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The broker ratings are overall consensus figures derived from Multex Global Estimates reports. The EPS, EBIT and revenue estimates relate to the full-year and therefore do not necessarily correlate to the reporting period indicated. The consensus recommendation gives a numerical rating where 1=buy, 2=outperform, 3=hold, 4=Underperf. and 5=sell.

UK, US and European results this week
Result Date	Company name	Country	Results	Consensus Rec		No. Anl	EPS	Revenue
Tuesday
24.Jun	FedEx Corporation	US	FY	2.33	Outperform	18	2.71	22,409
24.Jun	Goldshield	GB	Prel. FY	3.00	Hold	2	37.79	108
24.Jun	Omnova Solutins	US	H1	2.00	Outperform	2	-0.09	694
24.Jun	Palm Inc	US	FY	2.90	Hold	10	-2.92	834
24.Jun	Paychex Inc	US	FY	2.83	Hold	24	0.78	1,101
24.Jun	Verity Inc	US	FY	2.50	Outperform	6	0.38	104
24.Jun	Workspace	GB	FY	1.86	Outperform	7	55.45
Wednesday
25.Jun	3Com Corporation	US	FY	3.11	Hold	9	-0.18	1,012
25.Jun	General Mills	US	FY	2.06	Outperform	17	2.63	10,423
25.Jun	Goldman Sachs Group	US	H1	2.47	Outperform	15	4.74	15,120
25.Jun	Hornbach Holding	DE	FY	3.00	Hold	3	2.12	1,705
25.Jun	Stagecoach	GB	Prel. FY	2.85	Hold	13	6.00	2,080
25.Jun	Stratos Lightwave	US	FY	4.00	Underperform	2	-2.92	42
25.Jun	The WD-40 Company	US	Q3	2.00	Outperform	3	1.61	235
25.Jun	Tribal	GB	Prel. FY	2.00	Outperform	6	17.72	101
25.Jun	Xansa	GB	FY	3.71	Underperform	14	4.55	464
Thursday
26.Jun	Berkeley Group	GB	Prel. FY	2.63	Hold	16	114.53	1,126
26.Jun	Clruyt	BE	FY	2.50	Outperform/Hold	15	3.50	3,168
26.Jun	Del-Monte Foods	US	FY	2.40	Outperform	5	0.84	3,168
26.Jun	Dixons	GB	FY	2.72	Hold	29	11.40	5,666
26.Jun	DS Smith	GB	Prel. FY	2.00	Outperform	6	17.41	1,483
26.Jun	Gerry Weber	DE	FY	3.60	Underperform	5	0.62	360
26.Jun	Gesco AG	DE	APC	1.00	Buy	1	-1.30	153
26.Jun	Lawson Software	US	FY	2.67	Hold	3	0.01	333
26.Jun	Nike Inc	US	FY	1.86	Outperform	14	2.78	10,573
26.Jun	Reliance Security	GB	FY	1.50	Buy/Outperform	5	40.00	267
Friday
27.Jun	Chemring	GB	H1	2.22	Outperform	10	29.49	122
27.Jun	First Technology	GB	Prel. FY	2.42	Outperform	12	26.20	128
27.Jun	Lone Star Steakhouse	US	H1	1.00	Buy	3	1.42	605
27.Jun	McCormick & Co	US	H1	2.46	Outperform	13	1.45	2,479
27.Jun	Sibir Energy	GB	FY	2.00	Outperform	1	-0.80	17
27.Jun	Tops Estate	GB	Prel. FY	3.00	Hold	2	10.86

The consensus recommendation gives a numerical rating where 1=buy, 2=outperform, 3=hold, 4=Underperf. and 5=sell.

UK, US and European results this week
Result Date	Company name	Country	Results	Consensus Rec		No. Anl	EPS	Revenue
Monday
30.Jun	Aetna Inc	US	H1	2.41	Outperform	17	4.52	17,988
30.Jun	Artesian Resources	US	H1	1.67	Outperform	3	1.84
30.Jun	Berkeley Berry	GB	Prel. FY	3.50	Hold/Underperform	2	-5.40
30.Jun	Captaris	US	H1	3.00	Hold	2	0.05	94
30.Jun	Hartest	GB	Prel. FY	3.00	Hold	1	0.49
30.Jun	Intertainment AG	D	FY	2.00	Outperform	1	-0.49	19
30.Jun	Mediware Information Systems	US	FY	2.00	Outperform	2	0.52	33
30.Jun	PC-Ware	D	FY	1.00	Buy	1	0.72	451
Tuesday
01.Jul	Beale	GB	Int.	3.50	Hold/Underperform	2	8.70	101
01.Jul	Carpetright	GB	Prel. FY	3.14	Hold	7	50.50	441
01.Jul	HMV Group	GB	Prel. FY	2.00	Outperform	14	15.89	1,712
01.Jul	Honeycombe	GB	Prel. FY	2.00	Outperform	2	6.14	34
01.Jul	Merix Corp	US	FY	2.83	Hold	6	-0.86	94
01.Jul	Scottish & Newcastle	GB	Prel. FY	2.80	Hold	27	41.20	4,616
01.Jul	Stonemartin	GB	FY	3.00	Hold	1	-2.69	5
Wednesday
02.Jul	Audiovox Corporation	US	H1	1.00	Buy	1	0.38	1,246
02.Jul	Biomet	US	FY	2.35	Outperform	20	1.09	1,387
02.Jul	Greene King	GB	Prel. FY	2.07	Outperform	14	70.00	538
02.Jul	Heidelberger Druckmaschinen	D	FY	3.27	Hold	23	0.64	3,991
02.Jul	Northgate	GB	FY	1.56	Outperform	9	40.93	320
02.Jul	Somerfield	GB	FY	2.64	Hold	14	4.95	4,683
02.Jul	Stolt Offshore	US	H1	3.00	Hold	6	-0.97	1,625
02.Jul	Vega Group	GB	FY	2.00	Outperform	1	5.90	34
Thursday
03.Jul	Heiton Group	IL	Prel. FY	2.33	Outperform	4	0.43	463
03.Jul	Online Travel	GB	Prel. FY	1.00	Buy	1	1.20

The Dow has formed a nice range, with clear boundaries to trade tomorrow. We will watch 9,260 up and 9,160 down.

Short Term Dow

Short term, the Dow is sitting at the lower trend line of the channel formed in the 60 Minute Chart at 9,200. Watch for a downside break at that trend line to indicate direction at the Open.

Medium Term Dow

In the medium term, we entered the market Short today at 9,180, but were stopped out with a 10 point loss. We are now out of the market, and will watch 9,160 down and 9,260 up, with 10 point stops.

NASDAQ & S&P

The NASDAQ continued to trend higher today within its sloping channel, and the S&P formed a range within its channel. We will be watching the boundaries tomorrow. *

Summary

The Dow traded sideways today, forming a range at the highs, which has given us clear levels to trade tomorrow. We are out of the market and will be watching 9,160 down and 9,260 up for tomorrow.

Insider Trader - You're up early!

Yep! Hope your trading is going well.

The broker ratings are overall consensus figures derived from Multex Global Estimates reports. The EPS, EBIT and revenue estimates relate to the full-year and therefore do not necessarily correlate to the reporting period indicated. The consensus recommendation gives a numerical rating where 1=buy, 2=outperform, 3=hold, 4=Underperf. and 5=sell.

UK, US and European results this week
Result Date	Company name	Country	Results	Consensus Rec		No. Anl	EPS	Revenue
Monday
14.Jul	Pace Mirco Tech	GB	Prel. FY	3.00	Hold	5	-7.14	183
14.Jul	Bank of America Corp	US	H1	2.04	Outperform	23	6.29	36,605
14.Jul	BB&T Corporation	US	H1	3.15	Hold	20	2.85	4,854
14.Jul	Citigroup	US	H1	2.00	Outperform	16	3.24	77,418
14.Jul	SKF AB	S	H1	2.17	Outperform	23	20.96	41,573
Tuesday
15.Jul	Agie Charmilles	CH	H1	3.20	Hold	6	3.70	1,021
15.Jul	Dow Jones & Co	US	H1	3.36	Hold	11	0.87	1,526
15.Jul	FleetBoston Financial Corporation	US	H1	2.52	Hold	21	2.38	11,427
15.Jul	Gannett	US	H1	2.42	Outperform	19	4.53	6,665
15.Jul	Intel Corporation	US	H1	2.35	Outperform	34	0.62	28,297
15.Jul	Mellon Financial Corporation	US	H1	2.67	Hold	15	1.62	4,196
15.Jul	New York Times	US	H1	2.53	Hold	15	2.03	3,263
15.Jul	Seagate Technology	US	Q4	2.00	Outperform	10	1.36	6,473
15.Jul	Sinnerschrader	D	Q2	4.00	Underperform	1
15.Jul	Stryker Corp	US	H1	2.50	Outperform	22	2.16	3,500
15.Jul	Suedzucker	D	Q1	2.60	Hold	10	1.55	4,564
15.Jul	Teles	D	Q2	1.50	Buy	2	0.47	79
15.Jul	USBancorp	US	H1	2.15	Outperform	26	1.98	13,053
Wednesday
16.Jul	Advanced Micro Devices	US	H1	3.32	Hold	25	-1.50	2,786
16.Jul	Bank One Corporation	US	H1	3.05	Hold	21	2.96	16,544
16.Jul	Capital One Financial Corporation	US	H1	2.17	Outperform	23	4.68	10,462
16.Jul	General Dynamics Corporation	US	H1	2.68	Hold	19	4.88	14,943
16.Jul	Harley-Davidson Inc	US	H1	2.33	Outperform	15	2.32	4,648
16.Jul	Knight-Ridder	US	H1	2.60	Hold	15	3.69	2,902
16.Jul	Microgen	GB	H1	2.00	Outperform	2	3.00	25
16.Jul	Micronas	CH	H1	2.06	Outperform	17	2.44	742
16.Jul	Rhoen Klinikum	D	H1	2.25	Outperform	4	2.82	972
Thursday
17.Jul	Altria Group	US	H1	1.82	Outperform	11	4.64	78,811
17.Jul	Avocet Mining	GB	FY	2.00	Outperform	2	3.50
17.Jul	Bankinter	S	Q2	2.76	Hold	25	1.62
17.Jul	Bespak	Gb	Prel. FY	2.33	Outperform	5	16.10
17.Jul	Coca-Cola	US	H1	2.11	Outperform	18	1.83	20,917
17.Jul	Electrolux	S	H1	2.67	Hold	18	16.72	126,567
17.Jul	Eniro AB	S	Q2	2.27	Outperform	15	3.61	5,150
17.Jul	First Data Corporation	US	H1	1.89	Outperform	28	1.92	8,746
17.Jul	Georg Fischer	CH	H1	2.86	Hold	7	19.18	3,285
17.Jul	Microsoft	US	Q4	1.65	Outperform	31	1.04	31,991
17.Jul	Misys	GB	Prel. FY	2.54	Hold	28	17.32	1,030
17.Jul	Nokia	FI	Q2	2.40	Outperform	56	0.79	30,685
17.Jul	Northern Rock	GB	H1	2.33	Outperform	24	63.32
17.Jul	SAP	D	Q2	2.66	Hold	45	3.51	7,237
17.Jul	Silk Industries	GB	Prel. FY	1.00	Buy	1	6.40
17.Jul	Wachovia Corporation	US	H1	2.35	Outperform	20	3.10	19,030
Friday
18.Jul	Abbey	IR	Prel. FY	1.50	Buy	3	0.88
18.Jul	Keycorp	US	H1	3.26	Hold	19	2.14	4,567
18.Jul	Mattel	US	H1	2.29	Outperform	14	1.28	5,005
18.Jul	Tietoenator	FI	Q2	2.48	Outperform	27	1.17	1,399

*Currencies are shown for the country represented. eg. DE=Euro, UK=GBP, US=Dollar

IT

- it's been a while - are you going to post more often?

I will do my best too. Good luck with the meeting tonight.

- Strong jobs report tries to rally stocks but fear of rate hikes still controls for now.
- Sizzling jobs report continues string of strong economic data as expansion beats expectations
- Market still discounting interest rate hikes as large cap indexes head toward 200 day SMA.

Stocks still selling on good news in fear of rate hikes.

Friday was another example of investors betting against the economy in fear of the Fed embarking upon a rate hiking campaign. As previously discussed, that fear is not without merit given the Feds track record on the economy once it decides it needs to clamp down on money supply. Despite strong economic data, investors fear the Fed will smother the recovery and thus limit earnings growth. When that happens, stocks are suddenly overvalued as earnings drives stock prices.

Stocks tried to put on a fairly brave face. Futures were down but once again rallied on the release of strong economic data with non-farm payrolls climbing another 288K, well ahead of expectations. They fought off a low open and turned positive. They held that gain most of the session before sellers took over ahead of the weekend and once again sold off. No relief bounce on the strong number, no short covering rally in bonds as the jobs report was rock solid.

Semiconductors showed relative strength with SOX gaining 1% though it was up over 2% on its high. Massive weakness in small and mid-cap stocks, however, seriously undercut that strength as the large cap and smaller cap indexes drove toward the March lows and the 200 day SMA. There are indications the selling is starting to get overdone, and another quick blowdown toward those levels will most likely do the trick. A look at the index chart patterns shows major weakness, but if they continue to fall hard and fear notches up further on breaches of the May low and the 200 day SMA, then there is enough to turn the market. Remember, this is a correction, not a major bottom. Sentiment indicators dont have to be at all time highs to do the trick, and they are getting there.

THE ECONOMY

Honey, now thats good job creation.

No way the economy could do better than March in creating jobs, but it did. Sure the overall number was lower (288K versus 337K revised), but it was still very strong, and when you factor out the 75K jobs in March that resulted from the end of the grocery strike, April was even stronger. 288K new jobs, the unemployment rate falling to 5.6%.

Strong in the overall number and stronger across the board. Business and professional services led the way with 123K, manufacturing up 21K (March revised up to 9K), construction +18K, retail +23K. All areas gained, and as the breakdown shows, it was not all gardening and burgers. For the past two months 625K jobs were created, the highest 2 month surge since April 2000 at the peak of the prior economic run. For the year job gains average 215K per month.

Hourly wages rose 0.3% the largest gain since last July. Interestingly, average hours worked held flat, but with jobs and wages increasing that means employers are adding workers, not more hours per worker. The productivity gains during the recession had allowed employers to run leaner and squeeze more out of existing (remaining) workers. To ramp up production further to meet demand they finally had to start adding workers. It came as we anticipated, a breakout, a bursting dam, a light switch turning on. Once businesses became confident enough, they started hiring fast.

Of course the spin doctors were out in force Friday saying it was just two good months out of thirty, the economy is still in trouble, deficits are still high, and it is just a matter of time before pigs start flying, dogs started sleeping with cats, etc. The argument that jobs took too long to recover is just wrong. Economists know that a recovery does not start until the stock market bottoms. That is the point where you start the job watch clock because the market is the best leading economic indicator. When it turns, then the economy turns. We said all along that job recovery would not start until late 2003 based on this indicator. It started a bit earlier than that, and now is really running. It also still amazes (amuses?) me how a question about job creation can be answered by a discussion about how we should not be in Iraq. Or there is the half-hearted acknowledgment of the gain but complaints that there is still a long way to go. That is like saying you are not back in a bull market until the old high has been hit. Love being in an election year with only 6 short, short months left.

Wholesale inventories rise but still low.

March stock on hand rose 0.6% (0.5% expected), but sales jumped 2.7%, the largest gain since August 1994. February inventories remained at a 1.2% gain but sales were revised higher to 2.1%. That took the stock to sales ratio to another record low at 1.13 months from 1.16 in February. This is one reason the Q1 GDP number did not jump as much as anticipated, but it does mean that manufacturing activity will have to increase.

It needs to increase for a number of reasons. One is the old supply and demand. This recovery got off on the wrong foot because the first tax cut package relied too heavily on so-called rebates to US citizens. Rebates are historically proved ineffective, but Bush was not going to get his first tax cut passed without including this giveaway in the package. Thus a billions of dollars in potential stimulus was squandered, pumping up demand a bit but doing nothing to help supply. That is lingering even today as we see in the inventories data. That is THE critical inflation problem, i.e., where supply is not increased to meet demand. In any recovery you need to make sure the supply side is given a lot of incentive to invest and produce even before demand is stimulated. That means credits, higher expensing, accelerated depreciation, and capital gains cuts. Those did not emerge until the last round of tax cuts, and while they really helped jumpstart the supply side, we see that side of the economy is still running behind as business have yet to make big commitments to plants and inventory building. Thus it is imperative that we dont eliminate incentives for business to keep investing; business still needs to increase production and output to meet demand or we really do face inflation problems.

We avoided inflation in the 1980s and 1990s because of the massive investment in technology that started with tax credits shot supply higher, and it was able to meet any demand that came along. We get into trouble when supply is handicapped or ignored while demand is pushed. The Fed can raise interest rates and get them up to nominal rate levels, but it also needs to keep close eye on the money supply and not let it dry up. Too little money and it does not matter where rates are.

Another major reason inventories need to rise more is supply interruption. Lean inventories work great when everything is perfect. They allow more cash flow, better profits, and the ability to expand because everything is not tied up in inventories. Perfection is hard to maintain. We live in a world of terror strikes. A supply interruption of any extent causes delays and price spikes. Another inflationary problem. We are seeing it in the price of oil and gasoline already. Jus the fear of the problem has helped drive prices higher.

Economic future.

The market continues to struggle with economic growth versus the Fed clamping down on that growth. The future still looks good for job creation, but that is not the real key. Employment is a lagging indicator, so the fact that it is rising is good, but it does not provide insight into the markets future. That comes from the probabilities of rising earnings, and those come from expanding sales.

Looking at the other economic indicators such as leading indicators, business investment, consumption, ECRI, and many more future looking economic indicators, the economic future looks solid. Growth projections have underestimated actual growth all along just as they underestimated the slowdown all the way down. Economists are just as bad as any other profession in clinging to the most recent trends and failing to see new trends.

We see this as a broad-based expansion that is continuing to build strength. There is talk of fading earnings in Q3 and Q4 based on difficult comparisons. Yes comparisons will be harder, but if the economic expansion continues they will beat them an continue to grow at a healthy pace. The fear remains the Fed getting in the way of that growth. The market still has to shed the last worries about valuation vis-vis any Fed rate hike impact. Another blow lower toward the 200 day SMA on SP500 and DJ30 more and more looks as if that will be all it takes.

THE MARKET

Stocks could not hold the attempted rally yet again, closing miserably near session lows. NASDAQ gave up 40 points, SP500 broke 1100 on stronger volume, small and mid-caps plunged, leading the charge lower. NYSE decliners outpaced advancers better than 12:1.

It was not all gloomy, and some of the bad data is actually good data in the world of the market reading. NASDAQ showed relative strength all day until it the afternoon. SOX was up over 2% though it closed out the day 1% higher. Tech and chips, the leaders to the downside, performed relatively better. NYSE breadth was unmercifully bad. You have to go way back to October 1997 during the height of the Asian crisis to find such a horrid breadth reading. These readings often come with important market turns.

In 2002 the long downtrend came to an end when there were two sets of strong negative breadth on NYSE. The first was on July 22 during the first leg down at -4:1. The second was a series of high negative readings in October, the worst at -5.96:1 on October 9 just as the market bottomed. This year there was a massive negative breadth reading on April 13. Now we are seeing the second high readings as SP500 cuts toward the March low and 200 day SMA. This pair of readings coming as DJ30 and SP500 finally sell off, joining NASDAQ and SOX at these levels, suggests the bottom of the base is forming.

In addition, volume is playing into this scenario as well. We discussed NYSE versus NASDAQ last week, noting that NYSE volume was catching up to NASDAQ. That is an indication the more speculative tech sector is getting sold out. Friday NYSE volume actually eclipsed NASDAQ as DJ30 and SP500 exploded lower on rising volume, heading toward the March low and the 200 day SMA as those two indexes started to catch up with the tech selling. The CBOE put/call ratio again closed over 1.0, the fourth time in the past week. The overall put/call ratio (all regional exchanges included in the calculation) closed at 0.98; another downburst toward the 200 day SMA on SP500 and DJ30 would push that over 1.0 on the close as well.

All of these point toward a potential near bottom. They are secondary indicators and thus take a back seat to price/volume action, and there have been 6 NASDAQ and 5 SP500 distribution sessions in the last 6 weeks. In other words, the distribution has occurred as has the selling. Further, no market analysis is complete without a look at leaders. Many areas of strength were hit Friday including gaming, oil & gas, medical instruments and drugs. In short, even the defensive areas were not a safe haven. The momentum is still downside, and another hard drop looks likely but could also set the bottom. The weak rebound to start the week and the sharp rollover put a lot of pessimism back into investors as hope was squashed out again. That plays into a firmer bottom setting up, but for now it has just hinted at one with secondary indicators.

Market Sentiment

Above we noted sentiment indicators that suggest the market is hitting some extremes that are part of bottom formation. We will no doubt receive emails citing the bulls versus bears surveys that are not hitting extreme levels. It is true that some of these indicators are not hitting extremes. The VIX, for example, is nowhere near an extreme level. That does not, however, mean that the other indicators are without merit. Rarely do you get all sentiment indicators lined up together. Moreover, this is not a major market bottom trying to be put into place, but a correction after a big run in 2003. In other words, it is c consolidation in a continuing run higher. Thus the indicators such as bulls versus bears or VIX dont have to all hit extreme levels.

VIX: 18.13; +1.08
VXN: 25.5; +0.32
VXO: 19.07; +1.42

Put/Call Ratio (CBOE): 1.01; -0.25. Fourth close at 1.0 or above in the past two weeks. A series of closes over 1.0 such as this accompanied the late October 2002 bottom as well as other bottoms.

NASDAQ

Spent most of the day in positive territory, but could not make it through the 10 day EMA, tapping that point on the high. It sold off and gave up 40 points to close at the low.

Stats: -19.78 points (-1.02%) to close at 1917.96
Volume: 1.648B (-7.07%). Volume backed off on the reversal and selling. There was no heavy dumping of stock just as there was no dumping Thursday when NASDAQ sold off and rallied back over the 200 day SMA on rising volume. NASDAQ really appears to be sold out here at it nears the March lows once more. Accumulation in the NASDAQ consolidation is still solid at 4 to 2.

Up Volume: 599M (+133M)
Down Volume: 1.037B (-245M)

A/D and Hi/Lo: Decliners led 2.83 to 1. Strong downside breadth once more, but nowhere near the league of NYSE.
Previous Session: Decliners led 2.46 to 1

New Highs: 30 (+1)
New Lows: 98 (+22)

Rallied most of the session until reality set in and it broke lower, closing below the Thursday intraday low when NASDAQ bottomed and rebounded on some stronger volume. The 10 day EMA (1957) on the high but that did not last. It put up a fight and only got sloppy late. It slid below the April low (1919) and is heading toward the March low (1896). A slip below that would provide a good scare, and with the other indicators in the market, a potential point to bottom.

SOX continued its relative outperformance, but it too gave back much of its gain. It hit the 18 day EMA on the high (465) and gave up 7 points on the close. It is the first index to undercut the 200 day SMA and the March low, and it is trying to be the first index to recover. Classic double bottom with the slight undercut of the March leg down. Of course, it now has to make that strong volume move higher. There is nibbling ongoing in the chip stocks; that will have to turn into serious buying.

S&P 500/NYSE

Undercut near support on volume, moving toward the March low and the rising 200 day SMA. It is finally breaking down in this consolidation, something it needed to do.

Stats: -15.29 points (-1.37%) to close at 1098.7
NYSE Volume: 1.649B (+9.55%). Strong, rising volume as SP500 undercut near support. The distribution of late has taken its toll.

Up Volume: 182M (-115M)
Down Volume: 1.454B (+252M)

A/D and Hi/Lo: Decliners led 12.29 to 1. Massive downside breadth rarely seen in the market. This pairs with the April -6.7:1 reading in April and this extreme suggests the selling is getting extreme. Even the Thursday breadth was excessively negative.
Previous Session: Decliners led 4.28 to 1

New Highs: 27 (-1)
New Lows: 713 (+402). An explosion in new lows as SP600 and SP400 broke below the March lows. This is another signal of some extremes popping up.


Broke through the weekly up trendline from the early 2003 lows and broke 1106 as well. Still holding in a support range at 1096, but looks ready to try the March low (1087 intraday, 1091 closing) and possibly the 200 day SMA (1076). Heavy negative breadth, breaking near support, surging new lows. It is finally making the break lower it needed, and it looks to be doing it on the right kind of negative numbers.

DJ30

Sliced through 10,250 with ease, selling on rising, above average volume. As with SP500, DJ30 is starting to make a drop toward the March low (10,007 intraday, 10,048 closing) and the 200 day SMA (10,001) for the second leg of this drop. Given the relative strength in SOX and NASDAQ, the breadth readings, the new low readings, and the put/call ratio, we believe a test and slight undercut of the 200 day may be all DJ30 and SP500 need to be ready for a reversal.

Stats: -123.92 points (-1.21%) to close at 10117.34
Volume: 228 million Friday versus 202 million Thursday.


THIS WEEK

The speculation about rate hikes will continue this week as some important economic reports hit the wire. The PPI (Producers Price Index) and CPI (Consumer Price Index) give some insight, albeit from the governments rather tortured perspective, as to prices facing businesses and consumers. The trend shows gradual re-inflation in the governments basket of goods though as we have noted before, healthcare and education costs are inflating at a much faster pace. It will be interesting to see how much of a bite higher oil prices are taking.

Two things appear to be hampering the markets ability to find a bottom in this correction. First, speculation about how much damage the Fed will do when it starts hiking rates. Stocks have been discounting this ever since the March jobs and retail sales reports hit the street. As of yet they have not found the level that fully discounts the first rates hikes and their impact on the economy. It is more than that, however. As we have noted, nominal interest rates are much higher than 1%, and the Fed could raise rates 100 basis points and be basically neutral with short term rates. Thus a 50 basis point hike that is currently factored in by the August FOMC meeting (that means two 25 basis point hikes, one in June and one in August) will not stall out growth. Again, the market is concerned the Fed is going to go overboard in hiking rates as the Fed often does, and it is getting to a comfort level between stock prices and any negative economic results due to the Fed raising rates too high too fast.

The second issue involves Iraq and the struggle to reach the point of turnover to the Iraqis. The continued violence from outside fighters and more recently native Iraqis makes the goal of achieving a democratic Iraq even more difficult and open ended, and that is weighing on the market. Japan and Germany were occupied for years after WWII before their totalitarian roots were gone, and to hand over control in just over 1 year after 40 years of dictatorship is ambitious. The turnover issue has to be resolved with some certainty.

Right now the sentiment indicators are getting to some extremes and the patterns are setting up similar to early 2003. There is the added concern of the Feds interest rate campaign, something not present in 2003, but the market is selling and discounting that part of the equation. We believe that once the market is convinced the Iraq handover will occur as planned the market can start to move higher. As with the last Gulf war, it is not the actual date of the move but when the market is convinced it will happen.

The question then remains as to how much the market will move on a break higher. Summer is coming and that typically means lethargic stock moves on light volume. Summer rallies occur, but sustained moves are hard to hold during this period. 2003 was more of an aberration because the market was coming off a nasty 3 year decline. Thus if stocks to reverse and break higher, the upside may be limited after an early summer rally in the move.

We were very interested in the action on NASDAQ and SOX Friday as they were showing some relative strength after being the first indexes to sell off. They were unable to break through resistance, but they were showing some life along with the sentiment extremes. It may take SP500 and DJ30 selling closer to their 200 day SMA to get a turn, but the high sentiment readings along with the sold out performance of NASDAQ and SOX make the chance of a turn much more likely. Again, however, the price/volume action, the nuts and bolts of the market, have not shown indications of a turn and until we see a strong upside session and a solid follow through we are going to take it easy with new positions, requiring very solid moves through solid entry points.

Support and Resistance

NASDAQ: Closed at 1917.96
- Resistance: The 200 day MA (1939). The 10 day EMA (1958). The April closing low at 1978. 1990 to 2000, the top of the late 2003 base. The simple 50 day MA (1994) and 50 day EMA (1995). 2050 represents some prior price points and has stopped NASDAQ the last time it tried that level. Breakout from the pattern is 2080. 2089 is the February closing high. 2112 is the early January high.
- Support: Mixed tops and bottoms at 1900. The March low (1896). 1850 below that.

S&P 500: Closed at 1098.70
- Resistance: 1106 is a May 2002 top and represents some early 2001 lows. 1110, the weekly up trendline from the early 2003 lows. 1118 is the April closing low and the 10 day EMA (1117). 1125 stalled the last bounce attempt. The exponential 50 day MA (1125) and the simple 50 day MA (1127). The April and January highs (1150 to 1155). Next is 1159 (February highs) and 1160 to 1175 the highs in that double top that spanned late 2001, early 2002.
- Support: 1096 to 1100, then the March low (1087). 1075 to 1070 from the December consolidation. The 200 day SMA (1076).

Dow: Closed at 10,117.34
- Resistance: 10,250. The 10 day EMA (10,284). The exponential 50 day MA (10,362) and simple 50 day MA (10,362). 10,570 is the April high. Price consolidation at 10,600 level. 10,747 is the February high.
- Support: 10,000. The 200 day SMA (10,001). 9900-9850.

Economic Calendar

These are consensus expectations. Our expectations will vary and are discussed in the Economy section.

5-12-04
- Trade balance, March (8:30): -42.6B expected, -$42.1B February.
- Treasury budget, April (2:00): $46.8B expected, $51.1B March.

5-13-04
- PPI, April (8:30): 0.3% expected, 0.5% March.
- Core PPI: 0.2% expected, 0.2% March
- Initial jobless claims (8:30): 325K expected, 315K prior.
- Retail sales, April (8:30): 0.1% expected, 1.8% March.
- Retail sales ex-auto (8:30): -0.2% expected, 1.7% March.

5-14-04
- Business inventories, March (8:30): 0.4% expected, 0.7% February.
- CPI, April (8:30): 0.3% expected, 0.5% March.
- Core CPI (8:30): 0.2% expected, 0.4% March.
- Industrial production, April (9:15): 0.5% expected, -0.2% March.
- Capacity utilization, April (9:15): 76.7% expected, 76.5% March.
- Michigan sentiment, preliminary (9:45): 96.5 expected, 94.2 prior.

- Expiration a sleeper as market continues lateral, low volume move.
- Oil falls as Saudi promises more production.
- Expiration is over, but same problems still present.
Market leaves town quietly after Wednesday reversal.

Wednesday foretold something potentially worse for expiration Friday, but it never materialized. The market started positive on some soothing words about oil production from Saudi Arabia, and an attempt to sell it off midday was met with some modest buying that kept the market positive on the close. Modest gains, modest breadth, modest volume, but given expiration Friday and that Wednesday reversal, it was a decent way to close the week as the hedge funds and traders closed the market flat given the OPEC weekend meeting and the large at the money options positions.

The indexes went nowhere during the session, failing again at near resistance but also holding over near support. The indexes have more or less moved laterally the past two weeks despite high volume upside and downside reversals that typically indicate a swing in the action coming in the direction of the reversal. They ended up canceling each other out in the near term, however, as investors continue to factor in near term issues. As we have discussed, there are few overriding problems confronting the market such as the Iraq handover and associated anticipated increase in violence, oil prices, Fed rate hikes and inflation (maybe some politics as well) that are keeping a lid on the upside. The positive outlook for the economy is keeping stocks from falling as well. Thus the lateral move the past two weeks.

THE ECONOMY

Fed says it stands ready to fight inflation.

Thursday's report discussed how the Fed was walking a tightrope yet again (that always seems to happen when you try to regulate markets) now that oil prices are spiking just as the Fed must raise rates from an extremely low level. It also has the supply deficit to deal with and inflation that can result because supply has yet to match demand. As we have noted before, and though Greenspan denies it, monetary policy alone cannot solve economic problems. You can flood an economy with money, but if no business has reason to borrow or spend (such as after a nasty business slump as in 2000 and beyond) all it does is put more money in the system with the same amount of goods. That is the classic, textbook scenario for inflation. Greenspan kept telling Congress that no tax cuts were needed, that tax cuts would be too late to do any good, and that the Fed had it all under control. Rate cut after rate cut, however, failed to produce any economic spark. Then the tax cuts were passed and, gee whiz, they actually jumpstarted supply. The Fed came back and admitted they actual were timely and had the desire effect, something the major media, unlike the Fed, never had the sand to admit after blasting the tax cuts as an untimely waste (as if the 50% of government spending is not an absolute squandering of our tax dollars; they seem to believe that a huge, bureaucratic, centralized government is better at allocating resources than the people making the buying and selling decisions on the frontline of the economy).

After many comments that jobs were the most important element in the economy, the Fed realized it was losing even more credibility with the financial markets. As discussed Thursday, employment is the most lagging indicator, and the Fed's focus on that to the exclusion of strong price growth is driving using the rearview mirror. We do not advocate Fed rate hiking campaigns simply because they often cause the very recession or bust the Fed was trying to avoid (i.e., the Fed fears the economy heats up too much and supposedly then crashes of its own weight) and because they come after the Fed intervened in the first place. Let markets alone and they will function the most efficiently. Regulate them and you create the imbalances that then require a very imperfect Fed to try and rebalance. The result is often swings that would not have occurred, and those that would have occurred are exacerbated, not mitigated as the Fed likes to tell us. Hell, the Fed takes credit for somehow saving the world economy from something worse in 2000. Frankly, we never bought into the argument that too much prosperity is a bad thing.

Indeed, the market has tried to balance things on its own once the Fed said it was going to start raising rates. Indeed, the market has done exactly what the Fed should do but typically refuses to acknowledge would work: take rates up immediately to the level it thinks they need to be in order to accomplish the goal. The market pushed rates right up to where it thinks neutral is. Just two weeks back one Fed governor responded to a question why didn't the Fed do that, and the answer was the usual, go slow, be prudent, respond to events. Sounds good, but the history of rate hiking shows that does not work. The Fed goes slow and ultimately gets frustrated because nothing happens. It never does; it always happens all at once when the cumulative hikes suddenly slam the economy. It talks a good game, but it cannot live up to the task.

Set the target, take it there all at once or in smaller steps, and give the market some certainty. Bernacke came close Friday when he responded with actual calculations that set the target rate at 3.7% to 4.7%. The Fed won't raise rates to that level anytime soon, yet the fact those figures were thrown out there tells the market, finally, that the Fed has some targets and it is not playing the "I'm thinking of a number between 0 and 20" game that requires the market to guess. It is also interesting in that it shows us that the Fed is also looking beyond Greenspan; more and more Fed governors are somewhat breaking ranks and not spouting the company line or typical Fed dogma under Greenspan. Again, Greenspan takes the nomination but then retires sometime after the election.

Saudi Promises more production.

Though it says supply is not the issued, Saudi Arabia Friday was pushing for a 2 million barrel per day increase in production ahead of the weekend OPEC meeting. Not only is Saudi Arabia pushing for the increase, it is already openly stated it would overproduce its 7.3 million bbl/day quota, saying it has allocated orders for 9 million barrels from its customers for June, and if more was needed, it was going to provide it. So much for production limits. Indeed, OPEC is already producing 2.8 million bbl/day over its production limit as prices have still risen.

Prices continue to rise, so there are obviously other issues other than just supply. The biggest is the perception of supply problems. Saudi has a capacity to produce 10.3 mbd, so there is still excess capacity. The problems include one we discussed last week, i.e., the potential for supply disruption given the geopolitical turmoil that could result in attacks on production facilities in the Middle East. If the terrorists cannot get to the US from within, do it without at the lifeblood of commerce. Even if Saudi et al have good intentions, if the terrorists are successful, intentions don't matter. Bin Laden has said he would topple Saudi if it did not bow to his version of Islam, and disrupting supply is a way to do it.

There is also pressure on the refined product side. Gasoline is in low supply so prices are up. The Bush administration gets the blame for this because somehow that 'oilman from Texas' is letting his friends gouge the consumer. Oil and gas is very cyclical. Visions of $50/bbl to $100/bbl oil in the late 1970's turned into $9/bbl in short order. It has always been boom or bust based on economic and cartel actions, and right now it is again a combination of both pushing prices higher. Oil companies made less because demand was less until very recently when the economy and world economy started to recover. You don't build extra capacity when there is recession just as Cisco didn't go out and build new production factories when it had piles of product in warehouses.

Of course, energy companies are more than willing to let prices rise to make the easy money. There are things that could be done to increase supply, but they are short term as refining capacity is a problem now with several old plants unable to maintain their rates of production. Energy companies may try to get some legislation to make it less expensive for them to build new capacity. Given that the market has price product at high rates, that should not be used as a solution. The incentive is there. Other than new plants, the regulations regarding the special gasoline blends could be eliminated short term. There are multiple formulations required in over a dozen regions in the US. One of the problems is that the old refineries cannot just switch out day to day to produce runs of these different fuels. Thus there is an imposed bottleneck on the system. We have to decide if we want some lower prices in the short term in trade for some more ozone short term. The EPA said no, but the administration could sign an executive order otherwise.

The problems are exaggerated by tons of money speculating prices will run higher. As the US buys for the SPR every day and OPEC claiming (until now) it was unable to impact price in the current market, speculators could bet against these market factors and continue to drive prices higher. Some decisive action on the gasoline (i.e., US regulation issues) side and OPEC saying it will produce whatever is necessary would help break this sequence that is ratcheting oil higher. Friday oil fell below $40/bbl on the Saudi comments. Indeed, Saudi says it wants and indeed sees oil at $23/bbl. If the US would take some action to help break this easy speculation game in the short term that would start breaking down the spiral and help prices adjust to where actual demand places them as opposed to speculative fear and greed.

Again, we said last week we thought oil prices were ready to peak even before Saudi came out with its thoughts. The oil charts were showing the peak even as speculation on the financial stations ratcheted higher. It is not a done deal yet, but it is starting to show the cracks that stall out a rally.

THE MARKET

Expiration came and went quietly other than that violent reshuffling late Wednesday. Monday brings a new expiration and that reshuffling to close May is over. Historically the Monday following expiration goes the opposite direction, but that has not been the case recently. With the big Wednesday reversal that was in preparation for expiration, however, it keeps us alert for potential selling on Monday.

As for the technical position, the indexes closed out the week in decent position given the high volume up and down reversals that have punctuated otherwise low volume drift. Friday saw NASDAQ close over the 10 day EMA and the March lows as it managed a recovery from the Monday gap lower and then held up very well after the Wednesday reversal. As usual SP500 held over the 200 day SMA and QQQ has yet to break below its March lows. Despite the violent swings the indexes held their ground, albeit at the lowest possible levels without necessarily giving way to a breakdown.

That still leaves them in precarious position heading into this week with the same near term downtrends and fighting with the short term moving averages as well as the same problems that have provided sufficient uncertainty to prevent the indexes from making a positive bounce from their potential double bottom patterns. The lateral move is a sign of strength the market did not look like it had. The issue now, and as it has been for the past two weeks, is whether the lateral move is the best the market can muster before another move lower or if it finally is comfortable with the near term uncertainties and can build off of this 13% NASDAQ, 7.5% SP500, and 9% SP600 correction. If the majority of the indexes can move one way or the other with respect to their 200 day SMA, the trend will be clear. Of course, that is just a restatement of the overall issue.

Market Sentiment

Last week saw bulls contract while bears expanded, though at 43.6% and 26.7%, neither are on the verge of providing a powerful crossover signal. Sentiment continues to erode and downside hedging and speculating continues to build, both good contrary indications for the market, i.e., indications the market is getting to a point it could make a rebound. As noted before, however, sentiment indicators are not accurate timing indicators. A dog can be pretty unhappy for a long time before it decides to run off, and market sentiment indicators are no more accurate as to time.

VIX: 18.49; -0.18
VXN: 24.9; -0.64
VXO: 19.16; -0.2

Put/Call Ratio (CBOE): 1.12; -0.09. Another close over 1.12, making that the ninth in the past three weeks. The overall put/call level, however, while showing an incredible rise in the moving average, has not closed below 1.0 yet. When it makes a close over 1.0, a bottom or at least a near term rally starts to come together.

NASDAQ

Managed to move back over the 10 day EMA on the close, continuing the low volume attempt to hold near the March lows and form a double bottom.

Stats: +15.5 points (+0.82%) to close at 1912.09
Volume: 1.379B (-10.67%). Another session of low, below average volume in the three week range below the 200 day SMA. Unlike SP500, volume even on the reversal sessions (up and down) has been low. There is a definite lack of current interest for technology as money piles up on the sidelines. Low volume consolidations, however, are not necessarily bad.

Up Volume: 994M (+358M)
Down Volume: 329M (-556M)

A/D and Hi/Lo: Advancers led 1.77 to 1
Previous Session: Decliners led 1.33 to 1

New Highs: 36 (+7)
New Lows: 78 (-23)

Tapped some support at 1900 on the low and managed to close over the 10 day EMA (1911) for the first time this month. Hardly a market turning event, but something it has been unable to do as it looked to be readying for more of a downtrend below the 10 and 18 day EMA. As it is it closed over the March low (1896.91) as it still is in the game for a double bottom base. Right now the pattern is negative but not overwhelmingly; if it was it would have rolled over after that Wednesday reversal.

The large cap techs as measured by the NDX and QQQ have yet to give up the March lows. There is a theory that investors will turn to large caps during this stage of the market for any further uptrend, and there is some historical support for this notion. We have noted that the market has failed to move without the small and middle caps since early 2003, but there is always the case that a transition is in progress right now. As the NASDAQ 100 is the largest cap NASDAQ stocks and it has been holding up similarly to the large cap SP500, there could be more credence to this idea. We will let the market show us which stocks to move into, small cap, large cap, or both. What is important right now is that the large caps are helping to hold back the tide right now, but the market has not said yet it is ready to make that move back up.

S&P 500/NYSE

Another session close below the 10 day EMA after trying a break higher, but managed a gain on some rising volume. Not great, but definitely not bad.

Stats: +4.37 points (+0.4%) to close at 1093.56
NYSE Volume: 1.256B (+4.02%). Volume edged higher Friday. Higher volume is not unusual for expiration Friday, but volume has been extremely low overall and the volume was still well below average Friday. Unlike NASDAQ, volume has spiked above average on the reversal sessions, up and down, showing much more participation in the large caps.

Up Volume: 840M (+311M)
Down Volume: 402M (-267M)

A/D and Hi/Lo: Advancers led 2.01 to 1. Very solid trade, but NYSE A/D is never up without participation from the smaller caps as well.
Previous Session: Advancers led 1.4 to 1

New Highs: 24 (+13)
New Lows: 29 (-22)

Continued to walk sideways. SP500 has enjoyed a very narrow closing range the past two weeks despite the wild intraday swings. That shows us a lot of hedge funds and speculators are helping market makers and specialists keep the prices in a range, but it also shows a pretty decent, low volume fight between buyers and sellers over the key 200 day SMA (1082). The lateral move is much more pronounced in SP500 than in the other indexes as it compresses over the 200 day and below the 18 day EMA (1101). The action in this index remains positive on the whole with a normal correction and consolidation of a strong run, holding above key support. Despite all of the problems with the Wednesday reversal that looked quite ominous, SP500 still looks to be putting together a rebound from this key level.

DJ30

Has stemmed the slide and is now moving laterally below 10,000 and the 200 day SMA (10,042). It too showed that reversal action Wednesday, but shrugged it off by the Friday close. Volume was up Friday as DJ30 closed higher but gave back 70 points from the high that tapped at the 200 day. It remains below the March lows at 10,007 and key resistance at the 200 day. This maintains its near term downtrend below the 10 and 18 day EMA (10,008, 10,086), but as noted, it is trying to convert into a lateral move. The downside still has the upper hand at this stage, however; it has to prove that it is ready to resume the move higher as it struggles below a lot of key resistance.

Stats: +29.1 points (+0.29%) to close at 9966.74
Volume: 180 million Friday versus 155 million Thursday.

THIS WEEK

Expiration is gone but the same near term influences remain. They are closer to resolution with OPEC members individually or OPEC as a whole ready to take action to calm nerves with respect to supply. Refining and speculation are other issues that the US will have to step up to address, but the impact of the Saudi position is already starting to be felt. The Iraq issue is more one of time; the market has to get comfortable with the actual handover, and that was not helped by another car bomb that targeted members of the current interim ruling body and new FBI warnings regarding threats against railways in the U.S.

As for inflation, the Fed is trying a new tactic, saying it will defend against inflation as it tries to calm the speculation in the financial markets. That is, however, even more frightening to us because it always seems to be a chemotherapy way of curing the ills: the economy just got on its feet and now we are going to get rid of what ails it by almost killing it and then letting it revive. The Fed cannot address the problem that exists: supply does not equal demand that easy money has created. Supply needs more incentives to meet demand other than enjoying jacking up prices in response to tighter demand. Suppliers have not been able to do that for years, and much as with employment, they are putting off ramping up supply until absolutely necessary, causing problems with demand. The cure is not to crush demand (and that is what happens because the Fed has to quell consumer spending, and that only happens when jobs are again at risk) but to coax more supply to meet demand. You want an expanding economy as that creates jobs and wealth; you do not want to artificially tamp it out just as it has had a bit of recovery.

That is bigger picture. Near term we remain cautious as to how the market will respond to the Wednesday reversal ahead of expiration. Expiration went out like a mouse, but Wednesday indicated some serious downside positioning occurring, and now that expiration is over we will see if that is still in command. The market remains at the crossroads, the large caps trying to transition to the upside while holding over key support (SP500 and QQQ) but NASDAQ and DJ30 still in near term downtrends. We continue to see some excellent patterns set up both upside and downside. Some were moving Friday, others still holding solid patterns, ready to make the move. As many, even more, are struggling, with many rolling back over after failed tests of earlier breakdowns below support. That points out the mixed character of the market, and we are ready to take advantage of these stocks while the market decides direction and then move toward the primary trend when it makes that decision.

Support and Resistance

NASDAQ: Closed at 1912.09
- Resistance: The MA in a near term downtrend are always a resistance level. 18 day EMA (1928); 200 day MA (1949). The April closing low at 1978. 1990 to 2000, the top of the late 2003 base. The simple 50 day MA (1972) and 50 day EMA (1966). 2050 represents some prior price points and has stopped NASDAQ the last time it tried that level. Breakout from the pattern is 2080. 2089 is the February closing high. 2112 is the early January high.
- Support: 1900 acted as support Friday as NASDAQ tapped at that level on the low and held. 1890, the gap up high at on Tuesday. The April lows (1880, 1878) trying to hold. 1850 below that. Some price tops at 1777, 1750.

S&P 500: Closed at 1093.56
- Resistance: The 10 day EMA (1095). 1096 to 1100. The 18 day EMA (1102). 1106 is a May 2002 top and represents some early 2001 lows. The exponential 50 day MA (1114) and the simple 50 day MA (1117). 1125 stalled the last bounce attempt. The April and January highs (1150 to 1155). Next is 1159 (February highs) and 1160 to 1175 the highs in that double top that spanned late 2001, early 2002.
- Support: The 200 day SMA (1082). April lows (1079, 1076). 1075 to 1070 from the December consolidation. 1058 - 1060 from November tops.

Dow: Closed at 9966.74
- Resistance: The 10 day EMA (10,008). The 200 day SMA (10,042). The 18 day EMA (10,087) and 10,250. The exponential 50 day MA (10,235) and simple 50 day MA (10,257). 10,570 is the April high. Price consolidation at 10,600 level. 10,747 is the February high.
- Support: 9900-9850. 9650; 9585.

Economic Calendar

These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.

5-25-04
- Consumer confidence, May (10:00): 94.0 expected, 92.9 April.
- Existing home sales, April (10:00): 6.48M expected, 6.48M March.

5-26-04
- Durable goods orders, April (8:30): -0.8% expected, 5% March.
- New homes sales, April, (10:00): 1.2M expected, 1.228M March.

5-27-04
- GDP, Q1 second revision (8:30): 4.5% expected, 4.2% prior.
- GDP chain deflator (8:30): 2.5% expected, 2.5% prior.
- Initial jobless claims (8:30): 334K expected, 345K prior.

5-28-04
- Personal income, April (8:30): 0.5% expected, 0.4% March.
- Personal spending, April (8:30): 0.2% expected, 0.4% March.
- Michigan revised sentiment, May (9:45): 94.6 expected, 94.2 prior.
- Chicago PMI, May (10:00): 62.4 expected, 63.9 April.

Outstanding Thread.I never saw it b4
rgds aj

Thanks a lot, I will be updating it more often.

I agree with ajren. Excellent. Thanks for making the effort.

Someone agrees with me.Incredible.
rgds aj

Bit late this week.....

- Flat lining into the weekend.
- Manufacturing is on fire.
- Market avoids selloff, posts a modestly constructive session to cap a positive week.

Market slides into weekend quietly, but action is positive.

Low volume and modest price movement overall, but the indexes closed near the highs, fighting a modest urge to sell ahead of a long weekend that faces renewed terror threats. No one really wanted to take many chances, but there were still some nice moves from some stocks sporting solid patterns. That is one thing the market has shown since the follow through on Tuesday: solid, even if few in number, breakouts.

There was some great economic news from personal income and spending, and the Chicago manufacturing index was simply blowout. Indeed, the surging manufacturing sector almost assures that jobs for May will be another very strong showing. The market mulled the news, but did not necessarily rejoice. Bonds had been rebounding, but the strong Chicago data coincided with a drop in treasuries as bond traders saw the strong construction sector simply meaning higher rates were more of a certainty.

It was a quiet session with low volume and modest breadth, but it was not a weak session. Stocks started soft but in the end overcame early selling to close near session highs. The gains and losses were modest overall, but the market fought off some attempts to sell it, and buyers were not afraid to step into some stocks that have shown good strength during the selling and that are making breakout moves. Many have denied this move has any real meaning or that it is actually a summer rally, but more stocks are breaking out. Not hoards of stocks, but a steady improvement after the follow through. Often the market will provide a follow through and then stocks will continue to form up and then provide waves of breakouts as the overall market continues to set up its pattern. Indeed, the market is trying to set up a broader double bottom pattern following the follow through to the rally that started two Tuesdays back. In other words, it is still working on building even as some early leaders start breaking out. That is how rallies typically progress. This coming week we will see if the positive shift in price/volume action turns into even stronger volume gains to show more conviction.

THE ECONOMY

Personal spending and incomes continue to show solid gains.

April spending rose 0.3% versus the 0.2% expected and 0.5% in March (0.4% originally reported. Income increased 0.6% after a 0.4% rise in March (0.5% expected), one of the few times incomes actually outpaced spending in the past six months. Incomes, despite many who argue there is no recovery, continue to expand. That does not happen without a recovery.

Inflation news was good as well as the price index contained in the spending and income report rose just 0.1% versus a 0.3% March rise. The data is mixed regarding inflation. The GDP price deflator was lower as reported Thursday, another indication that inflation is not necessarily all it is cracked up to be. What we see is not necessarily a current problem with inflation but a structural problem that can give rise to future problems, i.e., where the supply has not caught up with demand. We have discussed this in the past two weeks, and basically it is a situation where stimulus was applied to the demand side long before the supply side was pushed to expand. Indeed, the supply side until quite recently has purposefully lagged as producers have held back, still burned from the big overhand left in their laps in 2000.

Chicago PMI surges to record levels, provides some promise supply is trying to catch up.

The May Chicago regional manufacturing report surged to a 16 year high at 68.0, much better than the 62 expected. New orders hit a 20 year high at 74.4; as you recall, we have pointed out each time orders have hit 20 year highs. That is key. Even during the boom of the 1990's, the growth rates were not the supercharged levels seen now. The last time growth was this explosive was after the big supply side incentives of the early 1980's were passed in Reagan's Emergency Economic Recovery Act. The supply side incentives led us to the greatest growth ever seen during the following 20 years. Once gain we are duplicating those explosive growth rates, setting up the potential for another boom where we see low inflation coupled with strong growth based on the productivity technological gains give us.

Yet, there are still many we see on the financial stations and other news stations making bald faced assertions that there is no economic recovery. It is a case of selective recognition or denial. You can cite actual statistics about GDP growth, surging business investment, surging profits, a job market that is catching fire, growth rates in economic indicators, the already sharp decline in deficit projections and be met with statements about how the stock market has still not recovered its losses, how jobs have not been totally replaced. Ask anyone who is intellectually honest and he or she will tell you the market does not recover to those astronomical levels for years after the bust. That does not mean the market is not healthy or that the job market is not growing rapidly, it just means the boom peaks have not been hit. And, of course, if they were already hit just a few short years later, you would be right back at a top and would be ripe for another collapse. It drives you batty listening to the intellectual dishonesty being pushed to unsuspecting citizens who presume that reporters may just possibly be intellectually honest. The growth is there; it cannot be denied. You may want resources directed to foster growth in other areas, but you cannot deny there is overall growth and strong growth at that.

Strong manufacturing sector helps reduce inflationary pressures.

As one manufacturer from the Chicago region stated, manufacturing is on fire. That is good news for inflation. Everyone worries about a strong manufacturing sector indicating more inflation; treasuries sold off on the news of strong Chicago gains. Yet, manufacturing is the supply side, the part of the economy needing to catch up to demand. If it is really cranking up, that is very good news vis- -vis inflation. More supply means supply finally starts to catch up with demand. In other words there are goods to meet demand and prices don't have to be bid higher as dollars fight for a limited number of goods. In a free market, supply will meet demand. It was meeting demand back in the late 1990's and 2000, but the Fed blocked it, choked off demand when it dried up the money supply, and left producers with mountains of inventory. With supply free to meet demand, there was no problem with inflation. Indeed, the numbers showed that. The Fed, however, killed off demand and the effects of that lasted well into the demand recovery in 2002. The Fed impacted supply even after its rate hikes because it left the supply side in such a sorry shape when it killed off demand. Just now supply is starting to come to life, and we can only hope that the surge in manufacturing is a sign that it is catching up to demand.

When will the Fed raise rates?

It is getting closer to the June FOMC meeting, and the FFF contract shows 25 basis points still priced in. We have said all along that 3 strong jobs reports in close proximity would mean the Fed is ready to raise rates. Yes it is using a lagging indicator to trigger its rate hiking campaign, but that is what it has told us. The strong regional manufacturing reports and their employment sub-indexes are indicating a third consecutive strong monthly report. New non-farm payrolls in excess of 200K is what we are expecting the jobs report to show next Friday. That will be enough for the Fed to act at the late June meeting.

Unfortunately, the Fed is going to play its usual cloak and dagger games regarding how much it is going to raise rates and when. It likes to keep the market guessing despite all of the rhetoric regarding transparency and the new statements. It is going to say it will 'go slow', but that is no guarantee as we have discussed. That only means the Fed will act too long and end up doing too much, all the while keeping the market guessing as to when it will finish. That won't give the Fed the cushion it needs soon enough, and it won't give the market the certainty it needs. The market has already moved through 5 months of correction, and that could easily be enough to set the stage for the next move. The Fed, however, has only just recently made clear it will raise sooner than later. That puts additional uncertainty in the market and extends the correction. The Fed says it does not want a repeat of 1994, but it is acting as if that is what it wants. As we noted Thursday night, history lessons are never learned or at least are never applied to real life. The Fed may say it doesn't want another 1994, but it is going by the same playbook that gave us 1994. Five months into a correction and the Fed is just hinting around about rate hikes. The market hates that uncertainty, and it finds it hard to make significant gains with the Fed cloud overhead, not to mention the other near term problems. Five months can stretch into most of 2004 if the Fed is not clearer. Again, a one step move to the target level with a pre-released statement saying what it was going to do and why would be a huge shot of certainty to the market as well as give the Fed some disaster maneuvering room. Will it happen? Ha.

THE MARKET

Overall a positive week, and not just in the fact the indexes posted gains, the first time in four weeks. The week saw a follow through to the rally that started modestly two Tuesdays back. That follow through is a necessary step to set up a further move though it does not guarantee the move. Stocks continued higher after the follow through, though there was no major rush higher. As noted, there were some solid breakouts from leadership stocks as the indexes worked to form the second leg of their double bottom bases. The action may have been modest overall as stocks took a breather ahead of the Memorial Day weekend, but it held its gains and is set up well for a further move.

Despite what many say, this looks like the summer rally to us. It started early, but so does Christmas shopping season each year as well. It is not waiting for the Iraq handover, and it anticipated the break in the oil price climb higher, starting to rally just before prices per barrel peaked on the adamant Saudi statements regarding production. Even after the close Friday, more OPEC and non-OPEC producers were saying they were already ramping up production to help ease prices. They know all too well that if prices remain too high for too long western economies suffer. If that happens prices will decline anyway because demand goes down and who knows when it will resume. Far better to push prices lower now, avoid a recession, and keep demand solid. Again, that has helped kick off an early summer rally a week before it is officially summer.

While we don't think this summer move will be sustainable through year end as was the 2003 recovery tour move, we don't necessarily buy off on what Merrill Lynch and others were telling their clients Friday. Basically they were saying it was going to be a tough summer, and with stocks already at resistance they did not expect the market to make further headway but would bottom in September after a tough summer. There were several brokerages and pundits stating this point Friday. It is getting to the point of being accepted conventional wisdom. That is typically a problem for that view. We think this rally could surprise more to the upside than they are anticipating before it peaks out and makes a late summer dip into September.

That almost presupposes that the major indexes will be unable to breakout from the double bottom patterns that are forming, thus sending them back into their bases to form up once more into October for a possible break higher right ahead of the election. For now we see a decent follow through as well as some strong stocks making breakouts and bucking for leadership. If those continue to improve we could see significantly more upside to come during the current move.

It was very interesting to see SP400, the mid-cap index, in the lead Friday. While small stocks have been getting the tough love treatment on the financial stations (i.e., like them but have to leave them in favor of large caps), mid-caps may present an alternative that investors can move into and feel they are getting a better value. Not that the mid-caps did not run as did the small caps during 2003; they did. They are often overlooked in the comparisons of small and large caps. They may prove to be a happy medium for those looking to get out of small caps but who do not want to own lumbering large caps.

Market Sentiment

Despite the gains for the week, sentiment remained dampened. Bulls declined while bears rose, but not enough to turn the tide. The put/call ratio remained at high levels all week, indicating investors were still not comfortable with the move higher, using the bounce to hedge their long plays and speculate on some downside action.

VIX: 15.5; +0.22
VXN: 21.33; -0.17
VXO: 15.82; +0.29

Put/Call Ratio (CBOE): 1.05; +0.11. Another close over 1.0, the tenth in three weeks. Definitely moving to more extreme levels, and indeed it appears the market has started a meaningful bounce after those repeated closed over 1.0.

NASDAQ

Modest gain, moving laterally as it takes a breather on low volume after breaking over its 200 and 50 day EMA last week.

Stats: +2.24 points (+0.11%) to close at 1986.74
Volume: 1.246B (-24.26%). Amazingly weak volume to close out a decent week that saw some accumulation action. Nothing major, but up on rising volume and lower on declining volume. That is what you want to see.

Up Volume: 709M (-339M)
Down Volume: 512M (+16M)

A/D and Hi/Lo: Advancers led 1.09 to 1
Previous Session: Advancers led 1.2 to 1

New Highs: 56 (-22)
New Lows: 22 (-1)


After clearing the 200 and 50 day EMA (1956, 1966), NASDAQ was content to move laterally Friday, holding onto its gains on low trade. Not a bad cap to a week that saw a higher volume advance on the follow through session that sets the stage for a further rally. After a gap lower that undercut the March lows and then a gap right back up (clearer on the QQQ), this advance has commenced. That gap lower then immediate gap higher is a bullish technical indication, and thus far that appears to be the case. It is also a classic double bottom with the right leg undercutting the left, shaking out (scaring out?) the last sellers before starting the rebound. Still a lot of work to do on the 4.5 month base. A trip up to 2075 near the middle of the pattern, would be a very solid move in itself and warrant at least a rest to form a handle. From there whether it breaks out or not remains to be seen given the strength of the market at that time.

QQQ continued its advance toward the hump in its double bottom (37.50). It never violated its March low and thus is considered technically in better condition for sustained upside movement.

S&P 500/NYSE

Nowhere session on very low volume, but after retaking the 50 day EMA that is not a bad day. Rest is good.

Stats: -0.60 points (-0.1%) to close at 1120.68
NYSE Volume: 1.17B (-19.21%). Major volume drop off as the large caps took a breather after a solid move off the 200 day SMA and up to the 50 day EMA. Good volume action given the index was taking a breather.

Up Volume: 629M (-408M)
Down Volume: 519M (+134M)

A/D and Hi/Lo: Advancers led 1.37 to 1
Previous Session: Advancers led 2.26 to 1

New Highs: 65 (-15)
New Lows: 15 (-3)


Held the Thursday break over the 50 day SMA (1117) as volume remained low and it still needed a breather after the strong Tuesday and Thursday moves. Showing much better price/volume action (up on rising sessions, down on falling sessions) as it provided a follow through move this past week. It is sitting just below near resistance at 1125, tapping at that level on the highs the past two sessions. It may walk laterally for another session or two before it resumes, but we expect volume to start improving this week. It needs to for it to break and hold a move over 1125.

DJ30

Could not break over the 50 day EMA (10,214) or the higher simple 50 day MA (10,246) as the blue chips never got on track Friday after some big point gains last week. It has set up similarly to the other indexes, but it has yet to successfully take out the 50 day MA after it was able to recapture the 200 day SMA (10, 064) Tuesday. Still think it is following as opposed to leading.

Stats: -16.75 points (-0.16%) to close at 10188.45
Volume: 159 million Friday versus 187 million Thursday.


THIS WEEK

Last week the market set up a further upside move with its follow through to the rally that started the prior Tuesday (5-18-04). Volume was decent, but notably lower given the pre-holiday week. What most are looking for this week is whether volume picks up, and if so, does it work in the same direction as last week, i.e., does accumulation take place.

There are some major economic reports to be released such as the ISM (national manufacturing), ISM services, productivity, factory orders, and the May employment report. The latter will be the focus as investors try to get a handle on when the Fed will raise rates. 215K are expected as of now, but we think it could easily top that given what the regional manufacturing reports are showing. If the ISM employment sub-index is strong, you can expect that expectations will be ratcheted higher.

The return from Memorial Day officially marks the start of summer for the market, and in normal summers that typically means slower trade. After a rally all of 2003, we expect this to be more normal: early summer rally that peaks out sometime before July earnings, then a waffling remainder of the summer where stocks struggle and slide into September and October. Typically stocks find a bottom in September and start a meaningful move in October. With the election in November and the Fed starting to raise rates, that is even more likely this year.

Again, we think the summer rally has already started, anticipating the softening in oil prices this past week when it bounced off the lows two weeks back. We think the market will be hard pressed to breakout over the April highs, but that depends upon the strength. If things improve in Iraq, if there is no major insurgency or terrorist attack there, we could see the handover factor get priced in as well. All of this would help the follow through continue to build, and we would expect to see more breakouts flowing as it does.

That is where we will be looking with respect to plays: the stocks that set up good patterns and then are part of the waves of breakouts. We will see how big the waves are or if they are ripples. Again, we are not expecting a watershed rally, so we will set our targets but be realistic and take what the market gives on the moves. If they run out of gas early, we will protect what we have made.

Reports are coming in regarding an attack in Saudi Arabia relating to oil facilities. 10 people are reported killed including one American. One British citizen was dragged behind a car. Hostages have been taken and there is now a standoff as Saudi troops have surrounded what are said to be Al Qaeda terrorists. We have written about our concern of attacks on Middle Eastern oil facilities, and it is not too hard to draw a connection between Saudi's statements about increasing oil output. It is a tenuous situation. The attack does not appear to have hampered any production, but we expect to see some nervous response in oil prices this week, and in the recent past that has put pressure on the equity market.

Support and Resistance

NASDAQ: Closed at 1986.74
- Resistance: 1990 to 2000, the top of the late 2003 base. 2050 represents some prior price points and has stopped NASDAQ the last time it tried that level. Breakout from the pattern is 2080. 2089 is the February closing high. 2112 is the early January high.
- Support: The simple 50 day MA (1972) and 50 day EMA (1966). The 200 day SMA (1956). 1900 to 1890. The April lows (1880, 1878). 1850 below that. Some price tops at 1777, 1750.

S&P 500: Closed at 1120.68
- Resistance: 1125 stalled the last bounce attempt. The April and January highs (1150 to 1155). Next is 1159 (February highs) and 1160 to 1175 the highs in that double top that spanned late 2001, early 2002.
- Support: The exponential 50 day MA (1114), and the simple 50 day MA (1117). The 18 day EMA (1107). 1106 is a May 2002 top and represents some early 2001 lows. 1096 to 1100. The 200 day SMA (1085). April lows (1079, 1076). 1075 to 1070 from the December consolidation. 1058 - 1060 from November tops.

Dow: Closed at 10,188.45
- Resistance: The 50 day EMA (10,214). The simple 50 day MA (10,247) and price resistance at 10,250. 10,570 is the April high. Price consolidation at 10,600 level. 10,747 is the February high.
- Support: The 18 day EMA (10,104). The 200 day SMA (10,064). March low (10,007). 9900-9850.

Economic Calendar

These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.

6-01-04
- Construction spending, April (10:00): 0.4% expected, 1.5% March.
- ISM Index, May (10:00): 61.5 expected, 62.4 April.

6-03-04
- Productivity, rev. Q1 (8:30): 3.7% expected, 3.5% prior.
- Initial jobless claims (8:30): 337K expected, 344K prior.
- Factory orders, April (10:00): -1.0% expected, 4.3% March.
- ISM Services, May (10:00): 66.0 expected, 68.4 April.

6-04-04
- Non-farm payrolls, May (8:30): 215K expected, 288K April.
- Unemployment rate, May (8:30): 5.6% expected, 5.6% April.
- Hourly earnings (8:30): 0.2% expected, 0.3% April.
- Average workweek (8:30): 33.8 expected, 33.7 April.

- Stocks rush higher on jobs report but cannot break resistance on lack of volume.
- Close to 1 million jobs in 3 months but leading indicators softening.
- SP500 fails to hold break over 1125 as summertime market still has reservations about Iraq, oil, and the Fed.

Jobs report spurs nice gains, but market unable to hold the important moves.

Three excellent months of job creation helped propel stocks higher from the open. A month ago strong jobs data raked the market over the coals as remembrances of a Fed brandishing rate hikes over the markets head while it pressed its boot on the markets neck reemerged. We felt that the market may have gotten over that worry, and watched to see if the jobs report could be the catalyst to break the indexes out of their range. Early on stocks were trying to do just that. SP500 managed to crack over resistance mid-session after running up to that resistance early and moving sideways. That had the look of a solid move: smacking into resistance, stalling, then blasting higher.

Problem is, volume was not as energetic as price. It was wimpy, mid-summer slack trade, and without conviction, the move over 1125 could not hold to the close. After a nice break higher midday the bids faded and stocks slipped. The downside momentum continued to the close with NASDAQ undercutting its opening price gap. Solid gains turned into just decent gains on the close as the indexes failed in a breakout opportunity. The market was willing but not ready to make the breakout move. That means the market still has to deal with Iraq, oil, the Fed, the election, and now, summer.

There are competing histories here. Election years often see a pretty decent summer. There can be a pause early and then a rally late summer and on into the election. The other summer pattern is an early summer rally that fades half way into the July earnings season. The market struggles into September where it then makes bottom that segues into an October to year end rally.

In 2003 this routine was disrupted as the market came off of a serious 3 year decline. The early 2003 consolidation after the bounce off the October 2002 lows set up the summer rally, and after 3 years, there was a lot of money ready to go to work. After that early 2003 consolidation, a massive breakout ensued that carried stocks right through the summer with just a pause after the July earnings season.

This year the market is digesting the 2003 rally that preceded the economic recovery. It has other factors to consider this year that come with an economy that has moved past recovery, e.g., Fed rate hikes, higher earnings comparisons, possible changes in economic policy with the election, and of course, renewed fears regarding terrorism as it has been over two years since 9-11. If it were a matter of just digesting gains, one could argue the current 4.5 month consolidation was enough. It is still working on the consolidation, but thus far it has not found the catalyst to break it out. The employment data, a rather obvious milepost, could not do it. Most likely the move will come rather unexpectedly once the market comes to grips with all of the near term impediments.

Thus we anticipate a further break higher to keep the summer rally moving higher. We do not expect it to continue to run through the summer. Indeed, the financial programs Saturday morning were abuzz with talk of a big summer run based on the strong economic data, tech spending being back, John Chambers swagger; you know, the good old days. This all sounds way too rosy and explains the bulls/bears diverging once again. The market can squeeze more out of this current rally based on a decent consolidation in the first half of the year, but if optimism continues to run higher and higher, that is the governor on the very move the pundits are touting.

Compare last year during the December 2002 to April 2003 consolidation. At that time pessimism was very high as most felt the market had only provided a bear market bounce off the October 2002 low. We saw a nice, low volume consolidation with solid price/volume action and great accumulation. Economically sensitive stocks such as TSCO were setting up nice accumulation bases. The combination of pessimism and good stock and index accumulation made us very positive for a good breakout. Now we have a so-so consolidation, a modest follow through, mediocre price/volume action, and important leadership stocks such as semiconductors struggling. Overlay the support seen in the pundits and the picture is not nearly as bullish. It is not bearish, but it is not as strong as the start of 2003. That makes since given the big run in 2003. Things are reverting more to normal patterns.

THE ECONOMY

Jobs power toward the million mark.

Wednesday we opined that job creation the past three months could approach 1 million, and with the 248K created in May (225K expected) along with upward revisions to March (353K from 337K) and April (346K from 288K), job creation in the most recent 3 months hit 947K. Gains were across the board as two-thirds of the sectors added jobs. Manufacturing added another 32K, making 91K hires since January, one of the strongest stretches of manufacturing hiring in years. Three quarters of the jobs created pay wages at or greater than median income levels. Employment search services noted that the $75K to $150K salary level jobs showed a tremendous amount of activity. They also noted a very steady trend by companies to invest in people and technology. All of this added up to the best 3 month period of job growth since March to May 2000, the strongest stretch of the boom, occurring ironically just as the economy rolled over.

Actually, there is not that much irony involved. Jobs are the most lagging indicator in the economy. Employers hang onto employees long after the downward slide starts and they wait well after the rebound is underway to add workers. In May the average factory workweek was higher (41.1 hrs), overtime rose (4.7 hrs, the highest since 7-2000), and wages were up 0.3% for the second straight month (now at a 4% annual growth rate, quite high). All of these are the indicia of an expanding jobs market. They are not, however, confirmation that the economy will continue to grow. They show the economy has grown to a level necessary for companies to hire in order to keep up with the demand and competition. They do not forecast how much further the run is. Thus even as jobs surged in early 2000 we were looking at leading indicators that were telling us the economy was starting to nose over.

Is the economy surging or slowing?

Before anyone starts emailing their friends, I am not saying that the economy is folding over as it started in early 2000. That occurred after a long expansion and a not so subtle rate hiking spree by the Fed intended to stop the stock market and the runaway consumer. Of course, to stop the stop market and the consumer it had to mortally wound the economy. The stock market would go first, then the consumer. It did just that, and of course, the Fed could not stop the house of cards it helped build from falling. It all came down as we are all well aware.

Right now the economy is just hitting stride after that nasty downturn. Monetary policy is still extremely accommodative even if the bond market has tanked and thus pushed interest rates higher. The Fed has yet to hike rates, and Greenspan practically stated last week that he would not raise rates more than a quarter point in the first hike. That should come in June with the next move in August. Greenspan said this was not going to be like 1994. No kidding. We almost passed out. Other than the admission in 2001 that the Fed did not really know whether the wealth effect really impacted consumer spending to any degree (the Fed even asked for evidence from any interested source), this is the closest the Fed has come to admitting it has screwed the pooch in the past. Greenspan seems so intent on not killing the recovery that he is ready to err the opposite way.

This is part of his legacy building in the twilight of his career. The economy has turned back up and Greenspan wants to make sure it is still moving well when he retires after the election. A couple of minor hikes along the way shows just how strong the economy is, yet it wont put the crimp on the growth. No complaints; the Fed is staying behind the economy as opposed to trying to manipulate it closely.

Leading indicators, high energy costs suggest economic slowing ahead

Greenspan has to be somewhat concerned. Energy prices spiked just as the economy became self-sustaining as some put it, i.e., when the economy no longer needs monetary stimulus to keep it going. Energy prices are a real problem for the Fed. Higher prices historically mean economic slowing. They also simply mean higher prices that can (emphasis can) lead to inflation. During the last few energy bumps higher, however, prices were not passed along. Not in 1984, not in 1994, not in 1999. The Fed, however, views them as inflationary. Thus the dilemma: one element that by rising can both slow the economy and yet give the impression of inflation in the economy.

Problem is, energy prices are not something that the respond to the Feds arsenal, at least not directly. The Fed can jack up interest rates enough to slow the economy and thus lower energy prices to an extent even if they are cartel controlled. While that may be the Feds goal or at least in line with its goals in some instances, with the economy just now recovering that is not what it wants this time. So the Fed is not going to raise rates in response to rising energy prices. It is willing to risk that they wont cross over into prices again this time around as it goes slow with the rate hikes.

Thus Greenspan is playing to growth as opposed to inflation, basically what he has said he is going to do. He cannot really do anything about energy prices anyway, so he is going to adopt a Paul Newman truism and only worry about things he can control (or at least thinks he can control). If energy prices dont back off below 35 fairly soon, however, they will have a negative impact on the consumer and the supply side as well. Not necessarily price inflation, just less disposable income for consumers and more costs for businesses. Less consumption by consumers, higher costs cutting into corporate earnings; that is the scenario higher energy costs set up if they remain strong for several months.

ECRI (Economic Cycle Research Institute) has a good track record with its leading indicators. They look 10 months ahead at an economic peak, 3 months ahead at an economic trough. They were rising ahead of the economic upturn then peaked in July 2003. They moved basically sideways through March, but then started to slide. In April they undercut the July 2003 to March 2004 lateral range and have slide each week since. Rallied ahead of the economic rally, kept moving up as the economy started to run, then peaked 11 months ago. The break lower did not start until recently, so any downturn is still quite a way down the road. It can still turn back up over the next month or two and change the track.

Again, this is not enough to predict an economic decline, but sustained higher energy prices historically cause economic slowdowns. It is also true that the US economy gets more GDP per barrel of oil than it used to, so it has some cushion against higher prices. That makes the timing of the drop in prices important. If oil prices continue to fade toward 35 or less as OPEC suggested they would, that will help. If gas prices back off in August and do not remain high into early fall, that will also help avoid a slowdown. The economy has momentum now as can be seen in the fact that consumer spending is still solid even with gas prices averaging over $2/gallon: with more people working and making more money (higher wages), that is helping offset higher energy prices. Again, this is something to keep watching as we move forward.

THE MARKET

The jobs report generated excitement among those in the market. Unfortunately there were not that many involved. SP500 made the break over 1125 midday, but without volume it could not hold the move. There was not major rollover, no breakdown from the range, just the inability to hold a breakout over resistance on what should be some good news. Strong job creation reported Friday, lower oil prices, strong ISM. Not enough to trigger a breakout. Whether the continuing issues in Iraq, lingering concerns regarding rate hikes, uncertain political climate, or a combination of these and other factors, the market was not ready to make a move Friday when the door was left wide open.

Market Sentiment

Mixed indications again. After improving, bulls and bears started to diverge again, not quite getting where they should have been. Bulls finished the week at 45.1% after dipping to 42.6% last week. Bears fell to 24.5% after coming close to 30%. It was getting there, but optimism crept back in.

The put/call ratio continues to run high, closing once more over 1.0, indicating more puts than calls being purchased. The market is generally optimistic; rarely are more puts than calls traded. Yet, over the past month the CBOE put/call ratio has closed over 1.0 over 10 times. There continues to be heavy hedging and speculation that stocks will fall. This is historically a contrary indicator: when most bet on one direction, particularly the atypical direction, that is a signal of extreme sentiment. Extremes typically lead to reactions in the other direction.

VIX: 16.78; -0.25
VXN: 23.84; -0.09
VXO: 16.51; -0.78

Put/Call Ratio (CBOE): 1.02; -0.11

NASDAQ

Gapped back over the 50 day SMA, took a swipe at 2000, then gave much of the move back as it could not attract any volume.

Stats: +18.36 points (+0.94%) to close at 1978.62
Volume: 1.426B (-7.03%). Volume faded even further below average. Yes it is the first Friday of the official summer, but we expected a bit more volume given the sustained good economic news.

Up Volume: 1.082B (+738M)
Down Volume: 324M (-846M)

A/D and Hi/Lo: Advancers led 1.95 to 1. Breadth was solid all day as stocks rose on the news. Just no volume to back it up.
Previous Session: Decliners led 2.54 to 1

New Highs: 55 (+3)
New Lows: 23 (-11)


After the Thursday thud lower, the Intel update and good jobs news reversed the poor action. NASDAQ gapped over the 50 day SMA (1977) then ran up to 1995.50, within spitting distance of next resistance at 2000. It gave back 17 points on the close, however, as its modest pullback from 2000 turned into a dump in the last half hour when NASDAQ shed 12 of those 17 points. It managed to hold the 50 day SMA on the close and thus the recent range, but that was small consolation. It starts the week basically from square one, back to working on the lateral move, trying to find a catalyst and the buyers to send it higher.

QQQ showed similar action, gapping higher, rallying, then giving back just about all of the move. Held the range on the close but a pretty weak showing given the good Intel and jobs news. As with NASDAQ, it starts the week anew, trying to find reason to breakout from this double bottom with handle pattern.

S&P 500/NYSE

Made the breakout over 1125 but could not hold it, maintaining the lateral move, forming the handle to the base. Lost the breakout battle but held the overall pattern.

Stats: +5.86 points (+0.52%) to close at 1122.5
NYSE Volume: 1.115B (-9.32%). Ambitious attempt at a breakout given the lack of volume. A veritable trickle of trade. Once it started to slide back from 1125, with this light volume it did not take much to give back 7 points, over half the move for the session.

Up Volume: 833M (+593M)
Down Volume: 276M (-709M)

A/D and Hi/Lo: Advancers led 1.95 to 1. Mediocre finish after posting well over 2:1 much of the session.
Previous Session: Decliners led 2.71 to 1

New Highs: 61 (+11)
New Lows: 16 (-1)

After a lot of movement Friday, the large caps ended the week still in the lateral move over the 50 day EMA (1115). Volume remained very much below average. Now it was disappointing that SP500 could not make the breakout over 1125 stick, but it also was just another session of low volume, lateral movement in the handle to its double bottom with handle base. Yes it did not hang onto the gains, but there was no reversal, just further work on the pattern and showing the type of price/volume action you want to see. The jobs report did not break it out, but it did not break it down either. The index continues to build the pattern, and as long as it does that, the closer it gets to resolution of the other issues standing in the way.

DJ30

Got really exciting for a moment as the blue chips topped 10,300, clearing resistance at 10,250. That lasted as long as it did on the other indexes before the afternoon slide. It gave back 57 points from that high, closing once more below the 50 day SMA (10,257) as well as some price resistance at 10,250. It too continues to work laterally after the bounce up off the May low near 9900. It is mimicking the SP500 though not the best pattern. It continues to follow along.

Stats: +46.91 points (+0.46%) to close at 10242.82
Volume: 161 million shares Friday versus 162 million shares Thursday.

THIS WEEK

The market starts over again Monday, still in the pattern that it tried Friday, albeit somewhat weakly, to break from. The good jobs report could not break it out but it also did not result in a sell off as it did last month. Instead, further pattern building as the market tries to resolve another group of issues involving Iraq, the Fed, oil prices, and elections. The pattern is still one that is working toward a near term resolution. SP500 has formed a decent double bottom with handle, QQQ as well. Accumulation weeks versus distribution weeks have evened out. The pattern holds, but the market is going to have to deliver once more as it did with the follow through session after rallying off the May low.

The PPI (producers price index) will be the economic data that receives the most attention as inflation worries are one of the dominant market themes. Economics near term, however, do not appear to be a driving force. The market seems to have become comfortable with growth as evident in that it did not sell off on strong jobs news Friday as it did last month for the April report. Instead of a specific news item setting off the market, it will more than likely come unannounced as investors are finally comfortable with the progress in Iraq (much better than reported via the popular news media) and energy prices. Again, the pattern is set up and stocks need to provide a break higher within the next week or so.

I still believe the market is in a summer rally and is working on setting the stage for the next move. The moves are fitful and sporadic much like the volume. Such is a summer rally. We are looking for a further breakout, but not with a ton of volume. As initial targets for the rally we are looking at the April highs (2075 NASDAQ, 1150 SP500). After that move the market will be heading into the July earnings season, and we see that as the peak of the summer move before a pullback into late July on into September.

Support and Resistance

NASDAQ: Closed at 1978.62
- Resistance: 1990 to 2000, the top of the late 2003 base. 2050 represents some prior price points and has stopped NASDAQ the last time it tried that level. Breakout from the pattern is 2080. 2089 is the February closing high. 2112 is the early January high.
- Support: The 50 day SMA (1977) and the 50 day EMA (1968). The 200 day SMA (1961). 1900 to 1890. The April lows (1880, 1878). 1850 below that. Some price tops at 1777, 1750.

S&P 500: Closed at 1122.50
- Resistance: 1125 stalled the last bounce attempt. The April and January highs (1150 to 1155). Next is 1159 (February highs) and 1160 to 1175 the highs in that double top that spanned late 2001, early 2002.
- Support: The 50 day SMA (1118) is trying to hold. The 50 day EMA (1115) held Friday. The 18 day EMA (1112). 1106 is a May 2002 top and represents some early 2001 lows. 1096 to 1100. The 200 day SMA (1087). April lows (1079, 1076). 1075 to 1070 from the December consolidation. 1058 - 1060 from November tops.

Dow: Closed at 10,242.82
- Resistance: price resistance at 10,250. The 50 day SMA (10,257). 10,570 is the April high. Price consolidation at 10,600 level. 10,747 is the February high.
- Support: The 18 day EMA (10,148). The 200 day SMA (10,081). March low (10,007). 9900-9850.

Economic Calendar

These are consensus expectations.

6-07-04
- Consumer credit, April (3:00): $5.5B expected, $5.7B March.

6-09-04
- Wholesale inventories, April (10:00): 0.5% expected, 0.6% March.

6-10-04
- Initial jobless claims (8:30): 335K expected, 339K prior.
- Treasury budget, May (2:00): -$67.5B expected, -$88.9B April.

6-11-04
- Trade balance, April (8:30): -$44.9B expected, -$46.0B March.
- PPI, May (8:30): 0.6% expected, 0.7% April.
- Core PPI (8:30): 0.2% expected, 0.2% April.
- Michigan sentiment, preliminary for June (9:45): 91.5 Expected, 90.2 May.

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Excelent post Insider Trader, I look forward to reading more from you.
Regards Angi