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Sunday, May 27, 2007

Weekly Market Update - down slightly, what's next?

Weekly Market Call

The week brought a mix of merger activity, reports on jobs, the state of the retail and housing markets, higher oil prices then lower oil prices.

We had Intel announce an agreement with STMicro to combine their flash memory production in a separate company. Coke is acquiring Energy Brands, also known as Glaceau. NASDAQ is buying OMX, the Nordic stock exchange operator. Hologic is buying Cytyc.

Retail earnings this week were not as dismal as in weeks past with some notable bright spots in Target and Aeropostale. There were also some notable disappointments with Saks, Gap, Lowes and Home Depot.

Wednesday we heard from former Fed Chairman Alan Greenspan who noted that he fears a "dramatic contraction" in the Chinese stock market. This is not exactly big news but it did take the wind out the market's sails.

Thursday durable-goods numbers and weekly jobless claims were announced. The number of U.S. workers filing new claims for unemployment last week increased by 15,000 to 311,000. This increase brought five straight weeks of declines to an end; however, the number still came in below analysts' projections for new claims. The Commerce Department reported that orders for durable goods increased by 0.6% in April. These reports provided assurance the economy remains reasonably healthy.

The big surprise of the day came in the form of April new-home sales data. The unexpected 16% jump helped propel the market higher in the early going, but the major averages eventually rolled over and ended the day with a big enough loss that it throws some doubt on the short term direction for stocks.

The next day we got weaker-than-expected existing home sales data that again gave investors the belief that the Federal Reserve could cut interest rates. Home prices (and home values) were noted to have fallen again but its effect on consumer spending remains muted. As a result, the averages recouped some of the previous day's losses but still ended the week lower.

The Dow looks to be taking a breather. The S&P 500 is also slowing down. Though it came close this week, it failed to set a new all-time closing high. Overall, the S&P was down on the week but did not violate its 20-day moving average. Of the major averages, the NASDAQ dropped the most this week and, more ominously, failed to close above its 20-day moving average.

The week after the holiday will be important. There are a number of economic reports forthcoming including Q1 GDP and the Fed's favorite, the core PCE deflator. If the markets move down again, we will likely be seeing a new short-term down trend being established. The markets have moved up effortlessly of late and this past week finally sows some doubt. We will keep our market calls as they were last week.

ETF Comments

Indexes: as discussed above, the major averages fell this week and so did the index ETFs that we track. DIA still looks reasonably healthy and so probably is most prone to at least a reversion back to its 20-day moving average. SPY is already back in that vicinity and its next move is a toss-up. IWM dipped below its 20-day MA last week but gained a bit this week and is hanging in above the 20-day now. QQQQ, already sitting below its 20-day MA has given up the most and so could bounce up again this week. Longer term (over the next month or two), it still looks to me like QQQQ could be in trouble, having dropped below what should have been strong support levels just under $47. And the TradeRadar signal is back in the SELL zone.

Real Estate: the iShares Dow Jones US Real Estate ETF (IYR) managed to gain 2 cents over the previous week's closing price of $81.21. IYR is even deeper in the TradeRadar SELL zone. The SPDR Homebuilders ETF (XHB) moved up over 2% as investors reacted to the better than expected new home sales numbers.

Financials: the SPDR Financial Sector ETF (XLF) fell over 1% this week. XLF may be making a top: it has fallen below its 20-day MA, violated its trend-line and is coming very close to the TradeRadar SELL zone. As for KBE, the bank index, it looks very similar though, unlike XLF, it is still above its trend-line.

TradeRadar Stock Picks

This was a very poor week for the TradeRadar portfolio with most stocks ending up down.

Generex Biotechnology (GNBT) was up a two cents this week on no news to speak of. Chart is still looking horrible and we are down 11.2%.

ProShares UltraShort QQQ (QID) bounced around some more this week but finished up at $48.15. We are down about 0.5% now. Looking out a week or two, QQQQ still looks vulnerable so we continue to hold.

Cisco Systems (CSCO) took a drubbing this week as tech gave up some recent gains. CSCO closed down at $25.52 and our gain swung to a loss 1%

BigBand Networks (BBND) got slammed this week, falling a buck to $17.41 and handing us a fractional loss. There was no negative news and it looks like it suffered as a result of a rotation out of tech. Yet another clue that the NASDAQ is in trouble.

SanDisk (SNDK) also got killed this week, falling to 41.97 after an analyst downgrade. Our modest gain now turns to a loss of 3.3%. The recent up-trend SNDK has been in has been violated and it now sits at the bottom of a horizontal channel. Any move down from here could throw into doubt what has looked like a longer-term reversal from a down trend to an up trend.

Millicom (MICC) really bounced around this week but managed to close at $85.67, down a bit from the previous week. Our gain is still 8.0% at the moment but MICC is starting to look range-bound.

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