The Only Three Groups Worth Playing

As we start 2008, the market finds itself in an interesting predicament.

The S&P 500 is holding on to the long-term uptrend channel ... barely. The economy is looking down the barrel at a recession, and it's only waiting for employment to break down and start the dominoes falling. The financial sector is a nuclear wasteland with no signs of a recovery anytime soon.

Meanwhile the global economy is strong and has acted as a cushion for large-cap multinational companies, which continue to produce solid earnings. The macro trends for the global and domestic economies have collided in 2007 to create a confusing turbulence as we enter 2008. We believe traders should focus on the market with a sector-by-sector approach and stay on the right side of the sector trends.

The bullish sectors in the market are not hard to find in these narrowing market conditions, but we'll make it simple: defensive, international and commodity. These are the only groups that continue to rally and show any kind of offensive energy.

The commodity-related equities have a great shot at a strong 2008 if the current commodity trends continue. Oil, gold, silver and platinum are all breaking out and acting strong. The related equities should follow.

We also remain very bullish on the international markets. The excess liquidity being created by the Fed is very likely going to create another asset bubble. We believe that asset will be foreign equities. The bullish growth and "story" are there to create another bubble similar to the technology bubble of the late '90s and the housing bubble after that.

U.S. Oil Fund

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The defense sector is continuing to move higher as the war in Iraq rolls on and concerns over a Chinese military buildup push money toward the aerospace/defense names.

Finally, the defensive groups such as consumer staples and utilities are doing well as domestic long-only money managers look for a place to hide.

While we wait for the fallout from the current economiccross currents to take effect, these groups should provide some trading opportunities on the long side in the first quarter of 2008.

streetTRACKS Gold ETF

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Traders should look to trade the commodity ETFs in the first quarter. The streetTRACKS Gold Shares (GLD - commentary - Cramer's Take), iShares Silver Trust (SLV - commentary - Cramer's Take), the U.S. Oil Fund (USO - commentary - Cramer's Take) and the PowerShares Multisector Commodity fund (DBA - commentary - Cramer's Take) are all breaking out and look like excellent trades to the upside. Commodities continue to surge higher, and the uptrends are certainly intact.

Hang Seng

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We would also watch the Hang Seng (Hong Kong) Index closely for a resumption of the primary uptrend. If the liquidity that is being created by the Fed is going to start flowing into Asia in a meaningful way, we should see it show up in the Hang Seng first, since it is the only Chinese exchange open to direct western investment.

The new year is off to a rocky start, but many of the crosscurrents that are leading to a murky forecast at the moment will be resolved for better or worse by the end of the first quarter of 2008.

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At the time of publication, John Hughes and Scott Maragioglio were long the iShares Silver ETF. Hughes and Maragioglio co-founded Epiphany Equity Research, which has developed and utilizes proprietary tools to identify and track liquidity changes in the market indices and sectors. Hughes advises numerous asset managers, hedge funds and institutions managing in excess of $30 billion. Maragioglio is a member of the market technicians association (MTA) as well as The American Association of Professional Technical Analysts (AAPTA) and holds a Chartered Market Technician (CMT) designation. Maragioglio has also served on the board of directors of the AAPTA.