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- 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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-Modest gains and low volume again mark the end of a shortened week.
- Import prices driven higher by oil, while treasuries experience subtle shifts.
- Indexes poised to continue summer rally as they recover from Wednesday higher volume selling.
Volatile open, close provide bookends to quiet session.

The market showed spunk, coming right back after some stronger volume selling Wednesday. Futures were higher, stocks opened higher, and they never really caved in. They also did not break out, but with the Friday closing in honor of President Reagan, the volume was light as many were reluctant to commit ahead of another 3 day break.

That light volume did not keep the action subdued. Stocks were quite volatile early as NASDAQ and SP500 jousted with near resistance at 2000 and 1135, respectively. They made two early tests of that level in the first hour, each time bouncing lower. The second failure sent NASDAQ plunging to session lows, peeling off 12 points from the early high. Stocks rebounded right back again, but then settled into a 4 hour lateral move right at the mid-levels of the session. So, would the market rally or sell, take the bullish or bearish route? It took the former, reverting to its recent bend toward bullish action with the exception of the Wednesday sell off.

The late move pushed NASDAQ back up to 2000 and SP500 back up to its down trendline. No volume to clear the levels, but after failing at them earlier in the session, the move made it look as if they had no problem with the level. We noted very wobbly action in leadership stocks. In the end many recovered decently, but many were all over the map and more than a few gave up near support. Overall the indexes held their ground and the Monday break higher, but there was some internal strife. Such is the way of summer, low volume rallies.

Semiconductor sales expected to surge.

The Semiconductor Industry Association raised its 2004 growth expectations to 28.6% from 19% originally forecast. That would put sales at $214B, a record that surpassed the $204B in 2000. Consumer electronics are the main driver of the gains as chips find their way into just about everything we use. I am not all too sure that some people I know dont have microprocessors inside them. Cellular phones, digital cameras, digital video recorders, and WiFi are major growth areas driving demand.

So you would think that would have the chip makers and analysts excited. That would be wrong. We have seen more enthusiasm at dental exams. Some analysts said higher chip demand meant the need to build more capacity and that would ultimately lead to overcapacity, lower prices, and a return to gloom in the industry. Well, yes, that could happen. If you make more money you can move into a higher tax bracket as well. Problems of the rich, problems of the successful. Talk about searching hard for the tarnished lining in an otherwise good story. The news did not help chips even with NSM announcing a strong quarter. It squeaked out a 19 cent gain, having to fight back to avoid closing negative. It simply was not the day for any stellar moves.

THE ECONOMY

Import prices rise on the back of 10% gain on oil.

Import prices rose 1.6%, double the 0.8% expected. That marks the eighth straight gain and brought on more talk of inflation. With oil jumping 10.3% after declining 0.4% in April, it was not hard to see where the increase came from. Take out oil and you have a 0.4% import price gain after a 0.2% rise in April. Industrial supplies excluding oil were still strong, however, posting a 2.1% gain as lumber, iron and steel, and natural gas rose.

For the past 12 months petroleum imports grew 43.9%. Overall import prices rose 7%. The divergence is stark. This of course brings us back to the inflation issue. Rising oil prices are considered by the Fed and others to be inflationary. First, we suggest that rising prices have more impact dampening economic growth than they do spurring inflation. As we have noted on several occasions, even if they were inflationary, raising interest rates is just about the poorest method there is of combating rising oil prices. Better to have a growing economy that has to deal with higher energy prices than a stagnant economy slowed by rate hikes that still has to deal with higher oil prices (remember 1974?).

Second, the rate of gain of oil prices versus other commodities in high demand (cement, lumber) is out of proportion. Lest we forget, OPEC started this rise in prices when it started talking about curtailing production because its internal projections showed a falling price per barrel in the second half of 2004. That started prices jumping early in the year, and then other problems, those unexpected events that always pop up when you monkey with market forces, started popping up. Iraq unrest. Attacks on Saudi oil compounds. Nigerian strikes. Before this is was the Venezuelan strikes in 2003 that raised prices. That terror premium on top of the OPEC created initial price rises that started the spiral higher are what has oil prices so high, not the demand. Again, oil prices are out of proportion with other commodities in short supply. It is starting to back off but there is much to be unwound, and there is the terror premium with respect to potential attacks on the actual production facilities or on the transportation modes (pipelines, tankers). That will push prices higher in times of worry, diminish in times of relative calm.

Treasury spreads narrow some as yield curve begins to flatten.

The bond market is always worth watching because it is one of the best forecasters for the economy overall and thus the stock market. Over the past few weeks the yield curve has flattened between the short term and longer term treasuries. The spread between the 2 year and 5 year treasury is narrowing, another measure of the yield curves slope. In an economy that is expanding on into the future the yield curve is normal, i.e., the short term treasury yields are lower than the longer term yields. That is what the yield curve is now.

Compare that with the yield curve back in 2000 where the short term yields were higher than the longer term, i.e., an inverted yield curve. The stock market had cratered in March and April, and the bond curve inverted that summer. That signals bad times ahead: long term rates are lower because the future economic activity is considered weak. If it were positive as in a normal curve, longer term yields would be higher because money would be more in demand in the future and yields would have to factor that into the present value.

Recently the yield curve between the 2 and 5 year treasuries is flattening out a bit. The spread is narrowing. They are not at critical levels as the yield curve is still healthy. After a dramatic improvement in the yield curve as the economy recovered and expanded, this weakening in the curve and spreads is another element worth watching much as the ECRI weekly indicator we discussed last weekend.

Why is this important? It paid to watch the signs of economic slowing in late 1999 and early 2000 that was being overlooked by the mainstream. Up through the market crash it was believed the economy was heating still. Despite the market plunge and the inverted yield curve it took a long time to let go of the idea that the economy was not expanding. We saw the signs of the slowdown and predicted the market meltdown. Right now we are simply being observant as to the true leading indicators, not the jobs report that everyone continues to hang on. These indicators are suggesting economic slowing in the future. They are not pointing to another recession, but with the higher energy prices, they are weakening some. That is consistent. Nine of the ten last recessions have come on the heels of a sustained spike in oil prices. Prices are dropping right now. They need to get down close to $30 and rather quickly to avoid being a real problem for the economy. As you know, we are predicting oil to fall closer to that level over the next month. Whether increased terror events ahead of US political conventions, the Iraq handover, and the election itself actually materialize will have an impact on those prices and thus the expectation of economic softening.

THE MARKET

Maybe investors were rattled when the government announced the postponement of the PPI. The treasury traders were blindsided, and that very well could have had a spillover effect on stocks Wednesday as well as hedges were frantically adjusted. In any event, after the higher volume selling the market woke up in a better mood and held positive most of the session. Yes volume was light, some rocky times for leaders, and no major breakthroughs, but the return to the more bullish intraday action where it rallied to the close healed some of the Wednesday selling and suggested that action was related to the reshuffling of hedges on the PPI move.

The action left the indexes poised to try another move toward the April highs. DJ30 is sitting on top of its early 2004 down trendline as is QQQ, the default leader of NASDAQ. Throw the SP600 (small caps) and SP400 (mid-caps) into that group as well. That puts them in very good position to continue the assault on the April highs.

NASDAQ and SP500 are just below their down trendlines, having given them back on Wednesday after punching through them Monday and Tuesday. They were unable to hold these levels. Both important indexes for the overall markets move and they will have to recover the trendlines this week. SP500 has been a relative leader and is still in good position. Moreover, while the market managed a bounce Thursday, a lot of leaders were struggling. They will have to come around this week to move the market along toward the April highs.

Overall the market is still in good position to try the April highs as it continues the summer rally that has a follow through under its belt on this last move off of the May low. Once at the April highs the move becomes problematical. It would be in position for a real breakout and subsequent rally. With some of the signs of slowing economic activity we continue to believe that a continued rally through the summer is unlikely. The indexes may very well make a move through the April highs but we dont think that move would be substantially above them or hold long; more of a peak to the next level and then faltering at some point around the July earnings.

This is our read on a more normal cycle this year as opposed to the 2003 run through the summer after 3 down years. It gives us more upside on this move to make some gains, and if it continues, so be it. If it falters we are going to be tight with positions and not take chances. We will still have upside opportunities even if it does falter in addition to some downside as the market fades in later summer on into September to set up a fall rebound.

Market Sentiment

VIX: 15.04; -0.35
VXN: 21.23; -1.12
VXO: 13.83; -0.93

Put/Call Ratio (CBOE): 1.15; +0.23

Rose on an up session. This indicator typically tracks opposite the market action. Given the change in the PPI date Wednesday and the long weekend there was a lot of hedging taking place once again. This is something we have seen during the past two months as the market sits on edge during the correction and is doing so even now as it moves higher to try the April highs after posting a follow through session to this rally. Still a lot of concern about the downside

NASDAQ

Tapped the 10 day EMA on the low and rebounded to close right at the high but below 2000 and the down trendline.

Stats: +9.26 points (+0.47%) to close at 1999.87
Volume: 1.356B (-11.31%). Second lowest volume of the year, both coming in the last month. Lots of low volume on NASDAQ as investors, while buying into technology on the rebound, are not lining up to put money into these stocks. Growth stocks need solid economic growth to expand, and with some softening in the yield curve and ECRI, they are showing some softening as well, not expanding on the upside move with much vigor.

Up Volume: 746M (+472M)
Down Volume: 586M (-657M)

A/D and Hi/Lo: Advancers led 1.04 to 1. Just about as flat as you can get.
Previous Session: Decliners led 2.77 to 1

New Highs: 40 (-24)
New Lows: 40 (+10)

NASDAQ had pretty much filled the Monday gap higher, not surprising given the rather lackluster break higher. It has not given back the breakout and still has the follow through on this rebound under its belt. That is positive for the upside. It is still below the January/April down trendline at 2010 and just missed recapturing some minor (more psychological resistance) resistance at 2000. It did what it needed to do in response to the Wednesday distribution, i.e., held the breakout. That keeps it in the hunt this week to try another break over the down trendline and continue the summer move toward the April highs at 2060 t0 2080.

QQQ continued to outperform the overall NASDAQ, holding the breakout and the move over the January to April down trendline (36.40). Very low volume but it too responded well to the Wednesday distribution. The pattern is still a double bottom with handle, but over the past 10 weeks there is also something of a reverse head and shoulders. It is in good position to try the April high (37.50) and even a breakthrough on up to 38.50.

S&P 500/NYSE

As with NASDAQ, SP500 managed a low volume rebound from the Wednesday selling but still closed below the 2003 down trendline.

Stats: +5.14 points (+0.45%) to close at 1136.47
NYSE Volume: 1.165B (-8.52%). Volume dried up before the 3 day break after the rising volume, though still well below average, selling on Wednesday. Volume is still well below average; even though SP500 has rallied and delivered a follow through on some rising trade, overall there is still a real lack of conviction this summer. Volume will have to rise to take out the April highs.

Up Volume: 681M (+407M)
Down Volume: 451M (-527M)

A/D and Hi/Lo: Advancers led 1.27 to 1
Previous Session: Decliners led 2.98 to 1

New Highs: 49 (-40)
New Lows: 27 (+9)

The large caps put a check on the Wednesday selling, rebounding to recover half the losses in a nice end to the week. The index tapped at the February/April down trendline (1137) three times intraday but could not retake it. It is banging right at that point as it easily held over 1125 support without coming close to testing that key level. Still poised for a test of 1150 (April high). After that it has a lot of heavy resistance from there to 1160 (1163 is the intraday high). It will have to find some additional strength to take out that level.

DJ30

Trying to exert some relative strength after lagging in a more ragged pattern during the correction. DJ30 held over the February/April down trendline (10,350) on the Wednesday selling and managed a bounce Thursday. Volume was lower, so there was no major upside strength, but holding that trendline gives the blue chips a decent launch pad to try for the April high (10,570). As with the other indexes the volume is lackluster, thus when it gets to 10,570, it will have a struggle on its hands unless there is a lot more trade on the upside.

Stats: +41.66 points (+0.4%) to close at 10410.1
Volume: 154 million shares Thursday versus 175 million shares Wednesday.

THIS WEEK

Very interesting week ahead both from the economics to be released as well as how the market responds to the Wednesday heavier volume selling and Thursday rebound. As noted they are still set up to continue the move toward the April highs, particularly QQQ, DJ30, and the smaller caps.

The primary focus will most likely center on the PPI (to be released no earlier than 6-15) and the CPI. PPI prices have been rising, but the key as we have discussed is whether those increases are passed onto the consumer. Over the last 20 years there have been rises in the PPI that have never made it to the CPI, including times when oil prices spiked higher. The market really seems transfixed by what the Fed will do. Greenspan upped the ante last week with his address to the other central bankers, putting on a tough face to show them he meant business. That was in part for show and in part the same old Greenspan we know. The impact on the market is, despite the Feds disclaimers, along the lines of 1994. If the Fed moves in baby steps (our apologies to What About Bob?) to get to parity or just below with nominal rates, it has 4 to 6 rate hikes to go and it has not even started. Add onto that what we call the threat to increase the size of the hike if the Fed deems necessary, and you have the market wondering, rightly so, just what the Fed is going to do. It basically has said it will do what it has to, when it has to, and make its own timetable for doing so.

To us that leaves the question about as open as it can get even with the assurances there will not be another 1994. Well, look at 1994. NASDAQ lost 12.5% in the first few months of that correction that lasted 10 months. The current correction has taken NASDAQ down 13.5% and has lasted 4.5 months already. As noted, the Fed has not even started raising interest rates. With meetings in June, August, September, November and December remaining this year, the Fed would be up just 100 basis points by November if it goes slow and steady. That most likely would not be an end to the hiking, but it would be another 5 months, making 10 months since the correction started. Assuming the market stays in limbo as it did in 1994 until the Fed said it was done, we dont see any difference from 1994 regardless of Fed soothsaying.

As always, the market is the final arbiter of the economic data. There are some signs of potential slowing reflected in the bond market and some leading indicators, and NASDAQ with its growth stocks started to lag some last week. At the same time other areas started to improve as noted. The market still has its follow through and its break higher intact, and we look for it to continue the move to the April highs regardless of concern about the Fed and some signs of potential economic slowing. The 1994 move saw its ups and downs in a range before it made the break higher; a move up to the April highs and a bit beyond would be no different.

Support and Resistance

NASDAQ: Closed at 1999.87
- Resistance: 2000 is the top of the late 2003 base. 2012 the January/April down trendline. 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: 1990 is the lower end of the range of the tops of the late 2003 base. The 50 day SMA (1980) and the 50 day EMA (1974). The 200 day SMA (1966). 1900 to 1890. The April lows (1880, 1878).

S&P 500: Closed at 1136.47
- Resistance: The March/April down trendline at 1137. 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: 1125. The 50 day SMA (1120) and the 50 day EMA (1118). 1106 is a May 2002 top and represents some early 2001 lows. 1096 to 1100. The 200 day SMA (1090).

Dow: Closed at 10,410.10
- Resistance: 10,478 (late April highs). 10,512 (late April high); 10,570 is the April high. Price consolidation at 10,600 level. 10,747 is the February high.
- Support: The January/April down trendline (10,345). The 50 day SMA (10,266). Price support at 10,250. The 50 day EMA (10,243). The 200 day SMA (10,101). March low (10,007). 9900-9850.

Economic Calendar

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

June 14
- Trade Balance, Apr (08:30): -$45.0B expected and -$46.0B prior
- Retail Sales, May (08:30): 1.0% expected and -0.5% prior
- Retail Sales ex-auto, May (08:30): 0.4% expected and -0.1% prior

June 15
- PPI, May (8:30): DELAYED 0.6% expected and 0.7% prior
- Core PPI, May (8:30): DELAYED 0.2% expected and 0.2% prior
- Business Inventories, Apr (08:30): 0.5% expected and 0.7% prior
- CPI, May (08:30): 0.4% expected and 0.2% prior
- Core CPI, May (08:30): 0.2% expected and 0.3% prior
- New York Empire State Index, June (08:30): 28.5 expected and 30.2 prior
- Michigan Sentiment-Prel., June (09:45): 91.0 expected and 90.2 prior

June 16
- Housing Starts, May (08:30): 1950K expected and 1969K prior
- Building Permits, May (08:30): 1965K expected and 2006K prior
- Industrial Production, May (09:15): 0.6% expected and 0.8% prior
- Capacity Utilization, May (09:15): 77.3% expected and 76.9% prior
- Fed Beige Book (14:00)

June 17
- Initial Claims, 06/12 (08:30): 330K expected and 352K prior
- Leading Indicators, May (10:00): 0.4% expected and 0.1% prior
- Philadelphia Fed, June (12:00): 25.0 expected and 23.8 prior

June 18
- Current Account, Q1 (08:30): -$139.6B expected and -$127.5B prior

Another great post.Very few posters.Hard to understand.
I can not understand why there is so much hysteria about oil.Why should there
be a problem even if there are more terrorist attacks ?
rgds aj

aj

If there is more attacks on the production side, pipelines etc, the price of oil will rise yet again due to the worry of being able to produce and pump it in the first place.

Russian oil a problem ?
rgds aj

aj - It's all down to politics as usual, just an excuse to put the price of oil up again.

===========================================================================

- Stocks overcome some negative news, rebound from Thursday.
- Economic undercurrents continue as current account deficit widens, Fed holding fewer instruments for foreign countries.
- Stocks set up for the coming week if investors are ready.
-Stocks end volatile week holding the range.
The news was not all that good for stocks Friday with a weaker semiconductor book to bill report issued Thursday evening, an expanding current account deficit, and more despicable terror acts in the Middle East. The news was sprinkled throughout the session, the last item shaking the market late, and stocks never quite got back on track afterwards.

Even with the last hour shakes stocks managed a positive close. SP500 moved over the down trendline intraday and was making a successful test when the afternoon news hit. That kept it from breaking that resistance on some stronger volume, though the volume was attributable to expiration position shuffling as opposed to any significant accumulation by institutional investors. Thus the move over that resistance would have been nice, but it would still take Monday to show that it was something more than expiration volume and volatility.

Not to say the action was negative. Stocks overcame some bad news and a softer open to close positive. SOX closed negative again, but it managed to hold some support at 450 and show a nice doji on the candlestick chart as it rebounded off its lows. Overall the indexes maintained their lateral move, bounced back some from the Thursday up and down action, and showed no real inclination to sell off. They are still set up in decent shape to try for another breakout this week.

If they do make the break higher, the issue still remains how high they will rally before this early summer move runs out of gas. It has not been a barnburner move by any stretch with volume remaining low and the moves either way mostly modest. Some are saying that a breakout will usher in a summer rally past the April highs, etc. We are not so optimistic, setting the April highs as our target, but will gladly let stocks run if they will. Certainly the action would have to change, i.e., there needs to be more sustained buying, for the indexes to clear those levels.

THE ECONOMY

Trade gap hits a record. Will foreign investors start leaving the pool?

At $144.9B the current account deficit hit 5.1% of GDP. The current account is the broadest measure of overall trade. The 5% level is considered key. Back in 2002 we discussed the 5% level as key at least in the sense others consider a key level. When there is a deficit in the number, the US needs other countries to invest more in the US to cover the gap. We buy more of their stuff, they are buying less of our stuff, so we need more foreign investment in other US assets (e.g., equities, debt) to make up the difference so we can keep running the deficit. At some point that deficit gets to an uncomfortable level for foreign investors. That can be caused by insecurity about the future of the economy, interest rates, inflation, etc. Indeed, the size of the gap itself can cause the insecurity because of the fear of what a large current account gap might cause. In other words, the gaps own shadow can scare foreign investors away.

If foreign investors dont want to finance the gap they sell their dollar denominated investments and move the money elsewhere. When you sell anything and there is not another buyer standing in line willing to pay a higher price for it, price falls. Selling can beget more selling, and then you have falling prices in US assets. That is another way of saying potential deflation, something Japan just spent a dozen years mired in.

Are there any signs this is happening? Thus far they are few and modest, but there are some. We have reported that there was an outflow of foreign capital from the US equity markets. There has been some of this continually ongoing since 9-11. The threat of terror reduced the value of US assets in the eyes of some foreigners. The weakening dollar after that event also showed the same effect: uneasy foreign investors putting some of their assets in non-dollar havens just in case.

The flow out of equity markets picked up some the past three months. The Federal Reserves holdings of securities for foreign investors fell over 5% the past quarter. There is a definite flow of funds out of the US. The key is whether the flow becomes a flood. There are a lot of issues that are a long way from finding resolution. Iraq, the war on terror, Fed rate hikes, what direction the US is going to take economically, socially and globally after the election, higher oil prices. Foreign money may just be taking a sabbatical until some of these issues are resolved. For now it is not critical, but it is very interesting that it started as the current account gap neared 5%. Again, that may be something of a self-fulfilling prophecy as the 5% of GDP in and of itself caused some to flee. After this initial flow the key is whether it remains light or picks up speed.

How does the Fed react?

The outflows are in the same league as rising energy prices: the Fed does not like them because they cut against economic growth and the Fed cannot do a whole heck of a lot about it without crushing the economy. Monetary policy cannot impact energy prices but in a very indirect way. It can make the US somewhat more attractive to foreign investors if it jacks interest rates up well above market rates; that makes the dollar more valuable as foreign investors want to put their money into the US and take advantage of above market rates without risk. Of course that torpedoes the economy as US investors do the same as opposed to investing in the US economy. In the long run that means you get low growth and interest rates the eventually have to fall due to lack of economic growth.

So you might conclude that the Fed has to ignore it. Or does it? Over the past quarter the broadest measure of money supply has risen 22% on an annualized basis. That is huge. Huge. That has led to several conspiracy theories as to the reason such as the Fed is anticipating some massive negative to hit the US. Maybe a terror attack, maybe a big meltdown in a major Wall Street firm or bank. With the Fed funds rate at 1%, there is not any real ammunition to stimulate the economy in the event of a major disaster, so the theory is the Fed is monetizing the economy even more in an effort to get it really running ahead of this event.

There are some major problems with those theories, one of the most apparent of which is the Feds impact in such situations is not in the quiet background ahead of disaster, but in bold moves following the event where the world looks to the Fed and says TGIF, thank God its the Fed as the central bank makes a dramatic move such as, well, injecting tremendous liquidity into the system.

There is another possibility. The Fed sees the possibility that more foreign funds may be leaving, and it is pumping more liquidity into the market to help speed the US economy and perhaps offset some of the negatives associated with the current account gap to the extent foreign capital will have to think twice about leaving. It can do this even as it talks of rate hikes. Remember, the Fed was lowering rates during the bear market but the money supply was not rising. It was not providing real incentive to borrow. Not until late in the game did it really let money supply go. Well, the opposite can happen here. It can raise rates but still pump up money supply. Even with rate hikes, at these low overall rates there is still a lot of stimulus. This is just a possibility for the dramatic jump in money supply. Frankly, the conspiracy theories about some big yet secret event to the entire world is a bit much. Usually the actual explanations are not nearly as entertaining as the speculation.

Did you hear the one about the minimum wage?

It is once again being proposed that the minimum wage be raised in order to get America out of poverty. Laudable goal, dubious methodology. The way to get America out of poverty is to remove incentives to stay in a poverty-inducing payment system. Take that money and use it to educate and train in areas the economy needs skilled workers. Provide incentives for employers to provide day care so single moms and dads can take the training and take those jobs. Put the rest of the money back in the economy to further drive technology and job creation.

History is replete with minimum wage rate hike examples. You know what happens when you hike the minimum wage? You get fewer workers doing the same work all of the workers did before. Small businesses wont hire that extra helper; they will simply make the others do that work. The problem is that simply raising the required wage does not generate more money, it simply causes a reallocation as to where it goes. If a small business only has a set pool of money it can pay its workers given its level of sales and expenses, it is going to cut back on something. Typically it is the number of workers, but it could also be that the business cuts its hours, civic donations, charitable donations, etc. None of those are good for the economy or those that live in this country. Again, a higher minimum wage does not create anything in the economy; it actually is destructive to those it is supposed to help and is another tax on small businesses that now have to make do with fewer employees or other investments in their business that could have made them more productive and profitable.

THE MARKET

To this point the upside move has been back and forth enough to make Job lose patience. Light early summer volume has kept SP500 and NASDAQ below the 2004 downtrend while DJ30, NASDAQ 100, and small to mid-cap indexes continue to hold over their 2004 downtrends. Leaders are holding up overall, but there continues to be erosion as the bottom drops out on apparently strong stocks. Big name semiconductors (INTC, AMAT, TXN, KLAC) continue to show very weak action while a few (e.g., BRCM) look very good. At the same time stocks such as MSFT and GE are showing a rebirth, rallying higher on strong volume as the come off their lows and form the right side of their bases. At the same time, big name industrials such as MMM continue to power ahead on volume.

Sounds like a market in transition, and while MSFT may be performing well, techs overall are having a rough go of it as NASDAQ has lagged the other indexes. It suffered two distribution sessions last week to add to the one the prior week. Breakdowns have not been confined just to technology, however. Even some of the defensive health and medical stocks are seeing the bottom open up and swallow them.

That has left energy stocks as one of the market leading groups. Historically that is not usually a positive for the market. Consumer, materials, and medical stocks are also leading, sectors that are a bit better for the market overall as they contain some growth stocks. Growth stocks are the market leaders in bull runs. If the more defensive, slower growth stocks take over, it is a sign the market is not anticipating strong continued economic growth.

Even with all of these undercurrents the indexes are still poised to continue the move off the May lows. Near term NASDAQ and SP500 have to take out their down trendlines. SP500 is at the doorstep, NASDAQ has some work but can make the move in a session as well. Again, the upside after that move is questionable above the April highs unless a real volume surge is maintained. As we noted last week, the market anticipates resolutions to issues well in advance, and it has yet to show action that suggests overwhelmingly favorable results regarding Iraq, the Fed, etc. At the same time it is setting up for the break higher. The strength of any upside breakout past the downtrend will be the best indication of the potential for the remainder of the rally. Indeed, a breakout itself could be the indication that the market has resolved its near term issues with Iraq, etc. As with all meaningful moves, volume will play the big role as the majority of investors will either want to move into stocks more aggressively or simply continue the same low volume meandering.

Market Sentiment

VIX: 14.99; -0.16
VXN: 20.02; -1.31
VXO: 14.75; -0.29

Put/Call Ratio (CBOE): 0.8; +0.01

NASDAQ

Rallied to tap resistance at 2000 once again, but gave back most of the move. Holding up, but needs to make a move to take out that level soon.

Stats: +3.06 points (+0.15%) to close at 1986.73
Volume: 1.729B (+16.33%). Big volume jump, but that was in all likelihood attributable to expiration though stocks such as MSFT, CSCO and DELL posted gains on big volume increases. Regardless of the Friday action, volume has to show some non-expiration strength on the next breakout move.

Up Volume: 930M (+513M)
Down Volume: 699M (-350M)

A/D and Hi/Lo: Decliners led 1.13 to 1. Mushy breadth as techs are still sluggish with NASDAQ underperforming much of the market thanks to SOX.
Previous Session: Decliners led 1.5 to 1

New Highs: 65 (+5)
New Lows: 73 (+30)

A 26 point range, closing in the middle of the range. NASDAQ tapped the 50 day SMA (1974) and the 200 day SMA (1971) on the low (1973.91) and managed a rebound. Toward the close, however, it was falling as opposed to rising. Volume was above average for the first time since early May, but again, expiration drove that increase. NASDAQ held its ground above near support and below the 2004 down trendline at 2002. It is getting pinched between the two. There is a lot of pressure from the topside, and SOX as we noted Thursday, is a big drag on techs. That is one reason we believe that NASDAQ can bounce near term and move toward the April highs: SOX has sold hard and is due a relief bounce. That bounce can allow NASDAQ to break the trendline and test those highs. Unless SOX can pull a similar move and clear its 200 day SMA at 488, the move will be limited when SOX runs out of steam on its relief bounce.

QQQ gave a big intraday move up to 36.84 but it could not hold, fading similar to NASDAQ. Volume was extremely light as QQQ continued to hover over the down trendline (36.29).

S&P 500/NYSE

Decent action but gave up a brief breakout over the down trendline. Still ready to complete that move.

Stats: +2.97 points (+0.26%) to close at 1135.02
NYSE Volume: 1.494B (+15.27%). Above average volume as well, the first in just about a month. It too was expiration volume, so we are not putting much stock in it. NYSE volume, however, has showing positive attributes recently. Tuesday it was up on a solid up session. Thursday the index was down on rising trade, but the index made a strong comeback to close basically flat. This volume is indicating it is ready to make the break higher.

Up Volume: 901M (+199M)
Down Volume: 574M (+22M)

A/D and Hi/Lo: Advancers led 1.27 to 1
Previous Session: Advancers led 1.38 to 1

New Highs: 144 (+14)
New Lows: 22 (-18)

This past week SP500 may have made the higher low that often comes right before a breakout. Monday it was under pressure, but held key support at 1125. That was the low point as the close held above the 10 day EMA (1130) the rest of the week with the Friday close right at the 2004 down trendline. Still in a good overall pattern since March, and as noted above, the price/volume action of late has been markedly improved. While it gave up the break over the 1135 trendline (high at 1139.08), it is still poised to make a move that sticks as it works for the April high at 1150.

DJ30

With MSFT and GE showing very strong trade and most other components rising on solid volume gains, DJ30 tapped the top of the recent range on the high (10,438) on strong volume. Seems the technology components were finally in sync with the more industrial components. Not all was upside volume, however, as WMT and HD were lower on some hefty trade. All in all, however, DJ30 continues to hold easily over its down trendline (10,330), tapping the 10 day EMA (10,351) on the low once more. Price/volume action has improved nicely, and DJ30 looks set to continue higher this week toward the April high (10,570).

Stats: +38.89 points (+0.37%) to close at 10416.41
Volume: 300 million shares Friday versus 170 million shares Thursday.

THIS WEEK

Despite the struggles on NASDAQ, precipitated in large part by a languishing SOX, stocks are set up for a break higher. They were set up for a break higher at the start of the prior week as well, but the time was not right at that time either. The indexes are cheating higher as the June 30 Iraq handover and the FOMC meeting approach, and we still do not believe they will wait until the actual events to start their moves. The market anticipates events with respect to its more significant moves. Thus we still anticipate an upside move ahead of that period. Indeed, if stocks run to the April highs by the time of the meeting we could see the turnover and FOMC decision lead to a pullback.

That leaves us still looking at upside plays, and of course, if stocks continue a run past the April highs we will let them do so. If we see serious volatility and trouble at that level we will be ready to exit and also be ready with some downside positions. Again, for now that still leaves us looking at stocks that are in particularly good position to provide nice upside gains near term, e.g., breakout tests, 50 day EMA tests, solid patterns in high momentum stocks. There are still many solid stocks holding up quite well, ready to make a new or further upside move. We will take what the market gives on a further run from here, see how stocks react at the April highs, then move out and look to the downside if it gets rocky, take partial gains and ride the rest if it is still solid, and even look for more upside if it makes a really strong move at that point.

Support and Resistance

NASDAQ: Closed at 1986.73
- Resistance: 2000 is the top of the late 2003 base. 2002 is the January/April down trendline. 2024 is the June high. 2050 represents some prior price points and has stopped NASDAQ the last time it tried that level. April high is 2080. 2089 is the February closing high. 2112 is the early January high.
- Support: The 50 day SMA (1974). The 200 day SMA (1971). 1925 is some support. 1900 to 1890. The April lows (1880, 1878).

S&P 500: Closed at 1135.02
- Resistance: The March/April down trendline at 1135. 1142 is the June high. 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 10 day EMA (1130). 1125. The 50 day EMA (1121) and the 50 day SMA (1119). 1106 is a May 2002 top and represents some early 2001 lows. 1096 to 1100. The 200 day SMA (1093).

Dow: Closed at 10,416.41
- Resistance: Late April peaks (10,478 to 10,512). 10,570 is the early April high. Price consolidation at 10,600 level. 10,747 is the February high.
- Support: The January/April down trendline (10,330). The 10 day EMA (10,351) held on the lows all week. The 50 day SMA (10,257) and EMA (10,267). Price support at 10,250. The 200 day SMA (10,126). March low (10,007). 9900-9850.

Economic Calendar:

June 24
- Durable Orders, May (08:30): 1.6% expected and -3.2% prior
- Initial Claims, 06/19 (08:30): 340K expected and 336K prior
- Help-Wanted Index, May (10:00): 40 expected and 38 prior
- New Home Sales, May (10:00): 1120K expected and 1093K prior

June 25
- GDP-Final, Q1 (08:30): 4.5% expected and 4.4% prior
- Chain Deflator-Final, Q1 (08:30): 2.6% expected and 2.6% prior
- Michigan Sentiment-Rev., June (09:45): 95.0 expected and 95.2 prior
- Existing Home Sales, May (10:00): 6.50M expected and 6.64M prior

- Indexes closed mixed, poised for next week.
- GDP pulled lower by surging imports, Michigan sentiment rises.
- Fed ready to raise rates, but cautious of Japan lesson.
- Good finish to a solid week as semiconductors come to life.
- Big week, market ready to run ahead of the actual news.
Stocks hold gains ahead of important week.

The major indexes finished mixed with semiconductors, techs and smaller caps closing higher, DJ30 and the large cap SP500 closing lower. In the end they all closed around the highs for the week, mostly maintaining the solid gains that occurred when the market suddenly found volume on Tuesday and Wednesday. Not blowout volume, but a return to solid trade after a couple of months of low volume drift.

Why are we not throwing Friday volume into that mix? Because volume was snoozing until the close. It was the final day for the rebalancing of all of the Russell indexes, however, and though funds had 10 days to accomplish the feat, it appears that they, much as teenagers writing a term paper, waited until the night before to do their homework. NASDAQ volume was a sleepy 1.2B with less than 30 minutes left. It finished at 2.67B. NYSE experienced an uptick as well, coming in at 1.8B. Stocks went wild at the close with massive market on close orders sending stocks down, up and then back to where they were just moments before.

That volume left things looking different at the close versus 20 minutes earlier. Before that influence, however, stocks were mostly holding steady on lower volume, down from the session highs but holding up as they moved into another weekend filled with high anxiety about the stepped up Iraq violence. After a nice move Tuesday and Wednesday, stocks stood by their gains as they took a breather, and are poised to move higher Monday and Tuesday ahead of the FOMC meeting and the Iraq handover. If stocks do continue the move as we anticipate, that will put NASDAQ near the April highs. At that point and when the anticipation becomes fact, the market may have a bit of a struggle.

That is one reason we issued several alerts taking some interim option gains that were building up nicely as stocks had moved up well last week but started to falter over lunch. It was worth locking in some solid gain ahead of the weekend and we will look at doing the same ahead of the mid-week headlines on a further move. We still anticipate a move up into that news barring any major Iraq or other geopolitical event, and that will rack up more gains that we will look at banking ahead of the news.

THE ECONOMY

Final Q1 GDP 3.9%, below 4.4% expected.

It all depends upon where you get your news as to what view you have of the economic data that comes out. Many stories we saw on GDP only talked about how it was below expectations and down for the second straight quarter (4.1% final in Q4). That of course is not the best news for the economy, but it is not the negative impression that many of the stories left you with as they left out key facts that complete the picture.

The primary story is how GDP is calculated. GDP measures production here in the US. In Q1 consumers bought a lot of imported goods. A lot. Imports are deducted from GDP because they are not created domestically. The US consumer, however, buys foreign and domestic goods with equal enthusiasm when he or she feels confident about the future. IN Q1 the import purchases were much greater than expected, so much so that they were the primary cause of the fall in GDP from 4.4% to 3.9%. Without the imports, GDP would have been right up with expectations.

This always causes a lot of angst with economy watchers who refuse to factor in consumption of foreign goods as an indication of a strong domestic consumer. In addition there are other indications than the consumer; the big surge in imports masks them in final GDP. Thus the headlines about a weak GDP are somewhat disingenuous, but when you are in a political campaign year, the 'facts' are often adjusted to fit the purposes of the writer.

Not that the economy is surging, but it is not crumbling either.

ECRI's weekly leading index slid again the past week, continuing the string of lower indications the past month. As noted last week, this does not mean the expansion is over, it just means it is slowing from a very solid pace. New home sales surged in May, existing home sales (84% of the market) jumped 2.6%, corporate profits were up 2.1% in Q1 over Q4, much better than the 1.4% reported in May. That was slower than the huge 7.6% jump in Q4, but the pace is still solid overall.

It is important to remember that the economy moves ahead in spurts and then pauses, all the while maintaining its trend. In our society of instant information, we spend way, way, way too much time looking at not just the trees, but the individual twigs and leaves as well. The daily, even hourly, economic reports tend to obscure the bigger picture if we don't keep grounded in the bigger picture.

We continue to see signs of slowing ahead, but not a catastrophic drop in the economy. There is some uncertainty as to the future with the Fed about to embark on a rate hiking move, and that has, based on our surveys of businesses, put a bit of a slowdown on future investment. It has not stalled it, but uncertainty is the hemming in the strength of the expansion as some plans for investment and hiring are put off a bit longer just to see what happens. The Fed's history of killing off expansions casts a long shadow

The Fed's tightrope walk.

While the world is certain inflation is rising in the US, there are many undercurrents that the Fed has to be concerned with, and from what we hear from our friends at the central bank, the Fed is aware of them.

High energy cost paradox.

One that we have discussed in the past month is the paradox of higher energy prices. Oil prices have finally hit a peak and are hovering between $36 and $38/bbl. All of that production has had some impact and we anticipate it will continue to weigh on prices a bit more. They are still high, however, high enough to crimp the economy. Higher energy prices can pass through to consumer prices at some point. They have not in the last few price spikes, but that is always a threat. Higher consumer prices caused by rising energy prices can be called inflation, but it is not the textbook definition, i.e., more dollars chasing fewer goods. Energy price hikes are different from other price increases, however, because they work to slow the economy. Thus if the Fed raises rates because prices rise as a result of rising energy prices, that has basically a double if not even further magnified slowing effect on the economy. Just ask the 1970's Fed that raised rates to combat rising energy prices. All we got were incredibly high interest rates to go along with an incredibly depressed economy.

The Japan lesson.

The Japanese depression is the other undercurrent the Fed has to factor in. We swung from deflation fears to inflation fears in just about record time. Deflation was still a topic de jour the second half of last year, even among FOMC governors. Now it is not mentioned. Much.

Not many remember or ever knew or cared, but before Japan really went down the rat hole in the 1980's it looked as if it was recovering. After the first stock market bust similar to the US market's April to May 2000 plunge that took NASDAQ down 40%, the Japanese economy slumped as well, but then stabilized and appeared to be rebounding. The Japanese central bank was ready to stave off inflation that could crimp the recovery, so it hiked interest rates gradually. Problem was, the economy was not nearly as strong as they thought. The problems that gave rise to the collapse were deep rooted; the secular downtrend was in place, and the apparent recovery was just a bounce back in a bigger downtrend. The rate hikes simply put a few more bullet holes in an already declining economy.

The Fed is aware of what happened in Japan. Here in the US the pundits like to say that the US reacted differently, lowering rates rapidly and injecting fiscal stimulus into the system with tax cuts. That is true. As we noted during the recession and slow recovery, however, the Fed was behind the curve in lower rates, never getting ahead of real rates to the downside and thus providing incentives to borrow until after the fiscal stimulus had come into play. That helped prolong the decline and mitigated the recovery.

Now we are now 21 months from the market bottom, the true measure of when to start the clock for an economic recovery. We have had some very strong economic growth rates and the economy has expanded nicely, but we also have major problems facing us. We are at war, we have the threat of nuclear attack here at home, federal spending remains out of control. It is sickeningly ironic that our leaders ask us to sacrifice when their proposed highway bill has so much extravagance and pork in it. They say the entrepreneurs must sacrifice but at the same time funnel tax dollars to feed the fat man as President Reagan called the federal government.

The point: while everyone is concerned about inflation, we see signs of slowing economic activity down the road. Just look at commodities prices. The CRB peaked in March and has been trending lower since. The CRB industrials index did likewise. Commodities indicate that China has in fact slowed its economy, and as we are arguing, the US economy is slowing as well. Right now it is not an immediate problem, but with sustained higher energy costs that are working to slow the economy already, a series of rate hikes could accelerate the slowing already occurring. The growth rates have been impressive, but we have come through some very strange times. Stock prices started out at relatively high P/E's when the recovery began. There is another world war of sorts ongoing, and that has a way of bleeding economies. While there may be signs of near term price increases that need to be recognized and addressed, there are also big macro currents that raise the possibility of another undulation lower. Thus clamping down on growth by rate hikes is not the way to rectify the perceived price problem. Instead, actively promote supply with incentives to continue investing in the US. That way you address the price issues by increasing supply, and you also build up economic activity to help stave off any bigger picture macroeconomic downturn.

For now that is not even a consideration. There are two different camps in this political fight: making tax cuts and current stimulus current or cut it back, redistribute it, and then increase federal spending even more with national healthcare, etc. Both sides need to figure out spending is the real problem and slash federal spending. Cut the spending and let the taxpayers decide where their money should best be spent. The way both sides are racing to spend our money, that won't happen anytime soon.

THE MARKET

Stocks fought off the weaker GDP number and showed some early strength. While they backed off by the close, they did not roll over and they did not give up their higher volume gains from earlier in the week. The large caps and blue chips had a harder time late in the session, but overall stocks are poised to continue the move that started mid-week on rising volume.

The big difference in the market last week was the resurgence of the semiconductors. They rallied off some support at 450, paused after breaking the 50 day EMA, and are now heading toward the 200 day SMA (488) where they failed twice in the past month. Another good rally puts SOX right at that resistance. Whether it breaks through or fails will key the rest of the market's move. We anticipate the rally to resume ahead of the FOMC and Iraq handover Wednesday, and that would put SOX at the 200 day SMA and perhaps a bit beyond toward 500. Just as with the April highs on NASDAQ and SP500, that won't be easy for SOX to break through, at least on the first try. Volume will have to be even better than last week to clear those next levels.

Again, it is set up to move higher to try the next levels early this week, but moving significantly past those levels will be difficult unless there is a true change of market character.

Market Sentiment

Bulls vs. bears: Bulls backed off last week to 54.6% after hitting over 56% the prior week. 55% bullish advisors is a bearish sign, but the market rallied in any event. As noted last week, there was the 'indicators don't work anymore' feeling on the floor, and that is often the signal that at least near term there is enough pessimism to start a move higher. With bulls still near the 55% level and bears still low at 18.6% (20% is considered bearish), sustained upside will be hard to come by. Still, remember that these are secondary indicators. Price and volume action along with leadership stocks are the primary indicators as to the market's next move. Last week saw a good volume resumption of the rally that has some more upside in it.

VIX: 15.19; +0.38
VXN: 18.96; -0.4
VXO: 14.89; +0.5

Put/Call Ratio (CBOE): 0.68; +0.02

NASDAQ

One of the market leaders last week, NASDAQ posted another gain Friday, just eclipsing the early Junee highs. In good position to make a run at the April highs heading into the FOMC meeting.

Stats: +9.9 points (+0.49%) to close at 2025.47
Volume: 2.671B (+55.72%). Huge volume in the last few minutes made it look like an accumulation session. Before that surge, however, volume was 1.2B, well off pace from earlier in the week.

Up Volume: 1.728B (+968M)
Down Volume: 904M (+24M)

A/D and Hi/Lo: Advancers led 1.41 to 1. Not bad breadth for a slow session.
Previous Session: Advancers led 1.09 to 1

New Highs: 168 (+41)
New Lows: 84 (+54)

Once again rallied over the Junee high (2024) to 2033 before backing off at the close. Held the break over the Junee high but it was hard to quantify the action with the huge late volume surge. Before that surge volume was light, so the move was pensive. It has, however, left the NASDAQ in good position to continue the break higher. The initial targets are the late April high (2059) and early April high (2079). From there it is a matter of whether the move can gain additional strength.

The large cap techs put together a decent move itself though volume again eased, coming in well below average on QQQ. NDX, the full strength measure of the large cap techs showed solid volume heading into the weekend. QQQ and NDX have formed nice patterns and are ready for a break higher early in the week.

S&P 500/NYSE

The large cap names along with the blue chips took the hardest beating, falling back hard late as a lot of money moved around in the Russell rebalancing.

Stats: -6.22 points (-0.55%) to close at 1134.43
NYSE Volume: 1.817B (+30.29%). Huge volume jump late in the session. With less than a half hour left volume was just over 1B. Thus the selling was not distribution.

Up Volume: 841M (+240M)
Down Volume: 938M (+158M)

A/D and Hi/Lo: Advancers led 1.22 to 1. Very modest breadth but still positive even on a downside session.
Previous Session: Advancers led 1.06 to 1

New Highs: 149 (-56)
New Lows: 30 (+7)

Again cleared the early Junee high (1142) on the high, but was unable to hold the advance. It was holding up well until when it fell off the table with all of the market on close orders. It managed to hold roughly at the 10 day EMA (1134) and the 2004 down trendline. Despite the late dump lower, this leaves it in good position to move higher early this week. A 16 point move to April high (1150) with the January to March highs (1158-1163) realistically in range as well given NASDAQ still has plenty of upside before it gets to hits April high.

DJ30

The blue chips were hammered on the close similar to SP500 with the likes of GE and XOM getting clubbed. It fell through the 10 day EMA (10,390), but it is hanging on in the recent range. Unlike NASDAQ, it gave back its gain from mid-week. It is still holding up and ready to move with the rest of the market if SP500 and NASDAQ can recover and resume the break higher.

Stats: -71.97 points (-0.69%) to close at 10371.84
Volume: 308 million shares Friday versus 214 million shares Thursday. Big volume on both upside and downside moves, again with much of the volume and movement coming at the close basically requires you to toss out the volume for this index as well.

THIS WEEK

Big week in all respects. The market broke higher on solid volume last week, paused, and is set to resume the move ahead of the Wednesday FOMC announcement regarding interest rates and the Iraq handover. The latter is not like, say Y2K, that was over on a date specific. It is an important date, however, for the effort in Iraq. The economic data is also huge with ISM, personal income and spending, consumer confidence, and the June employment report. All of this comes before the July 4 three-day holiday, another date brought up as a possible terrorist threat.

That is a lot to digest at any time. We still anticipate stocks moving higher in anticipation of the Wednesday events as they continue to price in the possibilities on the idea of the events. Once they are here we have to see how the markets react. Key resistance lies ahead at the April and January highs; again, volume will have to be much improved for the indexes to take those levels out and continue higher.

In addition, the second half of July is never really kind to stocks. They move up into earnings, rally some on the first solid results, but then run out of steam. Q3 estimates are being written higher toward 26% already, so guidance will have to be good to keep stocks moving higher. We don't see anything to change the pattern this time around, but as always, if the market shows strong volume pushing higher, we will let the market lead the way.

What we are going to focus on this week are stocks that have made good moves and in the softer market Thursday and Friday have pulled back to test those moves. When they start back up they have proven the breakout as they have passed the test. Those show very good support and often cruise right on up in a rally. We won't turn down good patterns of any sort, but with the market already having run well and with the potential to run up to the big news Wednesday and then pullback, we don't want to into too many new positions that don't have much time or room to run.

Again, we won't pass up great patterns making strong moves, however. Why? Because leading stocks making strong moves in good patterns are one of the top indicators of what the market is going to do. Further, those stocks move farther and faster, and hold up better if the market does hit some rocks. It all goes back to seeing the big picture of what can happen and what is likely to happen, but also being smart enough to know that the market is the final decision maker. Take what the market gives and be happy with that.

Support and Resistance

NASDAQ: Closed at 2025.47
Resistance:
2024 is the June high. Not totally broken here.
2050 represents some prior price points and has stopped NASDAQ the last time it tried that level.
April high is 2080.
2089 is the February closing high. 2112 is the early January high.


Support:
2000 is the top of the late 2003 base.
1998 is the January/April down trendline.
The 18 day EMA (1992)
The 200 day SMA (1975).
1925 is some support.
1900 to 1890.
The April lows (1880, 1878).

S&P 500: Closed at 1134.43
Resistance:
1142 is the June high.
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 March/April down trendline at 1133.
The 18 day EMA (1130).
1125 is key support.
The 50 day EMA (1124) and the 50 day SMA (1119).
1106 is a May 2002 top and represents some early 2001 lows. 1096 to 1100.
The 200 day SMA (1096)

Dow: Closed at 10,371.84
Resistance:
Late April peaks at 10,478 to 10,512
10,570 is the early April high
Price consolidation at 10,600 level
10,747 is the February high

Support:
The 18 day EMA (10,348)
The January/April down trendline at 10,315
The 50 day EMA (10,294) and SMA (10,255).
Price support at 10,250
The 200 day SMA at 10,148
March low at 10,007. Then 9900-9850.

Economic Calendar

These are consensus expectations.

June 28
- Personal Income, May (08:30): 0.5% expected and 0.6% prior
- Personal Spending, May (08:30): 0.8% expected and 0.3% prior

June 29
- Consumer Confidence, June (10:00): 95.0 expected and 93.2 prior

June 30
- Chicago PMI, June (10:00): 64.5 expected and 68.0 prior
- FOMC Meeting (2:15): Expecting a 25 basis point rate hike as forecast by the Fed funds futures contract.

July 1
- Auto Sales, June: 5.6M expected and 5.7M prior
- Truck Sales, June: 8.0M expected and 8.5M prior
- Initial Jobless Claims, 06/26 (08:30): 349K prior
- Construction Spending, May (10:00):.5% expected and 1.3% prior
- ISM Index, June (10:00): 61.2 expected and 62.8 prior

July 02
- Non-farm Payrolls, June (08:30): 240K expected and 248K prior
- Unemployment Rate, June (08:30): 5.6% expected and 5.6% prior
- Hourly Earnings, June (08:30): 0.3% expected and 0.3% prior
- Average Workweek, June (08:30): 33.9 expected and 33.8 prior
- Factory Orders, May (10:00): 1.5% expected and -1.7% prior

- Market cannot make use of good news yet again, starts yet lower.
- Consumer prices rise more slowly, capping a week indicating the economy is already starting back up.
- SP500 cracks through 200 day MA, NASDAQ dives lower.
- Techs in full retreat, following SOX lower, pulling large cap indexes with it.
Market squanders last rally attempt of the week as stocks turn and dive lower.

It was a week where the market was poised to rebound, but as it has the past three weeks, it frittered away each attempt. Sessions would start stronger with new promise on some decent earnings reports, but then it would fade to the close as buyers shot their ammunition early and had no reserves to take their place. Classic bearish intraday action underscoring the market weakness as one bounce attempt after another failed.

The weakness was most evident in technology and semiconductors, though by the close even the smaller caps that had held their gains most of the session reversed and posted losses between techs and large caps. Dell upped its Q3 guidance, but that was not enough to hold early gains. Retail, a strong performer even with WMT in the tank, has started to erode and was down harder Friday on fears the consumer would run out of steam just as it appears the economy is starting to emerge from its short slow spot. IBM was a stark example of technologys struggle, having posted a solid earnings report that gapped the stock higher only to relinquish nearly all of the gain on a strong volume surge.

That was typical action for most stocks Friday although there were still pockets of strength, e.g., small financials (savings and loans, regional banks), defense and energy. The small financials are something of a surprise. As we have noted before, however, energy does not provide the kind of leadership that pulls the market higher. Energy tends to feed off of things that make the market weaker, in this case higher energy costs. When you leadership group thrives due to conditions that sap the rest of the market, that is not great. If the market had more leaders like that it would have fewer leaders like that.

It was another day with the same old pattern for the week (up early, down late), but it had a twist. SP500 broke below its 200 day SMA and NASDAQ blew out the next support level. The downside door was opened further with the SP500s weakness, but at the same time the further selling, particularly the SP500 undercut of the 200 day, sets up a rebound to test the breach. The question on these moves is whether it unleashes a lot of short covering and buying that reverses the downtrend or if it is just a relief bounce. Thus far the market has shown no inclination for the former as it has squandered several set ups to make the move higher.

THE ECONOMY

June consumer prices rise below expectations.

Overall prices rose 0.3%, just over the 0.2% expected (0.6% in May). Year over year that was a 3.3% gain, the largest gain since May 2001. The core rose just 0.1% versus 0.2% expected, and that was the slowest rise in 2004. Year over year core prices rose 1.9%. The Fed had discussed transitory factors influencing inflation higher thus far this year (namely energy), and stripping out food and energy the lower core indicates that is the case. Energy rose 2.6%, down from 4.6% in May. Food prices climbed 0.2%, but that was down from Mays 0.9% gain. Thus the elements stripped from the core showed slower growth, and when taken from the core it was still slower. That means that prices for everything in the core rose at a slower pace even more than the prices for energy and food. In sum, prices are still rising, but the big spike in price pressure is abating or has abated.

This always raises the issue as to whether the governments statistics accurately reflect prices consumers are paying. Education is notably left out of the calculation, and we all know that education costs rise semester after semester. Still, the prices being measured are constant, i.e., the group is not changed, Thus those prices being measured, regardless of whether they leave out some key areas, still show the relative change in those items month to month. Unless the numbers are out and out being cooked, they show the price trends of those items included in the report.

China GDP rises at a slower pace.

Similar to US consumer prices, Chinas GDP rose a sizzling 9.6% for Q2, but that was below expectations of a 9.8% gain and down from the 10% in Q1. Incredible growth, but it is being slowed by the government tightening the lending parameters. This is the start of the soft landing China and the rest of the world has been talking about. Gee, they also called the US stock market crash in 2000 and the plunge in GDP from 7% growth to negative a soft landing. Ask those thousands and thousands of companies that were crushed on the rocks as the economy plunged as well as the millions who lost their jobs and big chunks of their retirements about soft landings. Whenever the government starts tinkering with an economy, there is reason to fear. Todays soft landing is tomorrows tailspin out of control.

That is an overstatement at this point, but it is worth remembering that the US economy was considered too strong by the rest of the world and the Fed was pretty much forced to hike rates by peer pressure. Once it started on that path it did not know when to quit. Further, the economy was already showing wear and tear that the Fed ignored as it continued to raise rates. Just something to note as the months unfold.

Economic articles still talking of slowdown, but the real slowdown is a ways off.

A perusal of weekend reports on the economy still lean heavily on the idea that the consumer is slowing along with the rest of the economy. As is usual the stories lag the real events, mirroring the reports that are already history as opposed to focusing on the leading indications. The regional reports from New York and Philadelphia were huge with respect to the size and breadth of their gains. We note that they were the leading indicators of the slowdown in the economy, starting to fall off in May before the other areas slowed. Now they are revving up again. This is how it happened with the overall economy as well when it was coming out of the long decline: the regional reports started showing life. A few months after they turned to expansion the overall economy did the same. They are very good leading indicators.

That does not mean that the economy is ready to bolt higher again with 7% growth. It is a resumption of steady growth. The real kicker in growth will come in Q4 as the last of the tax incentives are taken advantage of. That will jump Q4 up to a handsome level. It wont carry that pace over into 2005 because there wont be the push to invest before a deadline. After that you have an expansion that is going on 26 months (measured by the October 2002 market bottom, the true measure). It will still have more ahead of it, but at that point we have to look at the new administrations economic policies as well as control of the Congress to see if the administration will have the ability to get anything passed. Even with no action, however, many key tax cuts will start to sunset, and that will have an adverse effect upon continued growth.

THE MARKET

The market could not respond positively to good news, at least not after the first few minutes of the session. Dells raised guidance, IBMs solid earnings, a slow CPI all gave rise to a better pre-market and open. Once again, however, stocks responded to decent news with a reversal as not enough buyers came in to support the move. Once again sellers jumped on late after the buyers packed up their wallets. Volume rose as the selling increased, NASDAQ dove toward the May lows in its trading range, and SP500 undercut its 200 day SMA. Classically weak action intraday and on a macro basis as well.

Market Sentiment

VIX: 14.34; -0.37
VXN: 20.94; -0.74
VXO: 15.35; -0.38

Put/Call Ratio (CBOE): 1.12; +0.29. The third close over 1.0 in two weeks. A couple more of these will swing sentiment enough to help foster a bounce. There is more hedging going on as well as downside speculation as seen in our discussion of the NYSE short interest Thursday night. The market is starting to get oversold enough to bounce, but as of yet has squandered all of its recent opportunities to do so.

NASDAQ

Had the impetus to rally with Dells news, but an early gap higher was over before it started and the selling as well as volume expanded as stocks dove in the last hour.

Stats: -29.56 points (-1.55%) to close at 1883.15
Volume: 1.792B (+7.08%). Third above average volume session in a row, and two of them on rising volume, indicating the big money was selling their shares, the fifth such instance in just this month. This type of selling begets more selling, heading toward a showdown with the May low. We do have to consider it was expiration Friday, and that pushes up volume.

Up Volume: 264M (-497M)
Down Volume: 1.512B (+654M)

A/D and Hi/Lo: Decliners led 2.26 to 1. With chips on the plunge as well, breadth was pretty ugly.
Previous Session: Decliners led 1 to 1

New Highs: 41 (+7)
New Lows: 161 (+47)

Another gap higher on some once again good news was given back, this time hard with selling volume. It was expiration, but volume accelerated late in the session as the selling worsened, a clear sign of distribution. NASDAQ is heading toward the May low (1876 closing, 1865 intraday), and with the strong selling volume it looks ready to undercut the trading range/base for the year. That opens the door toward 1775, the October 2002/March 2003 up trendline or 1755, some July 2003 highs. Before that happens it will rebound in a relief bounce if indeed it does not reverse and climb back up in the base. After undercutting the May low the index, already oversold, will be well oversold. Many bets on a further fall will be placed given the break below the low. That often sparks the rebound as those that are going to sell have done so on the breach, and speculate on more downside. At that point the sellers are at least temporarily sated and start covering. That helps are rebound move get started.

QQQ is in full retest toward the March and May low at 34. That level is pretty solid support and will tell us a lot about how the overall index is going to react.

S&P 500/NYSE

After DJ30 cracked its 200 day SMA last week, SP500 wasted little time in doing the same on some rising volume.

Stats: -5.3 points (-0.48%) to close at 1101.39
NYSE Volume: 1.447B (+2.95%). Volume was up and above average again as the large caps slightly undercut the 200 day SMA. Rising volume breaches are particularly noteworthy as a large number of institutional investors are taking part in the selling. If it does not recover rather quickly it typically leads to more selling as the 200 day is what we call support of last resort.

Up Volume: 554M (-3M)
Down Volume: 882M (+49M)

A/D and Hi/Lo: Advancers led 1.11 to 1. Was much stronger while the small and mid-caps were sporting gains.
Previous Session: Advancers led 1.18 to 1

New Highs: 145 (+34)
New Lows: 52 (+8)

SP500 tried to hold the 200 day SMA (1103), checking up at that level in the last hour but ultimately unable to hold it as the selling expanding near the close. It was not much of an undercut at this stage, but it needs to make a quick recovery. When institutions sell through the 200 day SMA (evidenced by rising, above average volume selling), that spells even further trouble for stocks as the big money is getting rid of them, not even wanting to hold them at this low level. SP500 is still easily above its March low near 1090 and its May low at 1080 to 1075. If there is no quick recovery of the 200 day then it is open to sell down to 1075 where there is also some December 2003 support from a consolidation.

We suspect that there will be more selling, perhaps on sharp volume, that takes SP500 toward 1075. It may not make it that far, however, before it is oversold enough to provide a relatively solid relief bounce or even a real turn back up from this selling.

SP600 yet again traded above the 50 day EMA, and yet again failed to hold the move. It sold back to the 50 day SMA, again trading in the narrow range between those to moving averages the past week. Still holding up, but no move to jump into these stocks as they test the key 50 day EMA. Dont see a lot of pressure on the small caps, but we do note they gave up a nice intraday gain and then some.

DJ30

Rallied intraday to recover the 200 day SMA (10,202) but in the repeat of afternoon reversals, it sold off and broke below the recent lows of this month. Under distribution with first INTC and now IBM the index looks ready to test 10,000. indeed, that level seems to be drawing it down as it did in March where it held. It has been unable to move above the 2004 down trendline, and this recent resumption of distribution points toward a test of 10,000, but we anticipate a rebound attempt before it gets to that level, though we do not anticipate that rebound to make much headway.

Stats: -23.38 points (-0.23%) to close at 10139.78
Volume: 267 million shares Friday versus 232 million shares Thursday.

THIS WEEK

A bit light on economic data, and nothing until later in the week. Of course earnings reports will be released at a furious pace, and that will continue to give the market some impetus overlay in addition to the macro concerns about a slowing economy and the election ahead as well as terrorist threats.

The market finished weak with NASDAQ selling hard toward the May low and SP500 undercutting its 200 day SMA. The Monday following expiration is often the reverse direction, particularly if the move is strong. That has not held the past few expirations, however. What we want to see is further selling that takes NASDAQ to the May low (1876 closing, 1865 intraday) and SP500 to further undercut its 200 day toward the March low (1091 closing, 1087 intraday). That would set up a nice point to rebound and it would put the market in an oversold enough and fearful enough condition to do it.

Whether that is just a relief move or has more substance will be seen in how volume responds and how leaders perform. Leaders are coming under pressure one by one, group by group. Friday the internets were hammered on NFLX results. Retailers were hurt by HOTTs announcement about a down quarter ahead. Medical appliances, a heart and soul market leader, was hurt bad by SYKs results and guidance. When leaders stumble, the market has nothing to hold it up. Thus at this stage a rebound has to be viewed as a relief move until proven otherwise.

That is not all that bad, however. The market has been in a trading range, and another crash lower to test or slightly undercut that range would set up another run higher in the range. That gives us upside opportunity, though we have to assume the move is a trading range bounce as opposed to a breakout to a new high. We will look for stocks that are coming off support, testing breakouts, and of course, setting up to breakout as well. Friday the breakouts were in the oil and gas sector, but as the market hits bottom we will be looking at the other areas that have set up quietly even during the selling as well as those stocks coming off of their 50 day EMA and other support to ride a bounce higher.

Support and Resistance

NASDAQ: Closed at 1883.15
Resistance:
March 2004 lows at 1900
The 10 day EMA at 1936
The 18 day EMA at 1955
The 50 day EMA at 1972
The 2004 down trendline at 1974
The 200 day SMA at 1982
2024 is the June high.
2050 represents some prior price points and has stopped NASDAQ the last three times it has tried that level.

Support:
The May 2004 lows (1876 closing, 1865 intraday).
October 2003 low at 1865.
The October 2002/March 2003 up trendline at 1775.
July 2003 highs at 1755.

S&P 500: Closed at 1101.39
Resistance:
The 200 day SMA at 1103
The 10 day EMA at 1113
The 50 day EMA at 1121
1125 was key price support.
The March/April down trendline at 1126
1142-1146 are the June highs.
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
1090 is the March low
May low at 1080 to 1075

Dow: Closed at 10,139.78
Resistance:
The 200 day SMA at 10,202
The January/April down trendline at 10,265
The 50 day EMA at 10,275
Late April peaks at 10,478 to 10,512
10,570 is the early April high
Price consolidation at 10,600 level
10,747 is the February high

Support:
March low at 10,007
May low at 9852 intraday, 9906 closing

Economic Calendar

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

July 20
- Housing Starts, June (8:30): 2000K expected and 1967K prior
- Building Permits, June (8:30): 2000K expected and 2097K prior

July 22
- Initial Jobless Claims, 07/16 (8:30):

July 22
- Leading Economic Indicators, June (10:00): 0.3% expected and 0.5% prior