Monday’s record point drop in the Dow Jones Industrial Average, and largest percentage drop in 21 years, is one of those outlier events that people will talk about for years. The VIX Fear & Greed Index spiked to 46.72, a record high and a clear sign of panic. But remember that we were in a similar situation in the summer of 2002 and again in early 2003, with the VIX soaring and the markets in the throes of a true panic. Those were just the latest couple of examples, and each time this happens the smart thing to do was to sit tight. This pattern is typical of the end of a down leg, not the beginning of a new one. Since 1990 there have been four other periods when the VIX closed above 40. Although the S&P 500’s performance was mixed the next day and week, over the following month and quarter it was up all four times.

The market cannot last long in its current panic condition, so this crisis should resolve this week. This morning’s big jump could mark the turn, or it is possible that the market will get much worse for a day or two before it gets better, if only from margin calls. Depending on what happens in Washington, worldwide equity markets could start shooting higher now or lose huge chunks of points over the next few days prior to a slingshot reversal. But it is very difficult to get out and then get back in at a lower level, as these chaotic markets usually turn on a dime with a tremendous burst of initial energy that doesn’t let anyone put their sideline cash to work gracefully.

There is an S&P 500 support level at 1094, and technicians are pointing to 1078 as the 61.8% retracement level of the entire bull market move from the 2002 lows. I see another very big energy level at 1040 that is virtually certain to stop any further decline and spark a massive rebound. (Remember that there may be a temporary overshoot of any energy level for a few hours, or even perhaps a day.) So if we do head back down later today or tomorrow, and 1094 or 1078 doesn’t hold up, 1040 should do the trick. That is a painful 66 points lower than Monday’s close, but we could see it intraday and then watch the market shoot back up to close up for the day. That’s typical of a panic bottom, and that’s why it is best to sit tight.

Obviously this is a particularly difficult time to be investing in any financial market, as we are now living through a historic market shake-out. What makes this especially tricky is how the huge flow of energy in and out of the markets is subject to change at a moment’s notice, depending on the latest news from Washington. There is a recovery plan—not a bailout—that will work at no taxpayer expense (see http://www.moneymorning.com/2008/09/25/credit-crisis-5/), and I know the people who are presenting it to Senator Obama, if he wants to provide leadership on this issue.

Remember that the stock market will bottom six months before the recession bottoms, as it always does. That’s why it is hard to buy stocks at the bottom—things still seem bleak—and also why short sellers and put buyers get killed for the first six months of a market upturn. They just can’t believe the market is going up when the fundamentals are still bad, yet that is always the way it happens.

I am working on a new recommendation for this week to take advantage of the current chaos. We are not invested in the high fliers like Apple, Research in Motion and Google that are getting slaughtered. If you are holding cash, take advantage of any down days during the rest of this week to put some of it to work. I will send more Flash Alerts this week if the markets remain chaotic. Don’t worry—this will soon be behind us.

Sometimes the Masters of the Universe just have a bad day. When I was a young Corn Products/Best Foods trainee, the company acquired the Penobscott Poultry Company. My job was to go through the long-overdue accounts receivable to develop a collection strategy. I quickly realized all the deadbeats were distributors and retailers in the Mafia area of New York City, and the best collection strategy would be to write off the accounts and continue to maintain two healthy knees.

But others with much more important jobs than I were locked in a conference room for three days wrestling with a Brand Name to join the other Brand Names that they believed lay at the heart of the company’s success: Best Foods, Hellman’s, Knorr soups and so on. At last, after 72 hours of almost continuous effort and gallons of coffee, they staggered out and announced the winner: Cackleberry Birds.

I think that’s why I had déjá vu when Ben Bernanke and Hank Paulson announced their Masters of the Universe Plan B: a $700 billion bailout of the banks and financial institutions that got us into this mess. Their theory is that if the government replaces bad mortgages, credit card debt or whatever with cash, these institutions will be more inclined to lend. We hope. Last time, when Alan Greenspan bailed out the banks in the early ’90s, they took the cash and bought government bonds, used the interest spread to rebuild their balance sheets over time, and told their loan officers to go fishing. Why Messrs. Bernanke and Paulson think those same banks won’t behave the same way this time escapes me.

At the very least, there is going to be a heck of a lot of leakage between the dollars used in the bailout and the dollars that show up in increased available credit. With the new 20% down payment rules on real estate, falling house prices undercutting appraisals for home equity loans, and even American Express cutting card limits for half of its cardholders, it isn’t really clear if there are many qualified borrowers around.

The trouble with the Paulson/Bernanke Plan B is that it does nothing immediately and directly for the American household, who accounts for 70% of the GDP and is in such dire straits that record numbers of them can’t pay their bills on time or keep up the payments on their mortgages. The strapped consumer is the root cause of Wall Street’s bad assets, so the Paulson/Bernanke Plan B papers over but ultimately fails Wall Street, and therefore the U.S. economy, and therefore the world economy. Only the Masters of the Universe could come up with the wrong plan aimed at the wrong target, where their market manipulations will eventually cause hyperinflation.

The Right Plan

How much simpler to say: Wait a minute. There are 1.1 million homes in foreclosure, plus another 800,000 that are three months past due. That’s 1.9 million homeowners who need their loans rewritten to stay in their house. If you divide $700 billion by 1.9 million, you get an average of $368,421 per household to work with. There will be more sliding into foreclosure, so let’s say we ultimately have to deal with four million homes, and we have $1.3 trillion available including the Fannie Mae and Freddie Mac bailout money. That’s $325,000 per household.

Now you look at each loan, and if the house is owner-occupied, you undo any payment resets, find a monthly amount the homeowner can pay, and write a new 30 year loan on those terms. If that requires the homeowner losing their usually pitifully small equity built up to date, too bad. If the difference between the new loan and the old loan value is less than 40 cents on the dollar, the financial institution eats it, too bad, and keeps the now-performing loan on their books. If that institution made so many bad loans that they have to merge, too bad. If the hit is bigger than 40 cents on the dollar, the government buys the loan at 60 cents on the dollar and writes off whatever the remaining difference is to get to the new loan amount. Eventually, when the house is sold or the mortgage paid, the part that is not written off will be returned to the taxpayer.

Under this scenario, I’ll bet it would take nowhere near $1.3 trillion to get all the toxic mortgages rewritten into good paper. The worst lenders would take the biggest hit, as they should, but all lenders would suddenly have clean balance sheets and lending capacity. Homeowners would keep their houses with an affordable fixed payment, and the consumer fears that are contributing to locking up the credit markets would be put to rest.

But the Masters of the Universe immediately think a bailout should go to their buddies at the institutions, and trickle down. So we will get some version of Paulson’s Cackleberry Bird bailout, and it will look like it is working for about four to six months — after which, la deluge. The credit markets are not going to unlock, GM and Ford are next in line to have a private word with Hank “No Bailouts” Paulson, and the downturn will be much longer and deeper than it needed to be.

During the Senate hearing, Paulson was asked repeatedly why taxpayers should accept the burden of his bailout. He replied: “You worry about taxpayers being on the hook? Guess what — they’re already on the hook.” He explained that meant the credit crisis would hit almost everyone in the pocket unless forceful action (his bailout) was taken.

Well, guess what, Mr. Paulson? I’m a taxpayer, and I am not on the hook until you push this mess through. And since you are already deficit spending, you don’t have $7 for a bailout, much less $700 billion or $1.3 trillion. You’re going to have to borrow every penny from the Fed, at interest. And don’t tell me that we have to move immediately and without oversight because Washington Mutual and Wachovia have developed weapons of mass destruction — that won’t work twice.

Individuals and institutions have pulled money out of stocks into cash all year. About $88 billion has left mutual funds for money market funds, and global money market fund assets have risen 32% since June 2007 to a record $5.7 trillion. That’s an absolute record, a record relative to GDP, and a record relative to equity market capitalization. The Fed put $30 billion into European money markets yesterday to help stabilize them–funny, I had no idea there was a shortage of dollars in Europe. Much of this cash is going to move into equities quickly to capture decent fourth-quarter performance and make bonuses for the year. It is just a question of what the match is, and when it strikes. I think the match was struck today, as it became clear Plan B is about to pass.

Wither The Market?

It still looks to me like the most likely case is that the very powerful rally off the SPX 1152 energy level marked the start of a major turnaround. It started with two big up days in a row, and the great majority of the biggest up moves in the S&P 500 have started with two big days, and not just one. We have had successful retests of the 1170 spike low and clear evidence that 1210 is the launch area, with a close over 1270 creating a bum’s rush of every late-to-the-game short seller reversing direction.

But that meant the S&P 500 must close back over the 1210 mark by Friday and charge up towards 1270, or the weekly chart will suddenly look like another big downleg is needed to clear out lingering bulls like me. Today’s surge makes it very likely that 1270 will be the next test. I am encouraged that the VIX Fear & Greed Index is staying high, well over 30 even after today’s rally, as that shows the kind of panic and fear that accompanies lows, not highs. I am worried about an ominous head-and-shoulders top patterns in the major indices that point down 30% from current levels. Those patterns need to be negated by the next rally, or we will see the worst stock market crash in 20 years. That’s a low probability, but not zero even after today. I am keeping a close eye on all of this for you, and will be very quick to change my forecast if circumstances warrant it.

For now, it will take a while for financials and home builders to attract serious institutional buying, and the consumer staples sector will quickly lose favor as it appears the bailout is working, so as the rally builds the big money should pour into technology. I think big companies like Microsoft, Hewlett-Packard and Intel (INTC) will treat you really well for the next six to eight months. Last week I recommended a Cisco (CSCO) January 2010 LEAP call, and the company held a business update call yesterday on its collaboration strategy. This may sound pretty obscure, but companies don’t want to buy routers, they want to solve problems. Effective collaboration is a real problem in the Internet era, and Cisco stays relevant and in their customers’ budgets by providing solutions that happen to use lots of CSCO hardware. Buy the Cisco January 2010 $20 LEAP call (WCY AD) under $6 for my $12 target when the stock gets to $32.

Biotech MegaShift

Isolagen (ILE) settled all remaining shareholder lawsuits, and the result shows why I do not take these lawsuits seriously. When these suits are filed, the stock drops sharply in response to the unexpected bad news and many subscribers are concerned that their investment will be further hurt if the company loses the suits. But these lawsuits are meant to enrich the plaintiffs’ bar, the attorneys who waste their lives leeching off insurance companies while not creating any value in the world.

The payments for all the settlements will be funded entirely by Isolagen’s errors and omissions liability insurance. Isolagen itself will receive a final payment of $500,000 from its insurance carrier for reimbursement of defense costs. There is no impact on our investment position. ILE remains a Top Buy up to $2 for my $9 target.

Content on Demand MegaShift

Telkonet (TKO) won four new patents, three in powerline communications and one for an advanced thermostat design. They now hold 12 patents in powerline communications and energy control.

The new rules and scrutiny on naked short selling should lead to less pressure on TKO stock, where there is a perpetually large naked short position. TKO remains a Top Buy all the way up to $5 for my $15 target.

New Energy Technology MegaShift

Ocean Power Technologies (OPTT) deployed its first commercial wave-power generator at Santona, off the northern coast of Spain. The 40 kilowatt buoy is under a contract with Iberdrola, the big Spanish utility that is a big windpower user. OPTT has a tentative deal to develop nine more powerful versions of the buoy over the next year and eventually create a wavepower farm for Iberdrola capable of generating enough energy to supply up to 2,500 homes annually. Management also will use this installation as a showcase for European sales through Total, their French partner.

Wavepower is real, cost-efficient and just taking off. Ocean Power is the technology leader, with more installations than anyone. While the stock may lag as long as oil prices stay down, OPTT can be bought all the way up to $20 for my $40 target.

WiMAX MegaShift

Alvarion (ALVR) won contracts with Azulstar to provide the equipment for the mobile WiMAX network in several West Michigan and New Mexico communities. While these little deployments are not stunning news, WiMAX enables entrepreneurs to deploy limited networks all over the U.S. with low capital costs and high returns on investment. I expect dozens of these announcements over the next few years. Yesterday, Deutsche Securities initiated coverage with a buy recommendation. ALVR is a Top Buy up to $11 for my $17 target.

With the U.S. financial system seeming to fall apart all around us and the Dow collapsing 400 to 500 points in a single day, everyone is worried about his or her portfolio. That’s natural — in yesterday’s decline alone, about $700 billion in market value vanished.

But I’ve been in the investment business for over 38 years. I’ve seen this before — in 1970, 1982, 1987, 1990 and 2001. And my advice to you is exactly the same as Warren Buffett’s would be.

1. Don’t sell. Don’t let the TV talking heads and short sellers panic you into selling after most of the damage is done. They do that to innocent bystanders every time. Remember that they never seem more “right” than at the bottom, when they can panic the most people out of solid long-term investments. When I see companies like Intel and Cisco selling for P/E ratios in the low teens, I know the short sellers are riding high — and riding for a fall, as usual.

2. Buy growth. In these panics, growth stocks get killed as institutions trade into stable companies like utilities and soaps, or high-dividend payers, or “value” stocks selling at low price-to-book ratios. But the snapback rally will be led by the growth stocks that have beaten down to low levels, so you need to have the guts to be a contrarian right now.

Why? Because the best way to defend your portfolio is to position yourself to rapidly build wealth in your portfolio as the market recovers. And the surest way to do that is to buy beaten-down growth stocks at valuations we won’t see again for years.

I mentioned last week that since the July 15 low, the S&P 500 had been range-bound between 1210 and 1270 and that we could see a cascade down from there. That’s exactly what we saw this week. I also mentioned that if we saw the S&P quickly pop back over 1200, we could believe the rally was near. The S&P did close just above that point today.

This is our chance to be contrarians, get in ahead of the crowd and make some real money. With investors heading for the hills this week, we’re going to shore up our portfolio by buying New World Investor stocks that are under our buy limits and adding one new position.

This week, I have a new recommendation that looks like an easy lay-up, a 2010 LEAP call on Cisco Systems (CSCO).

I don’t need to tell you that Cisco dominates the Internet Protocol-based networking equipment business, selling to communications and information technology companies all over the world. They started with routers to interconnect computer networks, and now sell a broad range of switches, storage products and even home networking devices.

This is one of the biggest industries in the world and will keep growing for years. CSCO is down from the last 12 months’ high of $34 to the $23 area, and I expect it to go right back over $30 in the next up leg. While a 30% move in a company this big is nothing to sneeze at, take a look at the January 2010 $20 LEAP call (WCY AD) selling for around $5.80. As CSCO stock moves up over $30, I expect this call to double in value over the next year. Buy WCY AD under $6 for my $12 target.

Biotech MegaShift

Last week I mentioned how Amgen (AMGN) would release its Phase III trial results for denosumab — a drug that treats post-menopausal osteoporosis — at the American Society for Bone and Mineral Research (ASBMR) annual meeting.

Here’s a breakdown of the results: denosumab cut the risk of spinal fractures by 68% compared to patients taking placebo, and hip fractures by 40%. These results put the drug on the same level with the best osteoporosis drugs available on the market. In fact, denosumab showed fewer side-effects than those seen from other drugs.

This news sat well with investors, as the stock shot up 6% on Tuesday thanks to the positive test results. I still expect Amgen to gain market share now the denosumab met and surpassed expectations. Also, the company received FDA approval last month to market a drug that boosts platelet levels in patients with a specific type of bleeding disorder. Analysts project $1 billion per year in global sales, even in the face of major competition from GlaxoSmithKline’s Promacta. That, combined with the $2 billion to $3 billion blockbuster denosumab, should be enough to send shares shooting up. Continue to hold both the Amgen January 2009 $70 LEAP call (YAA AN) and the January 2010 $40 LEAP call (WAM AH) until the Phase III trial data have completely rolled in.

Dendreon (DNDN) rallied on higher-than-normal volume on Monday, when most of the biopharmaceutical world came under pressure due to the recent bout of turmoil. So what happened? It seems the short-sellers panicked when the SEC announced it was going to continue cracking down on “naked shorts.”

In other news, DNDN’s CEO Mitch Gold is expected to present at the UBS Global Life Sciences Conference on Monday. This appearance comes just a few weeks ahead of DNDN’s study results on the company’s prostate cancer treatment Provenge. If enough men do well in the test, the FDA said it might approve the vaccine based on these midterm studies. If not, DNDN will have to wait until next year when its final results are delivered.

In the meantime, we should see Dendreon enjoy a nice run up over the next couple of weeks as short sellers cover their positions and investors who expect the midterm results to be positive are buying shares outright. If the results indicate the vaccine works, the company’s stock could gap up 50%. If not, the stock could sink. One of those two outcomes seems likely, but I still would rather just own the stock because I think the peak will show statistically positive results that support immediate approval of Provenge. Buy DNDN under $8 for my $40 target after Provenge is approved, or the shorts are squeezed to death.

Content on Demand MegaShift

Akamai (AKAM) announced on Tuesday that it was going to help Outspark — a publisher of online multiplayer games — deliver free-to-play games, leveraging Akamai’s Electronic Software Delivery solution globally. Outspark’s objective is to create a destination where members can play games and enjoy the community. By leveraging Akamai’s ESD solution and Download Manager, Outspark can decrease the download time for games, installations and account activations. Akamai’s technology is facilitating this whole process. This is yet another testament to AKAM’s expertise in global software distribution and its ability to deliver results. I have no doubt this move will increase the company’s revenue base. AKAM is a Top Buy all the way up to $30 for my $60 target.

Harmonic (HLIT) announced today that three Harmonic products have been awarded the 2008 Cable & Satellite International Product of the Year Awards and IBC Innovation Award for Content Delivery. These awards are meant for technical and product marketing superiority in the cable, satellite, terrestrial broadcasting and telco TV sectors. David Price, Vice President of Business Development and Marketing Communications at Harmonic said, “Over the past year, we have introduced a number of new solutions that enable delivery of advanced video services. The CSI Awards and IBC Innovation Award are important endorsements of the innovative and high quality design of our products.” HLIT is a Top Buy up to $12 for my $18 target.

On Tuesday after the market’s close, Samsung went public with its offer to buy SanDisk (SNDK) for $26 per share. SNDK rejected the offer, however, on the ground that it is too low. But the flash-giant announced it’s open to a higher offer. As I told you last week, I don’t expect SanDisk to accept the offer because its major partner is Toshiba — a direct rival of Samsung. I wouldn’t be surprised if Toshiba makes a counteroffer, but I’m still convinced SanDisk won’t turn over its business to another company. The flash industry is heading into another boom cycle come 2009, which will significantly boost SNDK’s stock. Buy SNDK on any dip back under $15 (about a 10% drop from here) for my $32 target.

New Energy Technology MegaShift

Fuel Cell Energy (FCEL) announced earlier this month that it is working in conjunction with South Korea’s POSCO to operate the world’s biggest fuel cell power plant that has the capacity to power 17,000 households. The facility is twice the size of FuelCell’s Connecticut plant.

The secret’s out: The global fuel cell market is growing rapidly at around 80% a year, and experts project it’ll be an $80 billion industry by 2020 thanks to the push for cleaner energy sources. Fuel Cell is in an excellent position to profit from this growth. Not only has the company entered into a 10-year contract with POSCO, but more states are expected to add renewable portfolio standards, which opens up a lot of markets for Fuel Cell. What’s more, this company’s gross margins have steadily improved quarter after quarter since 2005. FCEL is a Top Buy up to $12 for a $22 target.

In Monday’s Flash Alert after the close, I said: “Investors seemed most worried about the lack of a solution for the problems at insurer AIG, although both Washington Mutual and Wachovia Bank also have people worried. But that’s it for the poster children of the credit implosion. With Merrill Lynch being taken over by Bank of America and Lehman headed for liquidation, getting AIG, WaMu and Wachovia resolved should not take long.”

Last night’s $85 billion taxpayer-financed bailout of AIG resolved that one. Rumors are rife that WaMu has to find a buyer by Friday, or the FDIC will take them over after the close. That’s two. Wachovia may not need to be sold or taken over because they wrote their ALT-A loans a bit differently, but even if there is only one big problem left after this amazing week, I think the market will call that a win.

The next major support level for the S&P 500 is 1152. So far, the market is telling us that it does not know the dimensions of the credit crisis and is not ready to go up, even though the Treasury and the Fed are cleaning up one huge problem after another. With the VIX Fear & Greed Index now well over 30, there is a huge amount of potential energy to push stocks higher once the turn comes. The VIX is now higher than it was at the previous bottom on July 15.

The safest path is to wait for a bounce at or above 1152, a successful retest, and then a breakout over 1210. If that happens this week, the weekly candlestick chart will just show a very long tail that undercuts a previous low–that’s a very bullish configuration. These double bottoms are common. Look at this one from 1998, where during the week the S&P plunged to new lows and it looked like the sky was falling. By Friday, the bear trap was set and 10 of the next 13 weeks were up in a spectacular rally.

A very long tail on a double bottom is quite a bullish chart pattern that indicates a strong rally will start immediately. Many of the biggest rallies in market history started just this way. So if the S&P can get down to or near 1152, and then close the week over 1210, the market will be telling you this is a massive buying opportunity.

I’ll be in touch with you again in tomorrow’s Radar Report.

The dramatic drop in the stock market in the last 15 minutes of trading on Monday started when the 1210 support level on the S&P 500 gave way, and the prior spike low at 1200 was undercut. Although the news that Lehman Brothers filed for the biggest bankruptcy ever in terms of assets had the market down all day, it was just part of the ongoing congestion until 1210 was broken. If the S&P can quickly claw its way back over 1210 on Tuesday, we should see a fast run back to 1280 or more as a slingshot move off another capitulation low. Investors seemed most worried about the lack of a solution for the problems at insurer AIG, although both Washington Mutual and Wachovia Bank also have people worried.

But that’s it for the poster children of the credit implosion. With Merrill Lynch being taken over by Bank of America and Lehman headed for liquidation, getting AIG, WaMu and Wachovia resolved should not take long. Of course, there will be many small banks and other financial companies that don’t make it, but they are not big enough to worry investors.

Incidentally, Lehman was a Primary Dealer with the Fed, and in theory was eligible to borrow any amount of money as needed, plus under the expanded collateral rules Bernanke put in place yesterday, they could have put lots of their damaged assets on the Fed at face value in return for Treasury bills. How anyone with that backing managed to go bankrupt is quite remarkable, unless the Fed flatly told them the new rules were for others, not Lehman. I wonder if the truth will ever come out.

One thing we did not get Monday was the bears’ predicted downward spiral based on all the counterparties to Lehman derivatives getting killed. It didn’t happen, and it didn’t even seem to be an issue all day. That was how the contagion could have spread, if there was to be a new downward force added to the general credit crunch. Because that didn’t happen, and because the late-Monday weakness seemed to focus on AIG, a problem that will soon be resolved, I am watching for the next support level at 1180 to hold. The 1180 to 1200 range should mark a tradeable bottom for a strong rally. Remember that we are in the weak September/October period that often marks the end of major declines and the beginning of powerful rallies. The companies we own are doing fine this quarter, and I have not changed any buy limits or target prices.

Let’s watch the S&P’s action over the next couple of days, and let the market tell us what to do. A successful test of 1180, a bounce to 1210 followed by a successful test back to 1200 and then a decisive breakout over 1210 would be a very strong buy signal. The market would have to climb a wall of worry and bearish gnashing of teeth, but that’s what it usually likes to do.

After getting a look at July and August, this week Texas Instruments held its mid-quarter update conference call. The company tightened its guidance range while leaving the midpoint unchanged, which is to say their business is developing exactly as expected in spite of recent rumors that cell phones are weakening. Intel doesn’t hold these calls anymore, and most of the analysts on the Texas Instruments call follow the cellular industry, so they don’t normally ask about personal computers. But TI still sells a lot of chips into the personal computer market, and one analyst did ask how things are going there. TI management said that business is “pretty strong.” So in spite of the chaotic economy and general Wall Street fears of disappointing third-quarter results, it sounds like business in Asia will be strong enough to offset weakness in the U.S. Intel (INTC) probably will surprise to the upside when they report on October 14.

The aversion to risk is now so strong that major tech stocks like Cisco, Hewlett-Packard and Intel are all selling at forward P/E ratios in the low to mid-teens. NetLogic (NETL) is a higher growth tech company with a solid market position, and it sells for 16X forward earnings. In this environment, it is not surprising that smaller companies like QuickLogic (QUIK), Rochester Medical (ROCM) and TowerStream (TWER) are selling for extremely low prices, and no analyst even wants to think about Telkonet (TKO). They are simply under the radar right now. But, as usual, they will provide the highest returns in the next upleg. The only question is when that will come.

The government seized control of Fannie Mae and Freddie Mac on Sunday, for their fourth major public intervention since August 16, 2007. On that day, the Fed announced an emergency cut of the discount rate. On January 22, they announced an unscheduled meeting to cut the Fed funds rate. On March 16, they financed the takeover of Bear Stears.

After each of these interventions, the S&P 500 rallied between 6.5% and 10.9%, but then fell to new lows. There was a 54-day, 10.9% gain after the August cut, a 10-day, 6.5% gain after the January move, and a 64-day, 10.8% upturn after the Bear Stearns bailout. In fact, the only rally this year that was not caused by a Fed intervention was the one following the July 15 bottom, driven by falling oil prices. We might get another 10%+ rally, although the previous moves came at market lows and this time, the S&P was already off its bottom. Tuesday, we saw the worst drop in the S&P 500 in 18 months, which does not bode well.

Fundamentals can tell you where the values are, but only technical analysis can help with precise timing. Unfortunately, most technical analysis is worthless. Some of the very best technicians right now are worried about the possibility of a major drop in the market during the next six weeks, in part because September is usually the worst month of the year, and October is when crashes happen, bottoms are set, and major bull moves begin.

As you know, I have a different way of looking at the market, although I have the same worries. Since the July 15 low, the S&P 500 has been range-bound between 1210 or so on the low end and 1270 or so on the high end. This congestion has been going on for almost two months, and when the energy that has built up is released, we can expect a big move. I still think that move will be up, but today’s successful test of the 1210 level is a reminder that if it doesn’t hold, we could see a cascade down.

That suggests this is a poor time to be holding call or put options — those should wait until we see a definitive breakout or breakdown. But it’s a good time to add to the extremely undervalued stocks in unstoppable MegaShifts that we track in New World Investor. These stocks will lead the rally up from wherever it starts, and it will be mighty difficult to get on aboard as the train accelerates out of the station.

Biotech MegaShift

Amgen (AMGN) will release the Phase III results for denosumab next week at the American Society for Bone and Mineral Research (ASBMR) annual meeting in Montreal. The drug is injected just under the skin only once every six months, as a new treatment for women with post-menopausal osteoporosis.

If denosumab can match or beat the efficacy and safety track record of current osteoporosis drugs, it will be a $2 billion to $3 billion blockbuster.

Amgen already released top-line data for denosumab, which was very good against a placebo. What I want to see next week is that it had better results than the current standards of care, Fosamax and Reclast. Fosamax, which is now generic, is a daily or weekly pill that reduces vertebrae fractures by 47% and hip fractures by 51%. Reclast is a once-a-year intravenous infusion that reduces vertebrae fractures by 70% and hip fractures by 41%. If denosumab can reduce hip fractures by 40% to 50%, it will be a success due to ease of administration and better patient compliance through not forgetting to take a pill. If it can hit 52% or better on hip fractures and vertebrae fractures, it will be a home run.

Amgen will submit denosumab for approval by yearend, and launch it late in 2009. As the quarterly comparisons for Aranesp and Epogen sales get easier, I think the stock will continue to set 52-week highs. Continue to hold both the Amgen January 2009 $70 LEAP call (YAA AN) and the January 2010 $40 LEAP call (WAM AH).

Content on Demand MegaShift

Akamai (AKAM) competitor BitGravity was chosen by Tata Communications to provide the technology for a content delivery network in India, and the news clipped AKAM’s stock price. Tata has a global fiber optic network and, like all network owners, needs a better way to handle bandwidth-hogging video. With 500,000 new users of the Internet every day, and video downloads rapidly changing from seconds or a few minutes of standard definition to high definition that may run for a couple of hours if a feature film, the problem is getting worse rapidly. The market is growing equally rapidly, and has attracted new competitors.

But, as I’ve said before, most of them do only video. Akamai does everything, and does it differently. AKAM has more than 30,000 servers in 70 countries around the world storing and forwarding everything on a web page, and has over 50% of the market. Their goal is to sharply reduce the number of miles a signal has to travel to get to the user’s computer.

In contrast, BitGravity and the 40 other new startups don’t have a dispersed server farm. They use high-performance computers in 20 locations and complex software to ensure content takes the most efficient path from the customer’s server to the user’s computer. BitGravity operates on the Internet side of content delivery, which is OK as long as the connection between the Internet and the users is fast, and not clogged with too much video. Akamai operates on the user side of content delivery, pulling content to the desktop from the nearest server, without having to travel through thousands of miles of Internet connections. Akamai’s admittedly biased Chief Technology Officer says that until the connections between the Internet and the users are the equivalent of a 00-lane multi-terabit highway, instead of the five-lane gigabit highway we have today, no Internet-based content delivery network can scale to the degree that Akamai can.

Maybe Tata was just peeved that India’s fastest growing online recruiting website, Naukri.com, just chose Akamai to accelerate its web pages for surfers. AKAM is a Top Buy all the way up to $30 for my $60 target.

Harmonic (HLIT) was picked by Adobe to supply the core media transcoding technology, changing one media type to another, in the new Adobe Flash Media Encoding Server. This was a real “bragging rights” win, because Adobe’s Flash is pervasive on the Internet. HLIT is a Top Buy up to $12 for my $18 target.

Telkonet (TKO) set up a two year, $1 million line of credit with Thermo Credit, a well-known funding company that specializes in telecom. TKO already had a $2.5 million receivable financing agreement with Thermo. This additional line gives them the financing they were looking for to accelerate their move into energy management products, and management reiterated their goal of operating cash flow breakeven in 2008. TKO is a Top Buy up to $5 for my $15 target.

SanDisk (SNDK) jumped on the rumor that Samsung would make a bid for them last weekend, and then slid after analysts said it was unlikely. It is unlikely, because SanDisk”s major partner is Toshiba, a direct rival of Samsung. I think Samsung started the rumor to pressure SanDisk in their ongoing patent royalty renewal talks.

But what the Street is missing is that solid state disks — flash semiconductor replacements for hard disk drives — will be shipping in volume in the December quarter, and flash prices are likely to improve rather than get worse. SanDisk is very leveraged to higher prices, and the December quarter should be the first of several surprisingly good reports. Buy SNDK on any dip back under $15 (about a 10% drop from here) for my $32 target.

QuickLogic (QUIK) was hit about 20% for no reason other than Wall Street’s aversion to anything small. QUIK is a Top Buy all the way up to $4 (a triple from current levels!) for my $8 target.

New Energy Technology MegaShift

Canadian Solar (CSIQ) took a big hit in Tuesday’s waterfall decline along with all the other solar stocks. Lower oil prices, an aversion to small-stock risk, and worries about both a shortage of polysilicon and declining panel prices in 2009 knocked the sector down. Of course, if there is a shortage of polysilicon, there won’t be much problem with declining solar panel prices, and vice-versa.

While the Street is focused on solar panel reimbursement programs in Germany, Spain and the U.S., dozens of other countries are getting ready to start those programs. This is a big MegaShift that will go on for years. Buy CSIQ up to $31 for my $65 target.

Gasco Energy (GSX) will benefit if the Farmer’s Almanac for 2009 is right — and they are right about 80% of the time. The new edition says the coming winter will be one of the coldest on record. That will send natural gas prices up to $12 or $15, and could double Gasco’s stock price. Buy GSX up to $4.50 for my $9 target.

Ocean Power Technologies (OPTT) did $1.8 million in sales and lost $3.9 million in their July quarter. They have $96.5 million in cash on the balance sheet. Their numerous PowerBuoy projects are on schedule, and their new 150 kilowatt PowerBuoy is well along in the design process. I think wavepower is the most overlooked alternative energy source of all, and OPTT is the technology leader. Buy OPTT up to $20 for my $40 target.

Robotics MegaShift

iRobot (IRBT) is buying Nekton Research for $10 million. Nekton makes Autonomous Underwater Vehicles (AUV) for the Navy, primarily to explode underwater mines. It’s a good fit with iRobot’s land-based explosive disposal robot. Buy IRBT while it is under $15 for my $30 target.

We’re caught in a trap/We can’t get out….

I’m not channeling The King this week; I’m just looking at a market that has been in a long consolidation off the July bottom. Every failed advance and every aborted decline is simply adding to the congestion and increasing the available energy for the next leg, up or down. This long volatile-but-sideways pattern has established clear breakout and breakdown points on the S&P 500 at 1302 and 1235. That’s an awfully wide range, but it is what it is, and from the way the day traders and swing traders are moaning, Mr. Market is doing a great job of throwing everyone off the boat before the ship sails. We all know that September normally is the worst month of the year, and also that a year end rally often starts in late September or early October.

Today’s drop almost to 1235 probably means another rally is coming back to 1300, but we won’t know until we get there if the rally has legs.

Tomorrow’s jobs data, where the consensus is looking for a loss of 60,000 jobs, could be bad enough to keep this decline going. So from today’s close just above 1235, I can’t rule out the possibility of a breakdown back to 1200 or 1180 over the next few days. But I am even more convinced that the next big move is upward. When we break 1302, and after a brief pause around our old friend 1326, there is plenty of stored-up energy in the form of put buyers, short sellers and sidelined cash to get to 1380 in a hurry. Breaking that, 1440 becomes the next critical level, as it has been so many times in the last couple of years, both as resistance and as support. Breaking that, a lot of bears will have to throw in the towel as the old high at 1555 and beyond becomes the target. Breaking that, it’s difficult to argue we are in a bear market when the indices are setting new highs.

So we need to sit and wait. I believe we have the right stocks for the next upleg, which will be led by technology and holiday spending on consumer electronics, especially in Asia. Healthcare should do very well, also. I continue to think oil prices are headed for $80 to $100 as the peace process unfolds in the Middle East, which means our alternative energy stocks will lag. But this is no time to bail on them in the short term, first because a hurricane could easily pop oil and the stocks back up, and second because a cold winter could do the same. I want you to hold those stocks for the long term outlook for much higher oil prices, make sure you own some health care, and focus new money on technology.

Biotech MegaShift

Amgen (AMGN) as a takeover candidate? Even though the stock is hitting 52-week highs, it’s still selling for only 13.6X next year’s earnings estimate. For a Pfizer or Merck, it’s a deal that can be done with an immediate and major impact on revenues and pipeline. I think any such offer would be in the $80 to $90 range, giving immediate substantial value to either of our LEAP positions. Hold the Amgen January 2009 $70 LEAP (YAA AN) for my $20 target price if the stock can get to $90 by expiration. Also hold the January 2010 $40 LEAP (WAM AH) for its $35 target price when the stock gets to $75.

CombinatoRx (CRXX) was under pressure for the last few days as another newsletter recommended selling the stock “because it hit our 50% stop loss.” Has anything changed at the company? Yes — for the better. The company will report data from Crx-102 in osteoarthritis in October, and this editor admits it is likely to be good. He even pointed out that at a $50 million market capitalization you are getting essentially the entire pipeline for free. In fact, he said this is the most undervalued biotech in the world right now, BUT “we must follow our stop loss and exit the position.”

Really? Someone holding a gun at your head to make you write that trade ticket? I’m about ready to start an Internet business selling bumper stickers that say: “What Would Warren Do?” I’d send this guy one for free. Can you imagine Warren Buffet saying: “Gee, it’s the most undervalued biotech in the world and I’m getting the whole pipeline of drugs for free, but it’s down 50% from where I bought my first lot, so I’d better sell.”

The stock jumped today as the selling pressure eased, but it could double and still be below my buy limit. Crx-102 may fail, and the stock may go to $2 in the near-term, but that’s not the most likely outcome. Even if it happens, the CombinatoRx pipeline has many, many more drugs coming to move the stock back up. I am making CRXX a Top Buy up to $7, taking advantage of this newbie’s silliness, for my $16 target.

Dendreon (DNDN) will hear the results of the Phase III data peek around October 8. Wall Street hates the stock. All eight analysts that follow it rate it a hold or a sell. The bears have sold short about 36% of the tradeable float. If the news is good, this is going to be legendary short squeeze.

The October $7.50 call (UKO JU) closed at 92 cents today, and the $5 put (UKO VA) closed at 83 cents. So for a total of $1.75, you can own a position that makes money if the stock either goes below $3.25 ($5 minus $1.75) on bad news or above $9.25 on good news ($7.50 plus $1.75). One of those two outcomes seems likely, but I still would rather just own the stock because I think the peek will show statistically positive results that support immediate approval of Provenge. Buy DNDN under $8 for my $40 target after Provenge is approved, or the shorts are squeezed to death.

QLT (QLTI) completed a $65.5 million sale and leaseback of their headquarters, continuing to methodically execute on management’s plan to focus on just a few programs, including rebuilding Visudyne sales in combination therapy with the new VEG-F drugs for macular degeneration. This is a really well-run company,and I think the combination therapy data will support their position and shoot the stock up. QLTI remains a buy up to $6 for my $12 target.

ViroPharma (VPHM) and Lev Pharmaceuticals cleared any FTC hurdles to their merger when the Hart-Scott-Rodino Antitrust waiting period expired. The merger should go through by the end of the year. ViroPharma has started moving up and is over my buy limit, so I am taking VPHM off the Top Buy list, but leaving it as a buy on any opportunity under $13 for my $25 target.

Content on Demand MegaShift

Akamai (AKAM) has been weak since their soft September quarter guidance, and drifted to a 52-week low this morning. A private competitor, Conviva, raised a large round of financing and boasted that they are going to kick Akamai’s butt. The trouble is that Conviva, as private competitors like BitGravity and Limelight, and public competitors like Level 3 and AT&T, are all focused on handling video. Now, as you know from my Harmonic (HLIT) recommendation, I love video and know it accounts for more than half of all Internet traffic. But today, less than $50 million of the Internet content delivery revenue comes from handling video, and almost all of that goes to Akamai, from Apple and iTunes, or to Limelight, from MySpace, Xbox Live and Netflix’ Watch Now service. Limelight has done a good job of winning video business with low prices, but that has long been factored into Akamai’s stock price. The recent Olympics video feeds were handled by Limelight and Akamai.

But the other big driver of premium content delivery is cloud computing, the trend of having software on a server and selling access to the server instead of selling the software itself. The customer doesn’t have to worry about compatibility or software upgrades, and can access the service from anywhere via an Internet browser. These transactions-based systems have to be fast, so the service providers call Akamai, not one of the video specialists.

At a brokerage conference this week, the Chief Financial Officer said the company may consider buying back some of its shares due to the current low valuation, but favors strategic investments over buybacks. I’d like to see them buy Limelight. AKAM remains a Top Buy up to $30 for my $60 target.

EMC (EMC) owns 86% of VMware (VMW), where the head of R&D resigned this week to return to Oracle. Former CEO Diane Green had hired him, and I think this is just part of the normal shaking up after a new CEO comes in. The new CEO, Paul Maritz, has 20+ years of experience at Microsoft and Intel, and will be able to bring in someone to run R&D, no problem. Continue to buy the EMC January 2010 $15 LEAP call up to $5 for my $11 target — a quadruple from current levels.

Intel (INTC) slipped on fears their business will slow, even though management went out of their way on their recent conference call to say they see no weakness. No one has a better view of the worldwide supply pipeline than Intel. But the market research firm Gartner apparently thinks they can do better. They said this week they reduced their 2008 forecast for semiconductor sales from $287 billion to $285 billion. That’s a change of less than 1% — a rounding error in the market research business. But they also said they will probably keep cutting their projections in coming quarters if the U.S. economy weakens. Their latest forecast would show 4.2% growth for the year. The Gartner analyst said: “End-market demand for electronics products held up well in first half of ‘08, but reports from Taiwan indicate semiconductor market conditions are deteriorating.”

But this week the Semiconductor Industry Association said that July chip sales rose 7.6% to $22.2 billion, and year-to-date sales are up 5.0%. Consumer electronics, personal computers and cellphones now account for about 80% of chip demand, and demand has been strong in China, India and the rest of Asia. The first three priorities for Asian consumers are buying their cell phone, TV, and DVD players. After that, they look to trade the inconvenience of Internet cafes for a home PC. Thanks to declining PC prices and much more availability of inexpensive broadband, the data through the first half of 2008 suggests this is what has been happening.

Memory chip prices are in the toilet, though, and that is holding down the overall revenue numbers. But for Intel, low DRAM prices are good news, because it makes personal computers cheaper and drives demand for microprocessors. Both Dell and Hewlett-Packard reported their July quarters in August, and said PC demand is holding up well. Dell said July picked up from June. I don’t see anything bad here for Intel. Investors don’t seem to believe that Intel is having a very good year, with earnings coming in as expected when the stock was up at $27. This is one of the first stocks the big institutions will buy when they decide to put money to work to catch an upturn. The Intel 2009 $22.50 LEAP call (NQAX) is a Top Buy at current levels, and can be bought up to $6 for my $12.50 target, which assumes INTC stock hits $35 by expiration. Even if it falls short, there’s great money to be made here as Intel moves toward and into the $30s.

Sandisk (SNDK) is still depressed by the low pricing in the flash memory market, as some DRAM manufacturers switch part of their capacity to producing flash. But with the Ultra Mobile PCs about to hit the market, the demand for flash memory also will hit an inflection point. SNDK is an excellent buy at its current depressed price under my $15 buy limit, looking for a modest $32 target.

New Energy Technology MegaShift

Ocean Power Technologies (OPTT) will announce July results before the opening next Tuesday. The numbers are the least important part of the call — what I’ll really be listening for is comments on how the pipeline of potential projects is shaping up. OPTT can be bought up to $20 for my $40 target.

US Geothermal (HTM) is holding their conference call after the close today, even though they filed their financials on August 8. Obviously, the first question is: “Why didn’t you hold the call on August 8?” But aside from this weirdness, I think everything is OK, and as one of the few smaller geothermal companies with actual revenues from selling power, I’m hoping for a good turnout on the call. HTM is a Top Buy up to $4 for my $6 target.

Robotics MegaShift

iRobot (IRBT) introduced two new vacuum cleaning robots, the Roomba Pet Series to go after pet hair and dander and the Professional Series for large areas like McMansions, offices or high traffic areas. The Pet Series sells for $349 to $399, and the Professional for $599. Both are available immediately. Small retail businesses can replace their cleaning service with a Professional, and other vacuum companies like Dyson have found the pet hair niche supports a lot of volume at higher prices. Now if they could make one that picks up mouse “presents”…

iRobot has a huge short interest, with four million shares sold short that would take 42 days to cover at the average trading volume. On Tuesday, the company announced a $200 million, five year U.S. Army contract covering military robots, spare parts, training and repair services. The stock moved up to just under my buy limit. IRBT remains a buy under $15 for my $30 target.

Security MegaShift

SiRF Technology (SIRF) said their VP of Sales resigned “to pursue other interests.” I expect the company to hire someone who can bring the combined processor/GPS chip to market. SIRF is far below my $8 buy limit and is worth $10 to $20 in a takeover. My target price is $20, a 10-bagger from current levels.

WiMAX MegaShift

Sprint recently built its 1,000th WiMAX base station, which is up and running a month ahead of schedule. The Baltimore network is ready to launch this month, and it and Chicago will go live with average download speeds of three to five megabits per second. Modem and device suppliers are ready to go. Once the merger with Clearwire closes, the combined companies will get a $3.2 billion capital investment from Google, Intel and a few large cable companies. Yep, WiMAX is real, and taking off.

Proxim Wireless (PRXM) sold the Harmonix division of their Terabeam subsidiary to Renaissance Electronics for $5.3 million. The company is slimming down and focusing, and I think we should stick with it while they rebuild shareholder value. PRXM is a hold for my $4 target — another 10-bagger from current levels.