The markets have been acting, to put it mildly, schizophrenic since the beginning of the year.


Peter Cardillo
Chief Strategist
Westfalia Investments

Recent Daily Interviews

Thomas Weisel Partners'
Eric Ross

Economic Cycle Research Institute's
Anirvan Banerji

John Hancock's
Himali Kothari

Dresdner RCM's
Camilo Martinez

Fechtor Detwiler's
Joe Valenzuela

The

Nasdaq Composite Index, for instance, made steady gains in January only to have them completely wiped out in the first half of February, thanks to poor fourth-quarter earnings for some of the biggest names in tech. Even bellwether

Cisco

(CSCO) - Get Report

, which had earned the reputation of beating estimates by a penny,

disappointed investors.

Federal Reserve Chairman

Alan Greenspan and pals did their best to improve sentiment and the economy with their two 50 basis-point rate cuts, but to no avail.

So investors have been left scrambling, with no direction, news or data to guide them. For today's Daily Interview, we asked Peter Cardillo, chief strategist at

Westfalia Investments

, who's been following the market for 37 years, what he thinks about the recent activity and how investors should be responding.

TSC: The market's been described as "drifting" -- without any conviction or leadership. Is this description accurate?

Cardillo:

I'd like to characterize this market as a market that's gasping for air. The market, obviously, is very much under pressing conditions -- there is a lot of uncertainty surrounding the economy. I have been calling for pockets of recession and not a full-blown recession. What we're seeing is the manufacturing sector of the economy in recession, and I believe that corporate profits are having a recession. So until there is a clear direction to where the economy is going, I suspect the best result this market can give us is a trading range.

TSC: What would provide a catalyst for the market?

Cardillo:

I think a catalyst for the market would be a clear direction of where the economy really stands. We've been getting some mixed signals -- the employment number certainly was better than expected, retail sales came in stronger. I suspect we're going to have to see another round of numbers that would probably support the better numbers that we got this month as opposed to the previous months, and that would probably be the catalyst for the stock market.

Right now, the market's being led by institutional traders shifting money back and forth from one sector to the next, and we're not really seeing lots of new money being committed to the stock market. Generally speaking, this time of the year is when you get an influx of pension money rushing into the market. It looks as if this year, for the first time in a long time, a lot of that money actually wound up in money market funds.

TSC: In your experience, is the current market action consistent with other recessions?

Cardillo:

Polls are mixed. While people are nervous, I don't think that people are just pulling in their spending capacity to a halt. There is a sense of cautiousness among the public. I think the reason for that is the unemployment rate is still low, and people feel that if they lose their jobs today that they probably can replace them very quickly. In past recessions or when things were tough, that feeling was not really around. People would be fearful that if they lost their jobs, they wouldn't be able to replace them. But with unemployment at 4.1%, it's quite obvious that the psychology of there being a good job market is still pretty much intact. Although it seems there's not a day goes by, that a company -- big or small -- doesn't announce layoffs or cutbacks.

TSC: Everyone's talking about a second-half recovery -- do you buy into that?

Cardillo:

Yeah, there's no doubt we have a friendly Fed, and the Fed is doing everything possible I believe to avoid a full-blown recession. Let's not forget that it takes six to eight months for a rate cut to really take effect. Just like when the Fed was raising rates, it took a long time for the economy to slow, but when it did slow it slowed rather drastically. So, it's going to take some time. I think the Fed has cushioned us here. It gave us two hefty cuts back-to-back -- something that the Fed does not normally do unless it is fearful of the economy falling into recession.

TSC: What do investors have to hear to psychologically feel it's all right to jump back into the market?

TheStreet Recommends

Cardillo:

For one thing, we have to hear less layoffs and we have to begin to see consumers' confidence is beginning to rebound. Also, we'd have to see some economic numbers to support that. But the key is consumers' confidence because if the consumer continues to lose confidence, that in itself could throw the economy into recession because the consumer then, obviously, would pull back on his spending, and since two-thirds of the economic growth measured by

GDP is driven by the consumer, you can't afford to have a consumer that haves a negative attitude.

TSC: Are there certain sectors or stocks we should be keeping our eye on?

Cardillo:

I continue to think when we do get a rebound, the stock market will be led by growth stocks -- technology, telecommunications. Right now, they still remain fairly much down and out, but I think investors should continue to add them to their portfolios because when the rebound does come, they will come back rather strongly.

TSC: Are there any sectors that are getting too much attention -- good or bad?

Cardillo:

Well, the New Economy stocks have certainly suffered the most, but let's not forget that they were the ones who ran up the most and were very much overvalued. There's no question about that, so we did have a speculative run in the so-called New Economy stocks and now, it will take time for them to adjust. Many of the dot-com stocks have gone out of business, and there will probably be more, but there will be a lot of Internet companies that are going to stay around. I believe that that's where the future is.

I tend to think

Amazon.com

(AMZN) - Get Report

,

Yahoo!

(YHOO)

and

eBay

(EBAY) - Get Report

will continue to be the major players.

TSC: So until a rebound happens, where should you put your money if you are investing in stocks?

Cardillo:

I believe in a balanced portfolio. I believe that growth stocks should be in your portfolio today as well as defensive issues. Of course, owning

Philip Morris

(MO) - Get Report

that's yielding a nice, fat dividend -- what's wrong with that? That should always be in your portfolio, but investors should not throw all their money in defensive stocks.

TSC: From how the market has acted recently, what can you tell about how the next couple of months will be?

Cardillo:

I think the market is reacting like a market that wants to consolidate and eventually move higher. It's a market that really can't make up its mind and where many stocks are hitting their 52-week lows. From a contrarian viewpoint, it's a market where negative sentiment continues to increase -- those are the ingredients of a turnaround.