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

- 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