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Saturday, January 27, 2007

Weekly Market Update: Earnings and Interest Rates

Weekly Market Call

Earnings and interest rates dominated the week and made for a volatile stew. Much as we observed last week, most earnings reports are decent but we have seen better news in past quarters. Earnings to date are not driving the market upward in any consistent way. Indeed, all the major averages lost 0.6% this week except for the Russell 2000 which managed a gain of 0.4%.

Tech rallied on Wednesday due to good news from Yahoo and Sun but the rally couldn't last and the NASDAQ finished the week on a sour note. AMD plunged on a loss, Microsoft and eBay rose on strong earnings. Amid the inconsistency and volatility, TradeRadar is now flashing another weak SELL signal on the QQQQ as it did a few weeks ago. The fact that the signal strength is again weak is clearly indicative of a market that is treading water with no clear sense of direction.

On the other hand, TradeRadar continues to indicate that the Dow and S&P 500 remain in their up-trend though perhaps not as firmly as before.

Bad news from the housing market seems to be getting less bad. We have now had two months of rising housing starts and median prices of existing homes fell less than the previous month. Existing homes sales fell only slightly. The feeling among traders is that we may be near the bottom.

Against the backdrop of the housing market improving, December durable goods orders up 3.1% over November and still decent earnings from most companies, the other big driver in the market became a fear of the Fed. Whereas investors have been hoping for a rate cut by June, the feeling now is that we won't be seeing rates cut until December. Indeed, there are those who fear further tightening. This really took the wind out of the sails of the market after Wednesday's big rally. Note that bond yields have been moving steadily upward since the beginning of December, possibly confirming this expectation of higher rates.

Bottom line: uncertainty and caution are the rule of the day.

ETF Comments

As we said lask week, XLK, the tech ETF is mirroring the action on the QQQQ. This trend is continuing and we see the same kind of weak TradeRadar SELL signal for XLK. The decent news in housing didn't do much for XHB, the home builders ETF but IYR, the US Real Estate ETF (with more of a REIT orientation), reacted positively and continues its strong up-trend. Oil was up and down and XLE, the energy ETF, reacted accordingly. It remains above its 20-day and 200-day moving averages but below its 50-day moving average. Tough to make a call here.

TradeRadar Stock Picks

No major news for the three current stock picks that we continue to maintain as open long positions. Tarragon (TARR) drooped this week after recovering last week. Generex (GNBT) didn't budge. PacifiNet (PACT) lost a dime on continued profit taking. Whenever it gets up to the $6.50 to $7 range it seems to run into resistance.

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