The Market Edge Market Summary
http://www.marketedge.com/

What I find most interesting about this week’s Market Edge report is that after the market finally tanked, Market Edge’s technical approach got back to beating the market. As I have remarked in earlier columns, it’s been a bad time for pure technicians like the Edge.

Stocks took it on the chin last week as a shaky durable goods report coupled with an overnight, 9% decline in China set the stage for an across the board decline. The decline in China was the worse one day performance in a decade. The action got going on Tuesday as the DJIA lost 416 points as over 2.3 billion shares changed hands with all but 2% of the volume being on the down side. Wednesday saw more volatility as traders pushed stocks higher across the board but finished the day with a tepid 52 point gain. Thursday started off with a 200+ point decline only to rally back before ending the day in the red. Things calmed down a bit as the week came to a close leaving the DJIA with a 533 point (-4.3%) loss for the week as the blue chips closed at 12114.

It was the same story over at the NASDAQ, which started the week within 10 points of it's six year high recorded on 02/22/07 (NASDAQ 2524.94). By the close on Tuesday, the tech-heavy index had lost 107.24 points and closed at 2407.86, it's lowest close since 12/22/06 (NASDAQ – 2401.18). For the period the NASDAQ lost 147 points (-5.9%) and closed at 2368.

Year-to-date, the Dow is down 2.8% while the NASDAQ has lost 2.0% of it's value. Trading the DJIA (DIA) using a buy/hold strategy has produced a loss of 349 points (-2.8%) while utilizing the Market Edge long/short approach would have generated a gain of 539 point (+4.29%).

Navarro's Big Economic Picture
China Wags the Wall Street Dog

Well, that was a surprise. Or at least it seemed to be to much of the world. The pundits blamed the world wide semi-meltdown on a plunge in the Shanghai stock market. 

At least so far, I see this more as a technical correction than a stock market signaling economic weakness ahead. The data is, however, mixed on this subject. Nonetheless, there are just too many countries around the world hitting on all cylinders. And I am damn sure that the Chinese lurch was much more a function of a speculative bubble than any slowdown in the Middle Kingdom.

Still, if you are a shorter term trader, you don’t want to be on the long end of the market as trends around the world markets seem to be either breaking to the downside or already broken.

This Week's Market Movers

It’s a big week for data with the service ISM on Monday, productivity and factory orders on Tuesday, the Fed’s Beige Book and Consumer Credit on Wednesday, and BOTH the jobs report and the trade report on Friday. My guess is that action will be a bit tamer in  the early part of the week in anticipation of the Friday dynamic duo. I don’t see either Friday report as offering any blockbuster news .

I think, then, the jitters about the market alone will be enough to ramp up a bit of volatility and the slew of reports will play second fiddle to fear replacing greed in the current market equation.

The International Scene - Technical Take

In a sharp reversal, some longs went to avoid. They include SPY, IEV, EEM, and FXI.  Longs that deteriorated include EZU, EWG, ADRA, EWY  while ILF and EWW went from Long to Neutral.  Australia stood alone as a clear long.

The planet shuddered last week. It remains to be seen whether this was a technical event or a signal of weaker global economic growth to come. Stay tuned.

*Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, Korea, Malaysia, Mexico, Morocco, Pakistan, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.

Vaino's Biotech Corner
Biotech as a "Safe" Sector

Biotech is supposed to be insulated from the business cycle as a whole. Theoretically, biotech stock prices ought to reflex clinical successes and failures, rather than trends in future economic expansion. 

Looking at the Markets this week, both the AMEX biotech index (^BTK) and biotech ETF IBB (more diversified than BBH) plunged in lockstep with the broader markets, even falling a bit extra. In the long run, stocks of biotech companies with good pipelines are insulated from movements in the Market as a whole. So, when a big decline in biotech stocks occurs for reasons beyond science it can be a good time to buy.

As “mere anarchy was loosed on the world” this week I was watching for good biotech stocks to fall. Cardiome (CRME) a Canadian biotech I like, and wrote about last Canada Day, has taken an 11% dive since Tuesday (as of close Thursday:  I will be traveling on Friday and unable to check prices). I don’t believe this is warranted.

I wrote in July that Cardiome had fallen due to the FDA rejecting their NDA filing for an IV form of their drug RSD1235, which treats atrial fibrillation. A paper in 2004 published in the Journal of the American College of Cardiology on a Phase 2 study of this drug was very encouraging. The rejection had nothing to do with the science but merely with careless paperwork. As well, they announced good clinical results for an oral formulation of this same drug in September. The stock had a good run after I mentioned it, going from $8 to $14 and is now below $11.

Cardiome announced two weeks ago that the problems with the NDA filing above have been resolved, and the FDA has accepted their application. Please note, this does not mean the drug has been approved, only that the application has been accepted. I think this stock fell too far for reasons having nothing to do with science, and that the stock is now undervalued.

To be clear, the so-called “fear index” (VIX) remains (as of close March 1) almost 50% higher than it was on Monday, and more trouble could be on the way. Once the dust settles I think CRME will be a good stock to buy. 

I also like Amylin (AMLN) at theses prices, especially on news last week that the FDA will require further testing on Novartis’ (NVS) diabetes drug Januvia. Hopefully things will not fall apart, and the center will hold. 

The Never Ending Story: Hollis Eden

This coming week promises to see some fun volatility as Hollis Eden’s (HEPH) “tentative date” for an award under Project Bioshield on March 7^th approaches. As I’ve mentioned, I think this company has a weak pipeline (loads of preclinical studies, but, according to the FDA [clinicaltrials.gov], nothing currently in Phase 2) and sinks or swims based on this award. 

Now, this stock didn’t move as I though it would after announcing the January 31 “tentative contract” award date had been pushed back to March 7. I wrote in the Newsletter the week before January 31, that open interest on February options was very low, while open interest on March options was decent. Open interest on March options remains acceptable (not high, it’s a nano cap stock after all), and open interest on April options is negligible.  I think this portends a strong move one way or the other.

As I mentioned last month, my bet is on no contract and I bought March 7.5 puts (QGQ OU). For low price volatile shorts I think the safety of options, as opposed to outright shorting, is worth the premium. To be clear, this is highly speculative. We’ll see if I’m right next week. In any case, as with past “tentative award” dates last January, November, and September, there will be some fun volatility for day traders.

“Any trader or investor who ignores the power of macroeconomics over the world’s
financial markets will, sooner or later, lose more than they should—and if they are
trading on margin, perhaps more than they have.”
 -- If It's Raining in Brazil, Buy Starbucks

The Market Edge Market Summary from www.marketedge.com 

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Peter Navarro
Irvine, California USA
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DISCLAIMER: This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling, or holding of any financial instrument whatsoever. Trading and investing involves high levels of risk. The authors express personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The authors may or may not have positions in the financial instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future performance.