Last week we said "All the indicators support the argument that the SP500, as well as, NASDAQ can go either way. They are not as deeply oversold as they were last -meaning there is room for a roll-over- at the same time there has been enough improvement to warrant measured optimism." As it turned out the "way" the markets chose to go was higher for NASDAQ and nowhere for the SP500 and the DOW. Apparently, investors after refusing to give their love and affection to NASDAQ issues for quite some time, and they decided they had been too "mean" and "unforgiving" and thus it was time to venture back into issues sporting exorbitant P/Es,  and diminished growth prospects !  Thru-out our career in this business, we have learned a few lessons, one of them is this:  healthy markets exhibit fundamental prospects and technical characteristics  that  confirming  each other. Over the past 18 months we have found ourselves three times in a situation in  which the "technical" characteristics of the market look promising, but the fundamental characteristics are plain horrible, in the end the fundamentals won out, because they always do! In late February -early March of 2000, and again in June of 2000   NASDAQ "technically" looked pretty good, but ultimately it could not escape the fundamental realities. Now, is the third such time, in which the market looks technically good, but fundamentally it is not! As the chart shows below, tech stocks have been outperforming the rest of the market  underscoring people's beliefs that a recovery is around the corner. The problem, is this: these are the same people  who  in December, they said that business couldn't get worse, and it did! and then the market rallied in April when the same people said it couldn't get worse, but it did get worse. Now the same people are advising -and presumably- buying tech stocks because the recovery is a done deal! We do not think so! However, what drives the markets is perception, not reality. Reality hits later! In examining the technicals from last week, it hard to make a strong bearish case for the time being. All the data point to higher prices over the next few days, and maybe few weeks. Of course, there is always a chance that last week's data were grossly distorted due to three simultaneous exogenous factors: the FED rate cut, the re-balancing of the Russell 2000, and the end of the quarter "window dressing" In addition, this week isn't much better. We have a holiday in the middle of the week, thus low volume and many key players taking vacations. Thus,   we are cautiously optimistic over the next few days, and depending upon how things turn out this week, we may even turn outright bullish on a trading basis, for a position trade on the long side that will last into late July.   

Very rarely, in our weekly reports, we talk about fundamentals extensively. Usually, we concentrate on the technical condition of the market, due to the short time span the report covers. However, given that most of the technical indicators are now mostly neutral, after having turned bullish in the middle of the week- and given that the Federal Reserve is meeting this week, we think the market may be at a critical inflection point where investors' attention shift to fundamentals will play a decisive factor in determining the direction of  the market's next big move. Institutional investors are becoming increasingly convinced that the second half recovery scenario, will turn out to be a fantasy. Economic growth in the U.S. has come to a complete halt, Japan is in recession already, and Euro land economies have been accelerating in the wrong direction (down!) With the world's biggest economies in no growth mode simultaneously, it takes a whole lot of hope to put more money into this market, why? Because corporate profits will not see any improvement for an unknown number of quarters.  If the Federal Reserve lowers by 50 basis points and the markets rally, investors will be sticking to their faith in the FED's power to cure all ills, which so far has not cured any ills at all. If the markets falls in heavy volume, despite another easing by the FED,  it will mean that institutional investors are throwing the towel, in that case individual investors should not stand in the way! From an institutional investor's point of view, U.S. bonds are starting o look a lot more attractive, and certainly a lot less riskier. So, it is becoming a no brainer: Sell stocks buy bonds, the economy is not going anywhere any time soon. We think Monday may be an up day -ahead of the FED meeting- but given that the rally from last week stalled before the indexes even reached their 20 day EMAs, it will be wise to wait this one out until after the FED's decision and subsequent reaction to it by institutional investors.

For the past two weeks -as we pointed out in numerous occasions- the markets have been technically deteriorating. The reason behind the deterioration -in our view- is the simple fact that current price levels are not supported by fundamentals. The market run up sharply on the belief that lower interest rates will cure all problems. However, for the reasons we have extensively discussed in our weekly, monthly, and occasionally, in our daily reports, even if the economy recovered in the second half of the year, the rate of growth will not  exceed 2%-2.5% . Historically, this kind of growth rate has not been very accommodative to corporate profits. Now, it is becoming evident that even that level may not be achievable. The latest numbers on production and capacity should serve notice to everyone that the economy not only is not recovering, but actually is getting worse. Capacity utilization -- the amount of production capacity companies are using -- fell to 77.4%, the lowest rate since August 1983, yet the SP500 sports a p/e of 22! We think that it will be rather difficult going forward, to find any catalysts that will propel prices much higher above their recent highs. More likely, most of the news in the near term will probably serve as catalysts to drive the markets lower. People are still clinging on the hope that further aggressive action by the FED will do the trick. Thus, they may see the current decline as an opportunity to buy, and therefore providing a temporary floor for the market, and another rally towards the recent highs. In that case, the market will set itself up for a rather nasty decline going into the fall when the hopes for a recovery fail to materialize. TUNE IN TO OUR INTERNET RADIO SHOW SUNDAY 8:00pm PST for additional charts, proprietary indicators and analysis both technical and fundamental.

The rally that started in April, has entered its testing phase with regards to whether it was another "Bear Market Rally" or the beginning of a new "Bull Market." The indicators below show that we are in a "transition" period with regards to the overall trend. Notice the low Stochastic readings, the "toping" MACD, the declining ROC and the flattish Aroon Oscillators, combined with readings below zero for the McClellan Oscillators. When you put all these together, one conclusion emerges -based upon our past similar observations- The markets will attempt to build on the gains from the previous week, but whatever gains are achieved, they will soon evaporate. Traders could pick some gains on the long side early in the week -as long as they maintain "tight sell stops"- and then reverse to the short side, later in the week, if the market weakens further.

We really do not have much to say this time, a picture is worth a thousand words, look at the charts below and arrive at the conclusion yourself! We are particularly disturbed by the high level of bullishness among investors across the board. In the past, such exuberant and irrational optimism has led to rather bleak disappointments! However, something we like to stress as much as we can is this: a) just because the indicators have turned south, it does not automatically mean that prices will head south as well immediately, divergences can go on for quite some time, and b)usually the first 1-2 days after a three day recess, the market goes the opposite direction, from the direction that it went the last 1-2 days before the recess

The markets -led by the DOW- continued to move higher while the technical foundation continued to get weaker. NASDAQ appears to be completing -on a weekly basis- a rather not too healthy triple top. Sentiment is near highs seen back in September of last year, which is not too positive from a contrarian's point of view. The Aroon Oscillator is just a hair away from crossing into negative territory. MACD has turned down. The 10 day ROC has joined the list of negatively diverging indicators.. Stochastics have been making lower highs as well. The McClellan Oscillators have also registered lower highs as the markets moved higher. The aggregate RSI for the NDX is near it top, the aggregate momentum index collapsed 10 trading days ago, and has yet to recover. And the facts of technical deterioration go on and on...! On the fundamental front, it is noteworthy that the DOW is 400 points away from where it was in January of 2000, however at that time, the GDP was growing at 6% per year, at the present time it is not growing at all, and in the best case scenario it will grow at about 3%-3.5% in 2002. If 11700 was too expensive for investors' preferences when the economy was growing at 6%, how come the same level seems now cheap if the economy is going to grow next year at 3%-3.5%? We do not fight the market, if the market wishes to go higher, we will stick with it, but if anybody tells you current prices are fundamentally supported, and that the technicals look strong, then we must assume, that whoever is saying this nonsense, they must be smoking something that probably is illegal!

It has been said several times that the market is a "proxy" for the economy. The market, supposedly, predicts the direction of the economy six months down the road. Thus, we felt compelled to examine the market's "predictions" over the past one and a half year. According to the all telling chart at the bottom of this page, the market has made 6 calls with regards to the economy. THREE BULLISH (1,3 &5) AND THREE BEARISH (2,4 &6) THE BULLISH CALLS TURNED OUT TO BE FALSE, WHILE THE BEARISH CALLS TURNED OUT TO BE RIGHT. NOW IT IS MAKING ANOTHER BULLISH CALL(7) IS IT RIGHT THIS TIME? The truth is, nobody really can say with reasonable certainty. There are too many "cross currents" that negate both overly bullish and overly bearish scenarios. Given the market's recent lousy record in predicting economic prosperity until the end of time (call 1) as well as recovery (call 3 and 5) one should be a bit suspicious about trusting too much the bullish call that the market is making at the present time. On the other hand, if you keep making the same call over and over, at some time you will be proven right! Therefore our point is simply this: Just because the market seems to be saying something, that does not mean the market will ultimately be proven right, it also does not mean one should be fighting the tape! If the trend is up, it's up! It will continue to be up, until the market is either proven right, or, it realizes it made another foolish and premature call. So, what an investor should do? Learn last year's lessons: DON'T MARRY INTO ANY PARTICULAR SCENARIO, BE FLEXIBLE, AND DIVERSIFY, DIVERSIFY, DIVERSIFY! A balanced portfolio, will allow you to weather pretty much any kind of environment . From a technical point of view, all the charts are showing signs of "fatigue" as manifested by the numerous negative divergences currently in place. Thus, we would expect a pull back in the next one to two weeks. The nature of the pull back -and its degree of severity- should answer the question in regards to how much further this rally has left in it.

Last week we saw the DOW and the SP500 rise, while the “beloved” NASDAQ lost about 5% of its value. All the while, the question whether the economy is out of the woods yet, in our opinion is still unanswered. The bulls made their case based (and thus drove cyclical stocks higher) on four factors. 1. Do not fight the FED when it is reducing rates 2. It’s so bad it can’t get any worse 3. The GDP came higher than expected, thus the possibility of recession is non-existing and 4. Sentiment is so negative the market can only go higher. It is common among people to subjugate their own individual thinking in favor of the belief of the masses. At the moment -as evidenced by the rise in stocks- the masses seem to have bought the bullish argument. So, being the renegades we are we would like to offer a critical examination of the premises of the bullish argument. 1. The same people who are now saying on TV, “do not fight the FED” are the same morons who a year and a half ago were saying that technology is immune to higher interest rates because it is not cyclical, well, all those poor souls who bought into that silliness and kept their technology holdings, have seen their portfolios decline anywhere between 40% to 60%! 2.Issuing a “buy” recommendation just because “things are so bad they can’t get any worse” is an intellectually bankrupt and utterly insufficient argument. It should be noted that the people who advocate such a notion, are not old enough to have experienced the last true bear market of the early seventies, so we will pass on their recommendations! 3. The “much better” GDP numbers are an illusion. Any first year economics student looking into the details of the GDP report would tell you that almost 75% -80% of the “gains” were due to the decline in imports. A falling trade deficit results in the “increase” of “net exports” so it shows as an addition to the GDP. We all know -except the big shots on Wall Street- that a decrease in imports is consistent with an economy losing steam! Not to mention that the capital investment in IT fell a whopping 12%!. 4. Sentiment was negative four weeks ago, however, as the chart of aggregate bullish sentiment shows, for the past two weeks, bullish sentiment has been above its ten week moving average! So, the extreme negative sentiment condition has been ameliorated by the rally we had. To put it all together, a critical examination of the bullish thesis on a fundamental basis does not hold water. However, there is wild card that must be taken seriously. That wild card is the inexorable consumer, who like the Energizer Bunny, keeps spending and spending... If that monster of consumption of all things consumable continues to spend, then at some point companies may feel compelled to increase output in order to match consumer demand, thus resulting in a genuine up tick in the economy. For now we think the current rally is very similar to the rally last year between June and August. A three month rally based on false premises.

For quite some time we have criticized the FED for not being aggressive enough, and for being behind the curve. In several occasions we have steadfastly stated that short term interest rates need to come down by at least 100 basis points, so naturally we should be happy with the surprise interest rate cut the "benevolent" FED gave us. Well, we are NOT! We are happy to see rates coming down, but we are very unhappy to see the FED playing dangerous games with the financial markets, especially, during times of distress. The FED's mission should be to maintain stability, not exaggerate unwarranted price swings, whether they are on the downside, or, on the upside because both, in the end, cause losses to the average investor. Although the average investor may be unaware of the inner workings of the equity markets, the FED is not. So, allow us to elaborate why the "surprise" element of the rate cut -NOT the rate cut itself- is so dangerous. First of all, the FED knew that the last two weeks of March, sentiment had deteriorated considerably, and it had resulted in heavy put buying by the public. Put option sellers, have to sell short in order to hedge against the put options they sell. That is a legitimate practice. Therefore, going into options expiration week, there was a huge aggregate short position that would have to be covered, if the markets suddenly rallied. Second, there are about 3,000 to 4,000 hedge funds currently operating in the U.S. They have about half a trillion dollars in assets, but due to leverage, the actual trading firepower possessed by these funds is approximately anywhere between 1.5 to 4 trillion dollars -that's a staggering amount. These funds collect fees both on an absolute and a relative performance basis. In layman's language it simply means this: not only they have to generate a return for their clients (absolute performance) but also they have to outperform the market (relative performance) by a certain percentage. In other words, if the fund is up 20% for the year (absolute performance) but the benchmark index (for most funds the SP500) is up 22% then the fund can NOT collect fees, because it under performed relatively to the market! So why should the average investors care about that? They should care because, given the number and the size of trading firepower possessed by these funds, they can cause tremendous short-term moves that are not backed by fundamental economic conditions. Because these funds must outperform the market in order to collect fees, they use trading models that are designed to provide entry and exit points based on relative performance. You can see such a model near the bottom of this page. Keep in mind that although each fund uses its own proprietary system, the goal remains the same: outperform the market, so the fund can collect fees! These models move relatively to the markets and they create buy/sell/neutral signals that are designed to outperform it. Going into last week, most of these models had generated a "sell short" signal. Thus, many hedge funds Monday and early Tuesday, opened short positions, in addition to the short positions that were already open by put option sellers! Thus creating a "melt-up" when the FED surprisingly lowered interest rates! Why is this "bad?" it's bad because when all these major market participants who had sold short equities and bought bonds tried to reverse their positions, bonds PLUNGED, and stocks artificially were pushed to levels that can not be supported by fundamentals. The result was mortgage rates are now HIGHER than they were BEFORE the rate cut, and companies like JNPR, BRCD, CHKP, CIEN etc., are now selling -again- at multiples in excess of 80 times p/e, which is what got the market in trouble in the first place! Most of the models are now in an area that is pretty close to the "buy long" zone, which can make things even worse. As we mentioned earlier hedge funds must outperform the market, by getting in front of it. That means it is conceivable that another rally of 300-400 points can take place in NASDAQ in the next few days, as hedge funds plunge into the market in order to avoid being left out, causing another artificial, and unsustainable vertical advance Our tentative target is 2300-2400, we will issue a more precise target in the next 2-3 days). In the mean time -as shown by the Ameritrade Index- the small investor has not been buying yet, we assure you that another artificial advance will get the blood boiling among individual investors to "get in" before the market leaves without them, thus buying at the TOP all over again! We have NO problem with the market moving 30%-50% or even 100% in a reasonable time frame, while the fundamentals of the economic environment justify the advance. However, when the market moves unjustifiably in a short period of time -like it did between Oct. '99 and March '00, 80% in 4 months- then the result is disaster. The FED was partially responsible for creating the bubble last year due to its ridiculous easy monetary policy, it is partially responsible for the current economic slow down due to its ridiculous restrictive monetary policy last year, and it will be totally responsible if the market rockets higher from current levels , coming down just as hard later on, taking with it, the investors who got in near another top thank's to their own ignorance, and thank's to the FED's idiotic and reckless policies engineered by the pickle head who happens to be its Chairman. Since he took over as Fed chief in August 1987, the Chairman has been very busy trying to correct the fiascos that he himself created in the first place. TheStreet.com, in an excellent article chronicles the sins of Mr. Greenspan in an undisputed factual manner. We encourage you to log on to "The Street.com" and read the entire article. "... Greenspan is repeating past dysfunctional behavior. In 1987, he slashed rates to bail out an overheated stock market, only to raise them aggressively the following two years as inflation got out of control. In 1994, he ratcheted up the cost of money, contributing to Mexico's currency collapse. The Treasury bailed out Mexico -- a move the Fed aided with lower rates -- and the emerging markets bubble continued to balloon until the Asian crises of 1997-1998. In 1998, Greenspan brought down rates rapidly to ensure that liquidity was pumped back into the financial markets after the near collapse of Long Term Capital Management. Money supply soared. Greenspan primed the pump some more ahead of the Y2K changeover, and, almost like clockwork, inflation was moving up quickly by early 2000. That led to the rate hikes of last year. And it was these that caused the collapse in the Nasdaq and capital spending. A bold pattern emerges: panic-cut-hike-panic-cut-hike-panic-cut-hike. Whatever medical term one might use to label this type of behavior, it's clearly no way to run a central bank..."(by Peter Eavis, "Another Panic Cut Sets The Stage For Rate Hikes Next Year", The Street.com, 4/18/01, 3:06 PM EST) We could not agree more, this FED, and this Chairman are DANGEROUS to your financial well being. The FED knew the short positions that were present in the market, it could have elected to lower rates after options expiration to avoid panic buying, yet it recklessly chose not to, creating an artificial move in the market. In conclusion, last summer our subscribers remember how we said repeatedly that paying $200 for JNPR, or $100 for BRCD was plain silly. We make no apologies for our current opinion, but we believe that paying for JNPR $69 now, is just as silly as it was paying $200 last summer! Although it may go even higher for a short time- recent history has proven there is an abundance of silliness- if you think it is actually worth that much, you are in for a painful surprise, again!
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