After last week’s rally produced the best five-day gain since March 2003, I thought we might finally be ready to break free from the bottoming process and head up. But not quite yet. While these sharp declines are painful in the short run, everything I see tells me that we are about to head higher. If there was anything to smile about, it was yesterday’s S&P 500 close at 1326 — a number you should be thoroughly familiar with by now, and be able to say “Retest!” in your sleep.

With the VIX Fear & Greed Index now nearing 30, an extreme level in recent times, even more bulls are turning cautious or negative. You may have seen superbull Jim Cramer’s rant about an imminent 2000-point drop in the Dow Jones Industrial Average, for example. The S&P does have to rally from the 1326 area to keep the reversal pattern intact. It may go back to test the 1270 level one more time, but I think that is the lesser probability. Every major move since mid-2002 has shown this pattern of a reversal rally, a retest that goes back to the breakout point (1326) but not the lows (1270), and then the next leg up. That’s what I’m expecting. If the S&P breaks under 1326, stays there a while and then breaks 1270, I’ll have to agree that the immediate upside scenario is off the table. As always, we’ll let the market tell us what it wants to do.

We may or may not be in a recession right now. But it doesn’t matter because business is soft either way. The January contraction in the service sector certainly caught people by surprise, as it was the first down number in four and a half years. The January labor report showed that employers cut 17,000 jobs during the month, which will stand as the first reduction in four years, unless it is revised up. The Economic Cycle Research Institute has not made a recession call yet, but their latest index number leaves the Fed little time to avoid one:

In response to all this, the Fed announced plans to auction $60 billion more to banks in February, and they will keep doing that until the credit crises is over. They’ll have to make another quarter- or half-point reduction of the Fed funds rate, too. Will it work? Well, insiders are buying more stock than they are selling for the first time since 1995. And between 1988 and 1995, there were seven occasions when insiders were net buyers, and on average the S&P 500 rallied 21% over the subsequent 12 months. So I think that the insiders are making a better market call than the newly-bearish Cramer.

I’ve been working on a new tech recommendation that sells for less than $1 a share, but it was pushed out of this week’s issue by a flurry of earnings calls. With a sub-$1 stock, delaying the recommendation a bit makes tactical sense in this environment. But companies in our portfolio are doing well and even guiding strongly. So let’s get to the news and the numbers.

Biotech

Amgen (AMGN) said that they will do a business update call next Wednesday before the market opens. I don’t know the topic yet, but it may be related to the coming FDA advisory panel meeting on the safety of Epogen and Aranesp. I’ll let you know in next week’s Radar Report if anything noteworthy is brought up. Continue to buy the Amgen January 2009 $70 LEAP calls (VAMAN) up to $12.50 for a $25 target.

Millennium Pharmaceuticals (MLNM) reported fourth-quarter results this morning before the market opened. They did $181.2 million in sales and 17 cents a share, well above the consensus of $159.5 million and 13 cents. They confirmed their January 4 guidance for 20% to 30% growth in U.S. sales of Velcade to somewhere between $320 million and $345 million. Royalties on non-U.S. sales should be $175 million to $185 million. Pro forma earnings should hit 25 cents to 29 cents a share.

The company has priority review status from the FDA for Velcade as a frontline therapy for multiple myeloma, instead of just treating relapsed patients. That should lead to a June 20 decision for approval. About 62% of all drugs given priority review get FDA approval without the dreaded “approvable” letter or any other form of delay. MLNM’s odds are even better, both because Velcade is already on the market and because the phase III trial was halted when the drug proved to be extremely effective. Hold MLNM for my $23 target.

Rochester Medical (ROCM) reported December first-quarter sales up 9% to $8.2 million, below the $8.7 million estimate by the one analyst publishing on the stock. The 9% growth was the net result of 31% growth in Rochester brand sales and a 21% decline in private label sales. Management said that the decline is due to label changes and not expected to continue into the March quarter. ROCM earned five cents a share pro forma, down from 11 cents last year due to increased spending on sales and marketing. Earnings also fell short of the sole analyst’s prediction for seven cents.

The shortfall in revenues, and most of the shortfall in earnings, came from the decline in private label sales. This is a (1) volatile, (2) temporary and (3) less profitable part of the business that does not affect the real future of the company. Now that ROCM has distribution to hospitals, they are spending sales and marketing money to establish their branded products. Branded products are up to 70% of ROCM’s sales, growing over 30% a year. They will be in a perfect position when the October 1 Medicare reimbursement rules kick in, denying reimbursement for hospital-caused infections. Forty percent of those are urinary tract infections, and Rochester’s drug-eluting catheter is the answer to the problem.

On the conference call, management said that they are up to 10 salespeople, targeting 14. The stock dropped a couple of dollars due to disappointment over the earnings, yet it is this investment in marketing that will guarantee the future of the company and the stock. The shortfall in private label products is likely to swing the other way this quarter, while branded products continue to grow at 30% or better. One has to be really short-sighted to think that the stock should have been knocked down this much on these results. ROCM is a Top buy up to $20 for my $40 target.

Security MegaShift

SiRF Technologies (SIRF) reported fourth-quarter earnings on Monday, and the stock dropped following the announcement. I can’t write a complete analysis on the report today, due to the power outage, but I just want to say that it was one of the worst conference calls that I have ever been on in my professional life. Management was turbulent and seemed to feel threatened, and some analysts pulled the plug on the stock because of that.

I didn’t like the outcome of the conference call either, but looking at the numbers and rereading the transcript, I think that this has been way overdone. SiRF sells al lot of low-end processors to Taiwan “no-name” manufacturers who build the products for the holidays, including the Chinese New Year. Heavy sales of those products caused their profit margins to fall in the December quarter. Those sales go away after the holidays, so there will be a bigger-than-usual seasonal drop in first-quarter revenues. But I think that SiRF is still on track to introduce lots of high-end products as the year progresses, including important integrated chips that put GPS into cell phones.

I still think SiRF will hit my target after the new products go into volume production. But I am lowering my buy limit $12 and my target to $28.

Power Outage

Due to a power outage, I am unable to complete today’s newsletter. We’ll get caught up as soon as possible, no later than next week’s issue, and look for a Flash Alert on any breaking news that arises over the next few days.