INVESTING: Market’s malaise provides opportunity to look ahead

The stock market is experiencing a bout of hemming and hawing (that’s a savvy Wall Street term) that easily could last the rest of this year.

I highlighted this potential weakness, especially in the tech sector, a few weeks ago. I am using this time out to rehash some of the battles of 2006 and, more important, get ready to position for 2007. Stay with me and see how we’re going to make 2007 pay off for us, big time.

Last week, I scooped Barron’s on Pfizer, as the publication wrote a favorable piece on the stock shortly after I did. Health care has been one of the worst-performing of the 10 major S&P sectors the last three years, and that alone is enough to get my interest.

It’s not enough, though, for a sector to be an underperformer. It has to be hated enough to attract loads of short-selling. People have to be putting their money against the sector in bushels.

That’s exactly what’s happening in health care. The difference between this year and the last three is that the Democrats have investors scared out of their skivvies (another savvy term) regarding these stocks, and people think they are a slam dunk to short. Betting against such one-sided opinion potentially could make you a lot of money.

I’ve previously said the U.S. dollar won’t collapse in 2007, despite doomsayers who think it might. Now I’ve warmed up to the idea that it actually might move up enough next year for me to make pretty good money.

In the near term, there still could be weakness, so I am sticking with my Australian dollar position. But if the U.S. dollar holds support near its 2005 lows and moves above its down-trend lines, I am selling the Aussie buck and short-selling the euro. If the U.S. dollar goes up, the euro almost certainly will go down. The way to do this in the equities market is to sell short the exchange-traded fund FXE, which tracks the euro.

For a simpler move, check out the semiconductor industry. I am long in SMH, an exchange-traded fund that tracks the semi stocks. Next year might bring a boom in large capital expenditures. In the old days, that used to mean exclusively factories and warehouses, but tech now gets a ton of spending in these cycles, and semi companies are in the sweet spot to capture that.

I think 2007 could go down as the year of the big-cap growth stocks, but I don’t think they’ll go nuts, as they did in 1999. This means small-cap stocks slowly will slip to underperforming status as the year grinds on.

We may see monster moves out of Cisco and Microsoft. Check out a chart of Cisco. It marched to $27 five weeks ago and has been stuck there since. No one wants to sell the thing. Good sign.

I love latching on to big winners and holding on to them as long as they stay good. That’s what kept me in the S&P midcap index from January 2004 to August 2005. The index went on a tear because of the strength of energy and home builders. I’m looking for similar opportunities.