It’s been an eventful week for the broad market with some key levels breaking and then being retraced. We’ve covered a lot of this action over the past couple days in Flash Alerts. I’ve especially stressed the importance of keeping a close eye on the crucial 1326 weekly and monthly support level on the S&P 500. In yesterday’s Flash Alert I said that the S&P 500 had to recapture 1326 in order to move us out of the “crash alert” zone. That happened in a most spectacular way, as the S&P first dropped as low as 1270 in a clear retest of Tuesday’s lows, and then rocketed 69 points or 5.4% in three hours to close on Wednesday at 1339. Today that move was cemented by a strong close over 1351. A lot of the action has also been taking place in the S&P futures market outside of normal trading hours, and there the reversal off the intraday low was 83 points.

After all this, I find it fascinating that so many people are still bearish. Especially since the Fed’s three-quarter-point rate cut this week was its biggest move since it raised rates 0.75% in November 1994, right before a strong five-year bull market, and its largest cut since October 1984 — 23 years ago! The Fed’s move before the opening on Tuesday was followed by two powerful trading days that put an important triple bottom pattern in place. Yet during the day yesterday, I even saw stories bemoaning the bear market like this Associated Press missive:

Stocks Wobble Amid Recession Worries

Wednesday January 23, 2:39 pm ET

NEW YORK (AP) — Wall Street stumbled through an erratic session Wednesday, with the Dow Jones Industrials falling more than 320 points before regaining ground to trade nearly flat. Investors weighed down by recession fears sought some bargains, but it was likely that this rebound would be short-lived.

“You continue to see a handful of buyers come in, but they’re quickly overwhelmed by the sellers,” said Todd Salamone, vice president of research at Schaeffer’s Investment Research in Cincinnati.

Note that this article was written about two hours after the upturn had hit and the Dow was back to flat, yet the “handful of buyers” are “quickly overwhelmed by the sellers.” To me, this is starting to look like the Weebles’ market. Those of you with kids or grandkids know from the PBS cartoon show that “Weebles wobble but they don’t fall down.”

Apple had a very bad day after guiding under the consensus for their March second quarter. That may explain why some holders are saying that we are in a recession and a bear market, even though GDP will be up for the March quarter and the market has already shown that it doesn’t want to go down. Of course, there’s always the possibility that we could slip into a recession and stocks could head down again into a bear market. But that is not the message of the market so far this week, and I would rather listen to the market than a bunch of reporters and gurus panicking and selling stocks.

After the close I read that: “Investors were head-over-heels in love with stocks from the early 1980s to 2000, almost 20 years. This relationship is due for a cooling period.”

“Due?” Says who? I actually agree with the sentiment, and I am expecting a cooling period to start in April 2009, not now. But until I see it start, I won’t have the hubris to say that the market has to go down because I think it is “due.”

Yet, others obviously don’t feel the same way. Just take a look at the American Association of Individual Investors sentiment chart and you can see that bearish sentiment is overwhelming:

Plus, yesterday’s Yahoo! Finance survey question was: “With Wednesday’s dramatic turnaround has the U.S. stock market finally reached bottom?” The vote of 17,471 respondents: “Yes, it’s time to go shopping” — 33%; “No, this was a sucker’s rally”– 67%. Every contrarian should be salivating.

And also look at the I/B/E/S valuation chart, which is now at record lows.

From this all-time low of -56, just a rally back to fair value would take the S&P up to my longstanding April 2009 target of 1880. Every value investor should be salivating.

Sure, you feel terrible about your portfolio — everyone feels terrible. That’s what down markets are supposed to do:

1. Make you feel terrible
2. Panic you into selling stocks so you don’t suffer further losses
3. Make you feel even worse by turning and going up
4. Panic you into buying back in at higher prices so you don’t miss out
5. Rinse and repeat

I can’t do a lot about #1, except to point out the great bargains that you can get if you have cash flow to invest. (I advised you to be 100% invested before the recent decline started, so I won’t try to pretend that everyone has lots of available cash to put to work.) But if the Flash Alerts, sentiment and valuation charts, and accuracy of my turning point forecasts can break the chain of events that could occur at #2, then I will have done part of my job.

When the stocks and LEAPs that I’ve advised you to buy lead the next leg up in the market, providing you the doubles and triples that you deserve as we close in on that April 2009 major top that I now see in the cards, I will have done another important part of my job.

Finally, if I can identify that top, get you out of almost all stocks and into securities that go up when the market goes down, I will have done the last part of my job for this cycle.

So if we get a weekly close over 1326 tomorrow, I will feel very good about the market, as this will have been a near-perfect test of the monthly and weekly support that I expected at 1326. The big drop under 1326 during the week was scary, but when a market survives such a test and then quickly rebounds, it leaves a “long tail” down for the week on the candlestick charts. That sets the stage for a monster rally.

Then, on a successful test back down towards 1326, which might happen around my next turn date of March 22, I will send you a Flash Alert to recommend going back on margin, buying call options or just being sure that you are fully invested. These mini-panic corrections don’t happen that often, thank goodness, but when they do you can take maximum advantage of them by entering on the test down and riding the upturn all the way to the next bull market top. I will tell you right now that it won’t feel “right” to buy into that test down, because the gurus and talking heads will be rolling out all the same old reasons why this was a false rally and the bear market really, truly is about to begin this time. You have to be mentally prepared to step up to the plate when that Flash Alert hits your inbox. When moments like that strike, I plan to buy short-term SPDRs (SPY) call options and just keep rolling them up.

This market reminds me very much of the Long-Term Capital Management hedge fund mess in 1998, which capped a string of bad news. The reporters and gurus thought that the long bull market was finally over, but the big drop turned out to be just a nasty correction — 21% in only 31 days. Then the successful test of that low launched a 68% upleg during the next 17 months to the bull market peak in March 2000.

A similar 21% decline from the recent all-time S&P intraday high of 1576 would take the market to right about 1250, which is exactly where the futures bottomed on Tuesday. If we now got another 68% rise, the bull market peak would be at 2130, and my “parabolic” target for April 2009 is 2100. If the upleg runs “only” 50%, the market would get to 1880, which is my most likely (non-parabolic) market target. You can see the tremendous risk that someone is taking to label this a bear market and advise raising cash after Monday and Tuesday’s action.

Meanwhile, we are in earnings season and so far, it’s one of those times when whatever a company says knocks their stock down. Maybe it’s just the market environment so far, but when a company the size of Intel says that they see strength, but they are guiding low because everyone else is predicting weakness, you can bet most managements are going to guide conservatively. So let’s get to the earnings and other news, and add some quick updates to answer your recent questions.

Avian Flu MegaShift

BioCryst Pharmaceuticals (BCRX) said that they have concluded the small trial of intramuscular injections of peramivir for seasonal flu using a longer needle, and they think that it is worth moving forward with a larger trial. So instead of initiating a Phase III test this flu season, they will do another Phase II trial at a higher dose with the longer needle. But the trial will have to wait until the upcoming flu season in the Southern Hemisphere, starting around May. It sounds like the Department of Health and Human Services will only provide partial support for this trial, and the BioCryst/HHS $102.6 million, four-year research deal has been modified but is still in place.

To me, HHS must be more interested in the avian flu trial, and that is still on track and fully funded under the research contract. On balance, I heard nothing to change my opinion that BioCryst will be successful in bringing peramivir to market for hospitalized patients with avian flu, and therefore it will get added to the government’s purchasing list for antiviral stockpiling.

Next Monday, Shionogi Pharmaceuticals in Japan will discuss their initiation of a Phase II trial for intramuscular peramivir. Shionogi just gave BioCryst a $7 million milestone payment, so the news will be good. Continue to buy BCRX up to $13 for my $30 target after peramivir is approved for government purchase.

Biotech MegaShift

Amgen (AMGN) reported fourth-quarter earnings after the close today, and I am about to hop on the conference call. They did $3.75 billion in sales, compared with the consensus for $3.54 billion, and they reported $1.00 per share, up 11% from last year and beating the 97-cent consensus. At first glance, it was not a bad quarter considering that Aranesp sales fell 25% as the re-labeling process continues.

For 2008, the company guided for $14.2 to $14.6 billion in sales, compared with the current consensus for $14.49 billion. They said that adjusted earnings per share would be in a range from $4.00 to $4.30, compared with the consensus for $4.37.

I will update you next week on the rest of the report and conference call, unless something dramatic comes out on the call that requires a Flash Alert tomorrow. I still think that AMGN is headed higher after the March FDA panel meeting, if not sooner, and recommend buying the January 2009 $70 LEAP call (VAMAN) up to $12.50 for my $25 target.

Dendreon (DNDN) drew a question from Lyndon: “Because of the European approval of Provenge, may we have an update and your opinion?”

Even though Dendreon has not even applied for European approval, several news stories used that word to describe the European patent that was granted to DNDN last week. It was a broad patent, and would make the company worth more in a sale, but it is not significant at this time to the price of the stock. We just have to wait for the interim peek data, which the company says is “powered for approval.” Buy DNDN up to $8 for my $40 target after Provenge is approved.

SXC Health Solutions (SXCI) stock had a very disappointing 2007, down more than 50% from its highs. The market has given up on the stock, and its current price around $14 implies about a 5% growth rate, while it actually will grow 18% to 20% or more for the next several years. SXCI probably did $93 million in sales and 60 cents a share in 2007, so the price/earnings ratio is down to 23X, roughly the same as the growth rate. That’s cheap for a medical services stock.

We bought SXCI for their unique transparent pricing model, in which they pass along normally hidden discounts and kickbacks to the customers. No other pharmacy benefit management (PBM) company does this, and I still expect them to take lots of market share as new contract wins are announced in the industry.

At $14 a share with $4 a share in cash, the downside risk is minimal. Buy SXCI under $15 for my $30 target.

China MegaShift

The China Miracle looks to be in deep trouble in the stock market, just as I forecast, but I do expect them to rally back with the U.S. market to new highs after the Beijing Summer Olympics. Look at these recent IPO catastrophes:

	IPO Date	IPO Price	1/16/2008 Price	Loss
Xinyuan Real Estate (XIN)	11-Dec	$14.00	$9.90	-29%
ChinaEdu (CEDU)	10-Dec	$10.00	$6.85	-32%
China Nepstar Chain Drug (NPD)	8-Nov	$16.20	$13.94	-14%
Giant Interactive (GA)	31-Oct	$15.50	$11.44	-26%

Earlier Chinese IPOs, like Xinhua Finance Media (XFML) and Noah Education (NED), that went public earlier in 2007 have seen their stocks cut in half.

But China keeps growing, with 11.2% growth just reported for the fourth quarter. That’s the fastest growth in 13 years, and the government is putting in price controls to stop inflation, which is also at the fastest rate in 13 years. Yet they continue to print money like crazy, trying to keep up with Helicopter Ben so that the yuan doesn’t rise too quickly against the dollar. It’s a very volatile situation, and if there is a serious recession in the U.S., the Chinese market will blow up. But I don’t see a recession in the U.S. yet, just very slow growth for a couple of quarters, and in that environment the country can hold it together through the Olympics. But I would not be surprised to see the U.S. market substantially outperform China from the opening of the Olympics through an April 2009 top, so for now we will stay away from any major shift into Chinese stocks. I am tempted by Baidu.com (BIDU), Ctrip.com (CTRP) and a couple of others, though, and we might add one or two selectively in the next few weeks.

Content on Demand MegaShift

Harmonic (HLIT) has been weak, even though everything other companies have reported to date that would affect broadband video sales has been strong. Maybe Wall Street sees something coming in capital spending that neither I nor the company sees. More likely, maybe they don’t get the video revolution after all, and I confused the $12 prices in late October with a spreading understanding of what Harmonic is all about.

At the Needham Technology Conference, Harmonic’s CFO said that December-quarter bookings were “VERY” strong, and the company had a much larger backlog of orders as they exited the quarter. You can bet that guidance will be a pleasant surprise. We’ll have to wait for the January 29 conference call for details, but having this stock trading around $9 is just silly. Buy HLIT before the conference call up to $12 for my $18 target.

Motorola (MOT) reported an as-expected December quarter, but then the new CEO said that new handset products will not be introduced until late in the March quarter, too late to do much good. So they guided for a revenue decline and a loss in the quarter, which knocked almost 20% off the stock price, returning it to 2003 levels.

He was pretty blunt: “The recovery in mobile devices will take longer than expected and there is a lot more work to be done. Demand for some of our products has slowed in an intensified competitive landscape. Our consistency of new product introduction is still not where it needs to be. And we still have gaps in the portfolio in areas that are experiencing high rates of growth, including 3G (third-generation), China and other emerging markets.”

All of their turnaround problems are in the handset area, which we already knew. He is leveling with the Street and laid out his game plan for getting back on top of the product cycle, in part by using software-in-silicon. That’s the same product QuickLogic (QUIK) provides to some of MOT’s competitors, but I don’t expect QUIK to get a contract from Motorola.

We are in this stock for the turnaround, and I still believe that it will happen this year. Continue to buy the Motorola January 2009 $17.50 LEAP calls (VMAAW) up to $4 for a $10.50 target.

Telkonet (TKO) drew several questions from subscribers. Joe and Art wanted an update on the new CEO, since the stock hasn’t jumped up since his appointment. As I covered in last week’s Radar Report, the new 200-megabit product is a game-changing introduction and if the new full-time CEO can turn this technology into dollars — which I think he can — then we’re going to see a well-deserved pop in shares. So basically, the CEO has to prove that he can do the job, before the Street pushes the stock price up.

M. asked: “What are the prospects for TKO being bought out by a company such as Johnson Controls? In particular, the energy management aspect of TKO appears to be well within the scope of the business of Johnson Controls. Is the powerline aspect of TKO different enough to pique the interest of a larger company?”

It sure is, but I really hope they don’t sell. The new CEO has cheap stock options and a chance to make his fortune in his early 30s, and he has little incentive to sell now. But you are right that the broadband-over-powerline technology is a beautiful fit for many companies, and that gives us a realistic exit for the stock if he can’t turn it around. TKO remains a buy all the way up to $5 for my $15 target.

New Energy Technology MegaShift

Infinity Energy Resources (IFNY) completed its sale of operating wells in Colorado and Wyoming to Forest Oil for net proceeds of $16 million. They will pay off $12 million of their bank debt, settle some derivative liabilities and pay about $800,000 in interest and penalties to Amegy Bank. Infinity keeps 100% of its exploratory properties in the Piceance Basin and Labarge areas in the Rocky Mountains, and the right to a 20% working interest in any future wells that Forest Oil drills in the Sand Wash Basin.

In addition to the sale, Infinity cut a deal with Forest Oil to continue the drilling program in Erath County, Texas. Forest gets a 75% interest in the first 10 wells that they drill, and then a 50% interest in the 31,000 remaining undeveloped acres. Infinity keeps all the completed wells, plus 100 acres around each completed well.

Brian and Fred asked if this is the beginning of good news, and John said: “IFNY has sold all of their Rocky Mountain properties, which I had understood to be the ‘Crown Jewels’ of the firm after the Central American holdings. Doesn’t this eliminate future prospects for this firm? What’s left to give value here?”

What’s left is a lot of exploration prospects in the Rockies, a good interest in Texas, and a potential elephant offshore Nicaragua. There is no doubt that this dust-up with the bank hurt the shareholders, but there is plenty of value here to grow the company back up, with Nicaragua being the blockbuster win sometime in the future. Buy IFNY up to $3 for my $7 target.

WiMAX MegaShift

Intel said that their first WiMAX/Wi-Fi integrated chipset (code named “Echo Peak”) will begin appearing as an option on Centrino notebooks in mid-2008. Because WiMAX is a worldwide standard, travelers will be able to use a WiMAX laptop to make phone calls and connect to the Internet from almost anywhere. I think this will be a very hot product in the December quarter, and focus a lot of attention on WiMAX stocks.

Death of the Dollar

The U.S. budget deficit will balloon to $250 billion this year, and that is before the $150 billion tax rebate stimulus plan our responsible political leaders just agreed to. The $400 billion deficit for 2008 will double 2007′s rate, balloon the trade deficit and put even more pressure on the dollar.

At this week’s World Economic Forum in Davos, Switzerland, George Soros, the brilliant hedge fund manager, said: “The current crisis is not only the bust that follows the housing boom, it’s basically the end of a 60-year period of continuing credit expansion based on the dollar as the reserve currency. Now the rest of the world is increasingly unwilling to accumulate dollars.”

The dollar’s share of foreign reserves reached a record low of 63.8% in the September third quarter, down from 65% in the June period. What do you want to bet it falls quarter-by-quarter in 2008?

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