Your Weekly Wrap

Looking Forward to Bargain Hunting

Dear Bottarelli Research Member,

The most dreadful week in recent memory has now officially come to a close. Good riddance! For the week, the Dow was lost 2.1%, the S&P 500 lost 1.9% and the NASDAQ lost 2.2%. And remember, these numbers don’t even include the 200-point losses suffered on the Dow from last Thursday/Friday!

In terms of the metals, gold closed at $657.50 an ounce — down $23.40 just today and off a total of 7.6% from last Friday’s settlement price. Not to be outdone, silver closed down 13.2% and copper closed down 10.2% on the week as well.

In today’s trading, the NASDAQ eked out a 13-point gain which stopped an 8-session losing streak. Market sourpuss Mark Hulbert reports that a good number of investment advisers are now becoming bearish, which could be taken as good news from a contrarian standpoint. So if I may put on my prognosticator cap, here’s what I think it set to happen next…

From a basic “supply/demand” standpoint, the worldwide case for commodities like steel, copper, cement, oil and energy have not changed. Not by a long shot. Maybe I didn’t get the memo, but China’s population has not grinded to a halt — nor has America’s insatiable demand for oil slowed down.

On the same hand, economic expansion in the U.S. remains healthy. No matter if you’re a bull or a bear, you can’t argue the fact that lower tax rates and strong business investments have fueled this very strong economy we’re currently in.

Remember, the sell-off we just experienced came primarily after the Fed said their next move would depend on the incoming economic data, as further rate hikes could “yet” be needed. So, when the first significant piece of economic news was reported, showing a slight rise in CPI, the markets sold off with reckless abandon. In my view, the financial markets have now priced in two future rate hikes, which would boost the federal fund rate to 5.50%.

So back to my prognostication. What would spark a rally? Three things, really.

First, a basic valuation call on the realization that the sell-off was overdone. Some can say this is selective stock picking, others call it bargain hunting. But like I said above, nothing has changed the prevailing trends shaping today’s top investments, and when Wall Street realizes this, we could be in for quite a bounce.

Second, any pending news that could make the markets second guess their assumption of two more rate hikes could cause a rally. I’ll bite my tongue when I mention this name, but John Snow told the Bond Market Association today that overall growth is strong and core inflation remains in check. Some have called it the most direct comments Mr. Snow ever made about the Fed. I bring this up because there’s a good chance other analysts will soon make similar comments that question the next two rate hikes — and this could support a stock rally.

Third, we’re approaching the summer driving season, the time when oil gets the most attention of the year. If oil and oil-related stocks start attracting buying interest, the snow-balling effect of this buying could quite possibly be enough to propel the Dow up high enough to once again approach its all-time high. After all, a rising tide lifts all boats.

So as we head into next week, I’m actually quite excited about all the opportunities in front of us. As I’ve been saying all week, I’m closely monitoring my favorites for the best possible entry prices, and I’m seeing a lot of opportunity. It’s just a question of timing.

One name in particular that caught my eye today is Genentech (DNA – NYSE), thecompany I’ve repeatedly called my “favorite biotech stock.” I tell anyone who will listen that if you must own one biotech stock, DNA is it (sorry Amgen).

Today, DNA had a big-time bounce when Morgan Stanley upgraded them to “overweight” from “equal weight,” saying shares look attractive at current prices and setting a $90 price target. If you look at the chart, you can see a classic double-bottom formation right under the $77.50 level, which could be establishing a near-term floor in DNA.

In an impressive note, Morgan Stanley said that Genentech has “unrivaled sustained growth” among large-cap stocks. I couldn’t agree more. In fact, I think they own not one, but two of the world’s next wonder-drugs. I expect to use the stock’s current weakness to establish a longer-term upside position very soon. Until then, have a good weekend — and as always…

Lock and load!

Sincerely,