in the general aversion to development-stage stocks as investors’ risk appetite vanished. The day before the analyst meeting, the company presented results to the International Society for Prenatal Diagnostics meeting in Vancouver. Their Down syndrome test correctly identified 100% of Down syndrome samples, with no false positives. They have 10 fetal genetic markers now, which cover 93% of all U.S. ethnic groups. Previously, they had eight genetic markets and showed greater than 95% sensitivity (identifying Down syndrome) and greater than 95% specificity (avoiding false positives). That was good enough for approval, as the existing noninvasive prenatal diagnostic techniques are only 70% to 90% accurate. In fact, due to the dangers of amniocentesis before our daughter was born, my wife opted for an x-ray/blood test last year even though it was less accurate. Had the new Sequenom test been available then I know she would have opted for it in a heartbeat.

Going forward, Sequenom will start a multi-site prospective study in the fourth quarter, targeting a launch as a Laboratory Developed Test in the first half of 2009. Their Rh-factor test is available now to partner labs, and they will start a validation trial in the September quarter targeting FDA approval. Also in the September quarter the company’s FetalXY test will be available to partner labs

This was a blow-away presentation, and I expect the stock to consolidate a bit and then march on to my $12 target. Hold SQNM.

Energy Conversion Devices said they will hire 400 people to staff their expanded Greenville, MI United Solar Ovonic factory. With the price of oil so high, solar almost makes economic sense even without tax credits and programs. That’s good, because some of the programs in places like Germany and Spain are likely to be trimmed back. One reason the stock jumped today was a Lehman Brothers report saying ENER will be less affected than other solar companies by the volatility in European solar markets.

The bit of bad news for ENER came from the Cobasys joint venture with Chevron to build batteries for hybrids. Specifically, General Motors said they are behind on their Saturn and Chevy hybrids due to leaking batteries made by Cobasys. Due to this, GM is replacing 9,000 NiMH (nickel-metal-hydride) battery packs in hybrids built last year, before focusing on building the 2008 models. GM’s bigger hybrids like the Chevy Tahoe and GMC Yukon aren’t affected, because they use batteries made by Panasonic, which is a subsidiary of Toyota that pays some royalties to ENER.

The new management team at Energy Conversion Devices is trying to sell their position in Cobasys, either to Chevron or as part of a sale of the whole company to someone else. There is an anonymous bid on the table, and I think Toyota is likely the unknown buyer. In the meantime, Cobasys is running $90 million a year losses, which are being funded by loans from Toyota. Energy Conversion Devices accounts for their position in Cobasys using equity accounting, which means they do not report their share of the revenues and losses on ENER financial statements. Instead, equity accounting normally requires writing up or writing down the value of the investment each quarter. But ENER did not contribute any cash to the Cobasys joint venture, just technology, so they don’t even have an investment to adjust. All the losses have not and will not impact ENER’s income statement. When Cobasys finally is sold, ENER will book a financial gain of some small amount. But the GM battery problem is likely to reduce the amount of any payout to near zero.

That’s the only cloud hanging over this otherwise bright story, and I continue to recommend holding ENER, even though it is $10 over my target price. The stock is in the right place at the right time to stage a further run. Hold ENER for additional gains.

Content on Demand MegaShift

Harmonic (HLIT) announced a marketing agreement with Fujitsu to sell some Fujitsu encoding technology, and Wall Street immediately remembered the bad old days when HLIT sold third party advertising insertion equipment to the cable operators at the typical lower gross profit margins one gets for selling someone else’s equipment. There were a couple of quarters during that time where Harmonic’s revenue growth was OK but earnings faltered due to a product mix weighted towards the third party equipment. Besides, what the heck is the encoding technology leader doing selling someone else’s encoding technology?

The answer is pretty simple. Encoders use a “look ahead” technology to see what video is coming up, allowing them to keep up with the speed requirements for high definition encoding. It introduces a two to four second delay in the program broadcast, called latency. That works well for prerecorded programs, movies, commercials and such. Harmonic is the king of high definition encoding.

However, live events are a different story — there is no way to look ahead to see what is coming. If you want to have some fun during the next football season, watch the game on a HD set with your friends, but also listen to a radio broadcast through an earbud. You’ll be able to call catches, interceptions, touchdowns, field goals and tackles with amazing 100% accuracy.

Encoding is even tougher in mobile video situations, such as when your local TV news decides to cover a live fire, because the reporter has to interact with the anchor in the studio. The two to four second latency makes it very awkward to carry on a conversation. Fujitsu has developed technology for this live interactive broadcast mobile video niche that is optimized for low latency instead of high compression. I’m sure HLIT could develop the same box if they wanted to spend the R&D and management time on such a small niche, but they decided to buy rather than make this box. It will never be a big enough part of their revenues to affect their gross margins, so Wall Street’s worries are unfounded — as is so often the case with Harmonic. HLIT remains a Top Buy up to $12 for my $18 target.

New Energy Technology MegaShift

Gasco Energy (GSX) will benefit from a rip-roarin’ bull market in natural gas futures. High temperatures in many parts of the U.S. this week raised demand from utilities that use natural gas to generate electricity for home cooling. July natural gas futures are up to $12 per 1,000 cubic feet, from $6 earlier this year and $4 at the low in the middle of 2007. Futures for next winter also are around $12, and at these prices GSX makes a ton of money. Buy GSX while it is under $4.50 for my $9 target.