It's showtime for the financial markets this month, as every speck of speculation that has pushed floundering public companies to the top of year-to-date winners lists will be proved right or wrong on their earnings release dates.

It's not the numbers and words on paper that traders will be scrambling to ingest starting this week, as executives disgorge reports on their achievements over the past three months. No, it will be voices on the conference calls, declaring whether sales and earnings for the entire second half of the year look strong or weak.

With many hundreds of iffy stocks bid to one-year highs since the autumn lows, you can bet that companies that merely declare that their business has "stabilized" will no longer be greeted with 10% pops in the next day's trading, as they were in April and May. Investors have already wagered on stability, at minimum. At this point, only firm declarations of sunny skies and a return to 5% to 10% growth or better in the calendar third and fourth quarters will do.

If recent government reports on industrial decline and rising unemployment are accurate, the public's breathless recent move to bet on black in Wall Street's roulette wheel could be premature. But the Bush administration has so many ways to fix the wheel in its favor that bulls simply cannot be counted out.

"It's a classic battle of wind vs. tide," said one investment (and boating) veteran in an interview last week, suggesting that bears counting on ebbing economic growth are tussling with bulls attempting to sail forward on powerful gusts of government fiscal and monetary policy. Mr. P, the hedge fund manager who comments for this column anonymously from time to time, said in mid-June that he had switched from crazed bull to cautious bear. Now he's ready to go further, projecting the possibility, though by no means the certainty, of new lows for the market in the summer. An S&P 500 index at 670, he says, cannot be counted out. He is particularly concerned about the potential for labor strikes over the summer in the automobile and telecommunications industries to put a crimp in business output and consumer confidence.

Five Key Elements for the Second Half

As you set your own course for trading in the second half, consider mapping your views to the framework that I propose in my new book, Swing Trading . Here are the key elements, with my own views:

  • Determine the major economic trend: neutral with a mildly positive bias. A modest rebound in activity is still evident in the weekly leading index of the Economic Cycle Research Institute. There are dozens of ways to judge economic growth by squinting at government, academic and industry reports, but this multimeasure gauge has offered a useful shortcut for years.

    Hesitation: ISI Group, the prominent institutional research firm, has cut its estimate of second-quarter U.S. gross domestic product growth to 1% from 1.5%, and has said it is likely to cut its estimate for the third quarter to 4% from 5%. The discouraging news, ISI said in a recent report, is that its weekly survey of results at a wide range of individual companies is stuck in neutral -- and needs to ramp up sharply by September to support the Q3 figure of 5% growth. Also, it notes that unemployment claims have deteriorated significantly in recent weeks, durable goods orders and inventories were both down in May, and business loans remain depressed.

  • Determine major money supply/fiscal policy trend: very positive. The Bush administration has pulled a number of key levers in its attempt to get the economy rocking by the time the 2004 election season begins in earnest: tax cuts on dividends and capital gains; massive new withholding tax cuts retroactive to Jan. 1; hikes in federal spending on the military and Medicare; cuts in short- and long-term interest rates to 45-year lows; hike in the monetary growth rate to 7%; boost of credit expansion in the form of home refinancing to new highs -- three times last year's record rate; and permitting the U.S. dollar to fall in value vs. foreign currencies, boosting the fortunes of multinational companies in Europe and Asia. There's virtually nothing that government or central bankers can do to kick-start business and consumer spending that hasn't been tried.

  • Determine major news-cycle trend: neutral to negative. There is rising concern that the war in Iraq is far from over, skepticism of the Bush and Blair administrations' rationales for pursuing the conflict, and increasing negative noise from democratic contenders here and Tory complainers in the U.K.

  • Determine major market trend: mildly positive. The long-term trend of stocks turned thoroughly bullish in mid-March but has recently stalled, says Paul Desmond at Lowry's Reports, a sterling market-timing adviser of the past few years. Desmond believes a mild correction could shave 900 points off the Dow Jones Industrial Average without breaking the uptrend. He is wary of calling the recent move the start of a new bull market, however. Strong as it was, he says, the strengthening of buying interest and the weakening of selling interest were not nearly as pronounced as seen at the start of major multiyear rebounds of the past 60 years.

  • Determine strong and weak sectors: According to Lowry's, top groups include tobacco/distillers, regional banks, drugs, life insurance, recreation; worst groups include rare metals and real estate investment trusts (REITs).

    According to the work done on Dow Jones sector indices by the estimable Carl Swenlin of, leading groups at the moment are tobacco, Internet commerce, airlines, home construction, wireless communication, transportation equipment and home furnishings; weak groups are trucking, railroads, chemicals, industrial transportation and paper products.

    According to my own work, top sectors include Internet information providers, long-distance carriers, generic drugmakers, national brokerages, regional banks and data-storage device makers; worst groups are hospitals, manufactured housing, auto parts, chemicals and textile makers.

    Before going on to consider some volatile stocks to buy or sell in this climate, it's important to decide whether these bullet points represent views that are widely held, since the consensus view is a winner in the short term but ultimately is a loser. As Michael Steinhardt pointed out in his 2001 book, No Bull , you need an intellectually advantaged "variant perception" to distinguish yourself from every other trader. If your variant perception is correct, you must be prepared to lose a little at first by being early -- but then you should win big as the world ultimately beats a path in your direction. Trading is not a team sport. You can only win at the expense of someone else. As Mr. P has pointed out on numerous occasions, the loser of the future has a false belief. The job of a successful trader is to discover that false belief, and exploit it.

    All About Quality

    And now, one more viewpoint before continuing. Larry Williams, veteran of 40 years of trading and author of the excellent new book The Right Stock at the Right Time: Prospering in the Coming Good Years , called the recent market rally on the button in October, so he has earned the right to call the top. And he said in an interview last week from his home in San Diego that he pulled all his money out of stocks in the third week of June when his market valuation and sentiment models had risen to historically high levels. "I'm not wildly bearish here, but I'm not bullish either," he said. "I think we're going to go down to sideways. No one was bullish last fall when we bought in, and now we're on the opposite side of the spectrum."

    Williams says he doesn't short-sell stocks when he turns bearish, as he finds it too risky for his blood. He also doesn't buy speculative stocks when he believes the trend is positive, as he prefers shares of high-quality companies that put in steady results. "It's about missing the losers, not berating yourself for missing some big winners," he said. "If you can just avoid the three to five worst stocks in the Dow Jones Industrials, you can beat that index without any problem."

    At this juncture, it seems the consensus view holds that stocks have seen their bear-market lows and are now on the mend in a slowly strengthening economy shot full of adrenaline by tax cuts, lower interest rates and quiescent energy prices. The consensus believes that high-beta technology and retail stocks are in favor, lifted by expectations of higher profits in the fourth quarter -- along with explosive spending from Americans armed with refi money and tax rebates.

    Leaning somewhat against the wind, then, I'll suggest that investors are better off today with high-quality, dividend-paying defensive issues again, just as they were in 2000 and 2001, and should be wary of many of the speculative groups and names that shot up in the second quarter. My 10 broad-market picks for the second half, chosen with assistance from the MSN StockScouter rating system, are listed in the following table. My top five picks for the Dow alone are listed in the second table.

    StockScouter top 15 for the second half
    Company Name June 30 Price % Chg YTD Rating
    Burlington Resources (BR) 54.07 26.3 10
    Colonial BancGroup (CNB) 13.87 16.3 10
    Cisco Systems (CSCO) 16.79 28.9 10
    Cognizant Technology Solutions (CTSH) 27.30 13.4 10
    Doral Financial (DRL) 46.69 64.54 10
    Electronic Arts (ERTS) 80.99 62.7 10
    Entergy (ETR) 53.21 18.4 10
    Flagstar Bancorp (FBC) 25.55 138.4 10
    First Financial Holdings (FFCH) 29.91 22.5 10
    Fifth Third Bancorp (FITB) 58.71 1.2 10
    FirstMerit (FMER) 23.63 11.5 10
    Greater Bay Bancorp (GBBK) 20.43 19.8 10
    Granite Construction (GVA) 20.07 30.9 10
    Great Plains Energy (GXP) 29.28 32.1 10
    Getty Images (GYI) 41.61 36.2 10

    StockScouter top 5 Dow stocks for the second half
    Company July 7 Price % Change YTD Rating
    Home Depot (HD) 33.77 41.6 10
    Citigroup (C) 44.94 29.3 10
    Caterpillar (CAT) 56.41 25.7 9
    Intel (INTC) 22.91 47.5 8
    Coca-Cola (KO) 44.95 6.1 8

    Jon D. Markman is senior investment strategist and portfolio manager at Pinnacle Investment Advisors. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at At the time of publication, his fund was neither long nor short any stock mentioned in this column, but positions can change at any time. has a revenue-sharing relationship with under which it receives a portion of the revenue from Amazon purchases by customers directed there from

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