Adopt a contrarian style: 'Buy in May and go away'! (page 1 of 3)

Even though we do not expect a straight-line recovery we believe that the coming weakness due to some profit taking does provide buying opportunities for selected cyclicals and technology stocks with an investment horizon of 12-18 months.

US Stocks

Current levels of the Dow, S&P and Nasdaq are at or below the levels when the Fed announced the rate cut. Profit warnings still dominate sentiment and additional rate cuts are necessary to sustain any meaningful rally. And they should be forthcoming, unless the economy starts to show signs of bottoming.

Price of gasoline has soared 15% in the last month. Refineries are operating at near capacity, so increasing the supply of gasoline will be difficult. Higher prices will become a drag on an already slowing, fragile economy. Consumers are already spending $125 billion a year on fuel, and a 25-cent increase in the price of gasoline would take another $20 billion out of people's pockets, hence further reducing consumption. No new refineries have been built in the United States since the mid-1970 partly due to environmental concerns.

Wall Street has shown that panic is an equal opportunity emotion. The panic to get out of the stock market, in particularly tech stocks, in February and March has gave way to a panic to buy in the last three weeks. A key catalyst for the recent rally was that more than a few tech companies said that the sales and earnings picture is at least stabilizing. But as long as capital spending remained tight, earnings recovery will be delayed.

Panic is an emotion that should not cloud one's financial decisions in an up and down market. Stay with companies that can sustain its margins with inelastic demand for its products like RJ Reynolds Tobacco Holdings (RJR $59.74) or oil companies like Exxon Mobil (XOM $86.10).

US Technology Stocks

Another relatively quiet week for technology issues. With the bulk of "blue chip" technology companies having completed their March-quarter earnings reporting, investors are appearing to be turning conservative again and locking-in profits especially after 3 weeks of strong price appreciation. Since the low of 1619 established on 4 April 2001, the NASDAQ Composite Index has rallied 32.5% (to 2146). We expect the market to enter into a profit-taking phase over the next few trading days and as such, we suggest investors who are sitting on good profits to look towards securing capital gains and sell a portion (40%) of their profitable investment positions. For investors who are invested in more conservative time deposits and are seeking higher returns through new investments into the US technology sector, we suggest to Hold in the near-term until the expected price weakness stabilises.

We continue to stay away from the PC hardware segment, as well as PC-related semiconductor companies, as we maintain the view that the segment will be under-performers for the year 2001. However, if "push comes to shove" then we would only accumulate (for 2002 investment performance) Dell Computers (DELL US, $24.93, CSFB rating: Buy) and Intel Corp (INTC US, $30.40, CSFB rating: Buy) when their respective stock prices stabilise at lower levels (see 3-tiered structured buying strategy). Though we avoid the segment altogether, we like DELL best as we believe the company is well positioned to maintain its market share leadership even in an aggressive PC price-war environment.

DELL's competitive advantage primarily lies with its direct sales model which enables the company to avoid channel inventory problems (ie inventory buildup among resellers) that plagues other players within the industry.