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Sunday, June 3, 2007

Weekly Market Update - good news and rate worries

Weekly Market Call

Markets were determined to go higher this week. They shrugged off another sizable drop in Chinese stocks and embraced the non-event of the release of the Fed minutes from the last FOMC meeting. More merger news provided a continued underpinning for the bullish action and there was actually some pretty good economic news.

The core personal consumption expenditure (PCE) deflator was up just 0.1% for April. That was below an expected 0.2% increase and brought the year-over-year gain down to 2.0%. That is at the top of the Fed's forecast range of 1.75% to 2.0% for 2007 for the first time since the Fed stopped raising rates and indicates a moderation in inflation. May nonfarm payrolls were up a larger than expected 188,000 and indicated that growth in jobs will support consumer spending and a growing economy in general. Consumer confidence registered an uptick and the May ISM was up slightly and still registering positive growth. First quarter GDP was revised sharply lower and traders looked on the brighter side, saying this positioned the economy for better growth going forward.

The only negative sentiment appeared at the end of the week. The rate on the 10-year bond started backing up to close to 5% and this put a damper on Friday's market action. Though the markets still managed to close in positive territory, large early gains were reduced to about 0.3% for the day.

For the week, the markets turned in a very strong performance with the Dow and the S&P up over 1% on the week and the NASDAQ and the Russell 2000 up over 2% on the week.

It's clear that my call on weakness on the NASDAQ and uncertainty on the S&P was in error or, at best, premature. This market just wants to advance, no matter what. Whether the fundamentals or the technical picture fully justify this bullish sentiment is questionable, but for now it is best to just ride the wave.

ETF Comments

Indexes: Last week I predicted the Dow might show a little weakness and the NASDAQ might bounce up. I was half right. The NASDAQ did bounce up, even more than I expected, and the Dow continued its winning ways without missing a beat. All the index ETFs (DIA, SPY, QQQQ, IWM) had a very strong week.

Real Estate: the iShares Dow Jones US Real Estate ETF (IYR) regained almost all that it had lost in the previous weeks (about 6%) based simply on news of the Archstone-Smith deal. The apartment investment firm agreed to be acquired by Tishman Speyer Properties and Lehman Brothers in a $22 billion buyout. IYR is now flirting with its 50-day moving average. With the overall bullish sentiment in the market these days, this downtrodden ETF may actually be on the verge of a comeback. If interest rates begin to fall back, there may even be a fundamental reason for IYR's gains. As for the homebuilders, XHB was one of the few ETFs that finished down on the week but only slightly. Lately, bad news from major hombuilders hasn't been enought to derail this ETF and it maintains its uptrend.

Financials: Last week I indicated that the SPDR Financial Sector ETF (XLF) might be making a top as it had fallen below its 20-day MA, violated its trend-line and was coming very close to the TradeRadar SELL zone. This week saw a complete recovery with XLF moving up from the danger zone, having found support at a longer term trendline. Certainly no SELL signal to report on XLF this week. As for KBE, the bank index, it is not showing the same kind of strength. It apears stuck in a trading range in an ascending triangle pattern where it is vacillating between $58 and $59. No doubt the interest rate issues mentioned above are acting as an overhang.

TradeRadar Stock Picks

Generex Biotechnology (GNBT) was down six cents this week on, as usual, no news to speak of. We are down 17% and I only continue to hold because I have so little actual cash invested in GNBT that I can afford to wait.

ProShares UltraShort QQQ (QID) dropped to $46.29. We are down 4.3% now. My struggle here is that we have QID in the portfolio because I was aggressive in my interpretation of the TradeRadar SELL signal. Now that the SELL signal has proven to be wrong, do we keep it as a hedge? It is clear the markets are running ahead of the fundamentals, there are fewer and fewer new highs and it seems that at some point M&A fever has got to diminish and let the market take a breather.

Cisco Systems (CSCO) recovered a bit this week as the overall market showed gains. CSCO closed up at $26.86 and our gain is back up to 4%.

BigBand Networks (BBND) continued its weakness this week, falling further to $16.75. We are now down 4%. There was no negative news. We continue to hold based on expectations.

SanDisk (SNDK) looked like it was on the road to recovery but then drooped on Friday. Overall, SNDK managed to end the week at 42.54 and reducing our loss to just under 2%. The good news is that SNDK has at least stayed within its horizontal channel. Last week I was worrying that a move down would throw SNDK into a significant tailspin. For now, we seem to be safe.

Millicom (MICC) is our star of the week. MICC closed at $92.67, up about $7 from the previous week. Our gain is now over 16%. The catalyst was that Standard & Poor's Ratings Services lifted its long-term corporate credit rating on MICC based on strong growth and improving operating performance. Last week I wrote that MICC was starting to look range-bound. Not any more.

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