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Saturday, February 10, 2007

Weekly Market Update - Uncertainty turning to Bearishness?

Weekly Market Call

All the major indexes moved nicely higher this week until Friday when things got ugly. Cisco reporting good earnings and providing positive guidance gave the market a lift on Thursday but it wasn't enough to carry through to the end of the week. I am reminded of when Apple announced the iPhone and the NASDAQ hit a new high, only to fall back soon after. As I said then, it seemed unlikely the market as a whole could rise on the back of a phone or on the results of just one stock.

So what precipitated Friday's swoon? Three Fed officials did say that though they expect inflation to moderate later in the year, the risk of higher inflation remains. The Dallas Fed president even indicated there was a potential for further rate hikes. Not a message the market wants to hear.

Earnings season is about over now. A number of large-caps reported good earnings this week including the aforementioned Cisco as well as Prudential, Disney, Marriott and News Corp. The bad news is that, based on recent guidance, the expected first quarter growth rate for earnings is expected to fall to just 5%. After a string of double digit gains, this is not making investors comfortable.

In any case, all the indexes were down Friday but the only one showing a TradeRadar SELL signal is the NASDAQ 100. TradeRadar has been flashing SELL for three weeks in a row now and, as a result, I have advised selling QQQQ and buying QID, the ProShares UltaShort QQQ ETF, to profit from the expected drop in the NASDAQ. With many traders saying the market is overdue for a correction and many analysts quoting a statistic about the Dow and the S&P 500 not having had more than a 2% pullback since July, it is no wonder that a bearish attitude is creeping into the market.

ETF Comments

The technology ETF, XLK, has not been correlating closely with the NASDAQ and is still not generating a TradeRadar SELL signal. On the other hand, it is certainly not looking like a buy here.

Oil climbed this week but did not break through $60 a barrel so XLE, the energy ETF, did not advance. If we don't soon see XLE move past the $59 to $60 range we can expect another leg down and, perhaps, a confirmation that the long-term peak in energy is behind us.

I have been watching the housing/real estate ETFs lately, especially after recommending Tarragon Corp. (TARR). IYR, the US real estate ETF, has really been accelerating upward. After a modest pullback on Thursday, it took a bigger hit on Friday, probably the result of the rate jitters discussed above, but still managed to close the week up half a buck. Nevertheless, IYR now looks like it is starting a pullback. As for XHB, the homebuilders ETF, it closed down over $2 lower than last week. After moving slowly but steadily up since mid-July of last year, XHB is now threatening to flash a SELL signal. Having already fallen through support at $39-$38, it can next expect support in the $35-$36 range so there may not be too much more damage.

TradeRadar Stock Picks

A bit of movement in Generex (GNBT) which closed the week up less than a dime over the previous week. Tarragon (TARR) had an interesting day on Friday, swinging over a 5% range but finishing the day and the week practically where it started. PacifiNet (PACT) moved down but closed the week off only about $.30. QID, a leveraged ETF that moves inversely to the NASDAQ 100 and a recent addition to the list of picks, finished the week up about half a buck. Friday's bearishness affected all these stocks negatively and provided a boost only for the ultra-short ETF.

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