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Weekly Market Update - rate worries take center stage

Weekly Market Call

In last week's Market Update post I wrote that interest rate worries took the wind out of the sails of the market on Friday. This week, the trend continued and the markets sold off.

In the beginning of the week, the markets ignored an 8.3% decline in the Shanghai Composite index and set new records. The next three days saw declines as interest rates moved decisively over 5%, at one point hitting an intra-day day of 5.24%. Bill Gross of Pimco weighed in by declaring we are now in a bear market for bonds.

Fed chief Bernanke made it clear once again that inflation is uppermost on the Fed's mind and added that he expects tighter lending standards to continue to constrain housing demand.

Against this background, anything that confirmed economic growth was viewed as one more reason the Fed would not lower rates. A strong ISM Services Index was therefore viewed as bad. So-so retail sales could not undo the situation.

Around the world, there were more interest rate increases including New Zealand (no big deal) and the European Central Bank. A major brokerage announced that European stocks were set for a double-digit drop and advised selling all European holdings immediately.

By the end of the week, the market managed to recover some ground and the 10-year note ended at 5.11%. The NASDAQ ended down 1.5% but the other major averages finished down closer to 2%. And for a change, M&A activity didn't dominate market news.

ETF Comments

Indexes: last week I gave in and declared all the indexes were heading up (nice green up arrows displayed in the left sidebar). Naturally, they immediately turned in the opposite direction. Now, DIA and SPY sit below their 20-day moving averages and just above their 50-day moving averages. The Russell 2000 ETF, IWM, is sandwiched between these two moving averages as the 20-day is coming pretty close to the 50-day; there is only a one point difference between the two. Looking at the charts starting from the March '07 low, we are seeing moderate strength, short term TradeRadar SELL signals on DIA, SPY and IWM. As a minimum, these signals indicate caution; if the market breaks down further this week, the SELL would be confirmed. There was some perception that some strength remains in technology so the NASDAQ didn't suffer as much as the other indexes. Nevertheless, QQQQ is also showing its moderate strength, short term SELL signal though it actually finished the week rising just barely above its 20-day MA.

Real Estate: the iShares US Real Estate ETF (IYR) was severely impacted by the rise in rates. It's recent rally was nipped in the bud and it remains deep in the TradeRadar SELL zone. The home builders ETF, XHB, was also down this week and is now below both its 20-day and 50-day moving averages.

Financials: rising rates are no friend to the financials either and we saw declines in these ETFs also. As I recently wrote, the SPDR Financial Sector ETF (XLF) might be making a top. That seems to be confirmed now as TradeRadar is flashing a short term SELL signal and is close to a long term sell signal. On a long term basis, with the chart starting back in early 2006, the streetTracks KBW Bank Index (KBE) is still in the SELL zone identified back in March of this year.

TradeRadar Stock Picks

Generex Biotechnology (GNBT) was down another nine cents on no news. Even though I only have a couple of hundred dollars invested, the 22% loss thus far makes me want to dump GNBT rather than wait for some of its pipeline products to finally give the stock a boost.

ProShares UltraShort QQQ (QID) advanced this week as the NASDAQ fell, closing at $47.40 though we are still facing a loss of 2%. As the new week unfolds, we'll see if there is more weakness in store for the NASDAQ or whether the bounce will continue. I am leaning toward an expectation of more weakness and so maintain the position in QID.

Cisco Systems (CSCO) dropped a bit to $26.48, reducing our gain to 2.7%. It's chart is certainly not looking too encouraging but my feeling is that this is a stock worth holding

BigBand Networks (BBND) again continued its weakness, dropping to $16.04. One our best picks is now reduced to an 8% loss. As a recent IPO, I can accept some volatility and continue to believe in the company's future.

SanDisk (SNDK) actually managed a gain this week. At $44.22 we are now back in the positive column with a 1.9% gain. News revolving around more uses for FLASH memory and a slowing in the decline of prices helped.

Millicom (MICC) took a beating after an exceptional performance the week before. MICC closed at $84.50 and our gain was reduced by 10%. We are now showing a modest 6.6% profit.

Qualcomm (QCOM) is a new entry into our portfolio. It was first written about on Thursday night, June 7 (read the post), and purchased at the open on Friday, June 8. The price spiked at the open and, at $42.18, we paid more than expected. Closing at $41.87, we are immediately handed a small 0.7% loss.

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