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Sunday, April 1, 2007

Weekly Market Update - first quarter ends on a down note

Weekly Market Call

The first quarter is in the books and it was lackluster at best. The DOW failed to show a gain and the S&P 500 and NASDAQ Composite barely broke even. Many money managers have been talking about buying defensive large cap stocks; nevertheless, the Russell 2000 came through with a 1.7% gain.

As for the past week, the news was mostly bad. Oil prices were up strongly again as Iran and Britain continue their face off. Fed chief Bernanke testified before the Joint Economic Committee of Congress and indicated his major concern is still inflation. Translation: no rate cuts soon. A favorite Fed inflation indicator, the personal consumption expenditure (PCE) price deflator, came in with a bearish 0.3% increase for February.

Housing continues to preoccupy and disturb the markets. New home sales for February were down 3.9% after experiencing a sharp drop in January. Manufacturing is now becoming another source of worry. We had a rotten durable goods report with new orders up a smaller than expected 2.5% after a 9.3% plunge in January. In both cases, a bearish trend is is being established.

There were a few items on the positive side. Reports showing that consumer spending and the labor market remain strong met with investor approval. The March Chicago PMI index jumped to 61.7 from 47.9 in February, raising hopes of a manufacturing rebound.

So this past week was troubling from an economic point of view. Rather than plunging, the markets merely deteriorated. Next week, will we get back to climbing the "wall of worry"?

ETF Comments

Indexes - all of them (and their associated ETFs: DIA, SPY, QQQQ, IWM) were down about 1% this past week. It remains tough making a call here. They are all still in the TradeRadar SELL zone though it looks like SPY and QQQQ tried to rise above it but failed. Given the negative economic news discussed above, the next leg will be down unless corporate earnings, due to begin arriving in the next couple of weeks, provide some upside surprise.

Commodities - Oil was up strongly again this week, closing over $66 per barrel. The TradeRadar BUY signal for the US Oil ETF (USO) remains in place but resolution of the Iran-Britain crisis could see oil fall back rapidly. The SPDR Energy ETF (XLE) closed over $60 again and nearly hit a 52-week high. It once again is above its 200-day moving average, as it has been for most of the last four years. Basic Materials (XLB) remains outside the TradeRadar SELL zone and has pretty much completed a rebound after the February market break.

Technology - The SPDR Tech ETF (XLK) peeked out of the TradeRadar SELL zone but has dropped back in. The charts are very choppy for XLK. If business investment doesn't pick up, the direction for XLK could become clearer: down. As we said last week, however, there are pockets of strength in technology might provide some support.

Housing - the SPDR Home Builders ETF (XHB) just continues to get clobbered as the sub-prime mortgage mess festers. The iShares REIT ETF (IYR) was down a couple of points from the previous week and is still in the TradeRadar SELL zone. I keep waiting for the homebuilder problems to affect IYR more but, apparently due to the emphasis on commercial property in the constituent REITs, it manages to avoid plunging. Interestingly though, it has failed twice at trying to rise above its 65-day moving average. It may not be too late to do a little hedging with SRS, the ProShares inverse real estate ETF.

Biotech - XBI, the Biotech SPDR, bucked the trend this week and managed to close the week up a buck or so. It looks like it's trying to rebound but I wouldn't want to call it yet.

Financials - the SPDR Financial ETF (XLF) continues to display one of the strongest TradeRadar SELL signals though it manages to stay above its 200-day MA. This one is for bottom-fishers only.

TradeRadar Stock Picks

Back in mid-February I wrote that all the TradeRadar picks were in positive territory. Since then it's been a train wreck. As the first quarter of 2007 comes to a close, we have seen the market downturn make a mess of many of the charts of the stocks written about here. We have been forced to sell at a loss PacificNet (PACT) and Tarragon (TARR) and we have seen increased volatility in other holdings. With the market in uncertain territory, we continue to maintain positions on both the long and the short side.

Generex Biotechnology (GNBT) managed to close up a few cents more this week at $1.71 so a big two cents above the price at which we recommended it. The product pipeline seems strong and the chart is essentially flat so we continue to hold.

The NASDAQ 100 was down a bit this past week so we got a little recovery in our ProShares UltraShort QQQ (QID) which closed the week at $53.71. Our short-side pick has now swung back to a 2% gain. The QQQQ still looks weak and remains well within the TradeRadar SELL zone so we will continue to hold QID.

Cisco Systems (CSCO) was down over a buck this week. At $25.34 it has now swung to a loss of 1.7% from our recommended price. Having bought based on market position and industry expectations rather than a TradeRadar BUY signal, I am worried to be facing a loss already. As they often say, following any system consistently, even a bad one, is better than not following a system at all.

BigBand Networks (BBND) recovered this week based on news of equipment sales to six major Chinese cable operators and a Cramer reiteration to buy the stock. BBND closed the week at $18.01 so we're now a up little over 3%.

SanDisk (SNDK) had a tough week with rumors of weakness in flash memory cards sending the stock down. Could it be that the analysts who said flash prices were firming are wrong? I sure hope not. SNDK ended the week at $43.82 shaving our gain to a slim 1%.

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