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Saturday, March 24, 2007

Weekly Market Update - the Fed triggers a rally

Weekly Market Call

It seems the last few weeks have each provided one day where the markets rallied strongly. In some of those weeks, there was also a day when the market fell hard. On balance, the bulls have had the best of it lately. In terms of the major averages, we are now back in positive territory with the Russell 2000 leading the way again with a 2.6% gain, the NASDAQ and the S&P 500 at 1.7 % and 1.3 % respectively and the Dow just barely getting to 0.1% year-to-date.

This week's catalyst was the Fed policy statement. The phrase "the extent and timing of any additional firming..." was removed and replaced with "(F)uture policy adjustments will depend on the evolution of the outlook for both inflation and economic growth." Investors interpreted this as meaning the Fed has now dropped their bias towards tightening and a rate cut could be in the offing. The bulls pretty much ignored the comment that inflation had not declined as expected.

As usual, there is plenty of room for interpretation. The bear argument is that inflation is still a concern and the economy is clearly slowing. The Fed is in a bind. If they lower rates, it will accelerate inflation; if they raise rates it will choke the economy. The bears point out that with the Fed, inflation always wins this tug of war; ie, don't expect that rate cut any time soon. In contrast, Fed futures are now indicating a 44% chance a rate cut could happen by end of summer.

As so many pundits said after the February market decline, fundamentally nothing had changed, why should the market go down. The Fed has now released a new statement and once again, fundamentally nothing has changed but this time the market has gone up. If there had been more follow-through after Wednesday's rally, I would be a bull, too. Instead, I am on the fence.

ETF Comments

Indexes - all of them ( and their associated ETFs: DIA, SPY, QQQQ, IWM) were up about 3% this past week. It's tough making a call here. Looking at the two-year daily charts in TradeRadar, they are still firmly flashing strong SELL signals. Looking at short term charts (daily trading over the last few months) they are now flashing potential BUY signals. The long term charts indicate a reversal in the intermediate or long term trend. The question is: will this short term potential reversal lead us back to the long term uptrend we were in prior to February's downdraft?

Commodities - Oil was up strongly this week, closing over $62 per barrel. The TradeRadar BUY signal that was tentatively flashed in early February for the US Oil ETF (USO) seems to be confirmed. The SPDR Energy ETF (XLE) closed over $60 and is not far away from a 52-week high. Likewise, Basic Materials (XLB) has also stopped flashing the SELL signal. What should we think about this? With raw materials in demand and rising in price, is the economy picking up or is inflation on the upswing? What would the Fed say?

Technology - The SPDR Tech ETF (XLK) is on the edge of swinging out of the TradeRadar SELL zone. Indeed, there are pockets of strength in the tech universe (Qualcom, Oracle) and I have tried to identify a few others in my recent posts (Cisco Systems, BigBand Networks, SanDisk). Unfortunately, it seems there are at least as many tech stocks forecasting weak quarters ahead as there are those that are expecting strength. Caution is in order here.

Housing - the SPDR Home Builders ETF (XHB) continues to look weak as the sub-prime mortgage mess refuses to go away. The iShares REIT ETF (IYR) has at least perked up again but is still in the TradeRadar SELL zone.

Biotech - XBI, the Biotech SPDR, managed to recover a bit this week but the trend is still down. Avoid this one until we see a higher low.

Financials - the SPDR Financial ETF (XLF) looks a lot like IYR, perking up but still in the SELL zone. In spite of some great earnings reports from the broker/dealer stocks, the sub-prime mortgage issue continues to be an overhang on the financial group in general. Be cautious with this one, too.

TradeRadar Stock Picks

With the market moving up this past week, our short pick, the ProShares UltraShort QQQ (QID) has taken a beating. Our gain has gone from 8.0% down to 0.2% on one week. Ouch! Nevertheless, with QQQQ still in the TradeRadar SELL zone, we'll hang on a while longer.

Having unloaded PacificNet (now beginning to admit there was something funny going on with backdating of options) and Tarragon (who reported horrible earnings this past week) the only stock we have been following for a while is Generex (GNBT). They managed to close up a few cents at $1.68 to leave us exactly one cent below the price at which we recommended it.

On to the new slate of picks. First off, Cisco Systems (CSCO), recommended at $25.79 and closing the week at $26.19, provided a gain of 1.6%. BigBand Networks (BBND) was recommended at $17.45 and, after immediately falling to a loss, had a wild week. Hitting an intraday high of $18.69, it eventually closed at $17.10. Our loss is now 2%.

SanDisk (SNDK) is a stock I used to own and I still keep an eye on it. It looks like a strong reversal is underway and the TradeRadar BUY signal was announced this week in a short post. SNDK closed the week strongly at $44.88 for a gain of 3.5% since being recommended at $43.38

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