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Sunday, May 20, 2007

Weekly Market Update - a mixed market

Weekly Market Call

The markets moved in a mixed fashion this week with the large caps (the Dow, the S&P) making yet another weekly gain and the small caps (the NASDAQ, the Russell 2000) falling a bit. Once again, the gains were driven by liquidity: merger and acquistion news continues unabated. Examples: Cerberus Capital Management is buying an 80% stake in Chrysler for $7.45 billion, Mylan Labs is buying Merck KGaA's generic drug unit for $6.6 billion, Bausch & Lomb is going private for $4.5 billion and Microsoft is buying aQuantive for $6 billion. Citigroup got a big pop when it was announced that hedge fund manager and Sears Holdings chairman Eddie Lampert had taken a large stake.

On the economic front, the reports were meager and did little to drive the market. CPI came in at expectations excluding food and energy. Food and energy are, of course, where the price increases are but as usual investors shrugged that off as too volatile to matter. New claims for unemployment fell to an unexpectedly low number, leading investors to fear the economy is too strong for the Fed to cut rates.

As for earnings, retail sales mostly continue to disappoint. Guidance from some of the few major corporations reporting this week was not encouraging.

The markets seem focused on the strength of the trend and M&A activity and buyers step in whenever there is weakness. The cracks in the foundation are showing in the small caps where the buyers appear but not as convincingly. I will stay with my negative calls on the NASDAQ and the Russell 2000. It appears the Dow wants to continue its string of new highs and, where I had been uncertain on what the S&P was going to do, it appears it wants to join the party with the Dow. This may be seeing the beginning of classic late-cycle performance where large caps lead and small caps fall behind.

ETF Comments

Indexes: as discussed above, we had good gains for the Dow and S&P this week and so DIA and SPY both rose over 1%. The NASDAQ, as represented by QQQQ, just barely gave up a small fraction of a percent and the Russell 2000, as represented by IWM, fell about 0.7%. IWM is looking truly weak here while QQQQ is stubbornly hanging in though, as mentioned last week, momentum has clearly slowed. It looks very similar to the pattern we saw in February where QQQQ went sideways for a few weeks before tumbling at the end of the month.

Real Estate: as mentioned in a post earlier in the week, the iShares Dow Jones US Real Estate ETF (IYR) fell out of a trading range and proceeded to continue falling, closing the week down over 5.8%. The SPDR Homebuilders ETF (XHB) moved up over 1% as the bottom fishers stepped in again in the absence of another barrage of bad news in housing.

Financials: XLF had a good week, heavily driven by the strength in Citigroup (C) shares this week. No longer faltering, XLF is finally close to a new 52-week high. KBE, the streetTracks KBW Bank index ETF, is also looking much better, having fallen into and bounced out of the TradeRadar SELL zone. Though still lagging XLF in performance since the March low, KBE is now in a firm uptrend.

Energy: the Energy Select Sector SPDR (XLE) was off to the races this week racking up more new 52-week highs. XLE has been going up whether oil goes up or not though, this week, oil did go up and finished the week at $64.95 a barrel. Profits at refiners are now becoming a driving force for XLE. Oil itself, as represented by USO could be ready to rally as we head into the summer driving season and the Gulf hurricane season approaches.

TradeRadar Stock Picks

Generex Biotechnology (GNBT) was up a nickel this week on news of patent being a patent being awarded in Lebanon. Chart is still looking horrible and we are down 12%.

ProShares UltraShort QQQ (QID) is our newest pick. QID bounced around a bit this week but finished up 30 cents at $47.56. We are still down 1.7% from where we initiated the position the previous week. QQQQ still doesn't look especially healthy so I am content to wait this out for a while.

Cisco Systems: again no news on CSCO but they had a poor week, closing down at $26.21 and reducing our gain to only 1.6%

BigBand Networks (BBND) recovered somewhat after the previous week's drubbing. BBND finished at $18.42 to get us back up to a 5.6% gain.

SanDisk (SNDK) seems stuck in a bit of a trading range or channel but trending ever so slowly upward. This week it closed at $44.14, toward the lower end of the channel, reducing our gain to 1.8%

Millicom (MICC) had a strong week, closing at $85.84 and bringing our gain to 8.2%

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