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Saturday, July 28, 2007

Weekly Market Update - Nervous investors sink market

Weekly Market Call

The market did the opposite of what I expected this past week. I was looking for weakness early in the week and strength going into the weekend. Instead, the market held its own on Monday and then began drooping, spending Thursday and Friday in free-fall. Stocks fell hard and interest rates declined as investors fled equities and sent the bond market into buy mode.

Housing was the culprit again as increasing news of defaults, another large drop in new home sales, poor homebuilder performance and debt downgrades made markets nervous about sub-prime contagion spreading to other parts of the market.

LBO activity began to look shaky as loan placement for several big deals has run into resistance and, amid fears of a credit crunch, banks appear to be left holding the bag.

Suddenly risk is a dirty word. Markets could bounce early in the week but it may take a while before we see where the true trend is headed.

As for upcoming economic events, the biggest is probably the ISM Index report on Wednesday. It is expected to be flat at 56.0 but if it comes in low, look for investors to head for the exits.

ETF Comments

Indexes: what a mess! With the Russell 2000 dropping 7% this week, we see IWM in very bad shape with a gap displayed on Thursday as IWM plunged below its 200-day moving average and turned negative for the year. The S&P 500 didn't do much better and we see SPY on the verge of falling below its 200-day MA. The Dow is in trouble too but not as badly as the preceding two indexes. As a result, DIA has found its spot below its 20-day and 50-day MAs but above the 200-day MA. All this action has been on extremely heavy volume, heavier than the late February sell-off. The NASDAQ has held up remarkably well considering all the carnage going on around it and is actually still above its 50-day MA. Tech appears to be the only sector still in favor in the markets these days and QQQQ is benefiting.

Real Estate: with interest rates backing down, I felt that REITs might see some buying activity. They did, but just enough to suck me into recommending a REIT stock before it plunged. The iShares Dow Jones US Real Estate ETF (IYR) fell almost every day this past week and will soon be at levels not seen since 2005. Its 20 and 50-day MAs crossed below the 200-day MA almost a month ago and there is no sign of a bottom yet. The SPDR S&P Homebuilders ETF (XHB) is still making new lows. This ETF remains toxic with a chart to match.

Financials: Last week I said the bottom fell out of the financials. This week it somehow got even worse. The situation with XLF, the Financial Select Sector SPDR ETF, has gotten surprisingly bearish. Not only has the price fallen below the 200-day MA but the 20-day MA has also crossed below the 200-day. From the point of view of the technical analysts, these crossing moving averages are bad sign indeed. And this is taking place against a backdrop of falling interest rates which is usually good news for financials. The KBW Bank ETF, KBE, is less than a point away from its all time low. It has already seen the 20 and 50-day MAs cross below the 200-day. It appears the financials are entering a full-fledged bear market.

TradeRadar Stock Picks

The portfolio got hammered this week. MICC was sold at breakeven as the TradeRadar software generated a SELL signal too late to lock in a profit. Our recent pick, HCP, didn't last long on our list as it plunged with all other real estate related investments and its BUY signal got wiped out. SBUX is another new pick and it immediately declined but managed to hold onto its place in the portfolio.

Our tech holdings provided one bright spot in this dismal week. SNDK, CSCO and QCOM are at least still in positive territory. BBND had seemed to be on the mend but is now back at its lows as we look for its earning report this week.

And naturally it was a good week for the inverse funds QID and SRS.

To see more detail on the portfolio of TradeRadar Stock Picks, please visit the Track Profit & Loss page at trade-radar.com

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