Market Observations - 7-16-2007

Continuing upside moves. The following key indicators reached new highs this past week: S&P 500, Crude, FXI china 25 and MSCI emerging markets.

Again, that’s just to name a few. Despite negative headlines and sentiments, equity markets surged higher. Some market commentators are paid to create good stories. The market so far paid those who stayed long equities. (especially energy related). Therefore, never confuse a good story with attractive portfolio returns. This principle was revisited this week when Motorola reported earnings. Despite a negative sentiment, the stock traded net neutral and remains oversold. It is just a part of a big picture theme and restates the attractiveness of US technology stocks. Semiconductors are working along with communication equipment and networkers. Similarly, continue to favor select names in media and telecommunication.

On the other hand, credit risks are not fully flushed out of the marketplace. Certainly, housing related themes declined in the first half. Although, further breakdown ahead in select themes (ie. Lenders and REITS) most ideas are not actionable shorts. Rather revisit credit related shorts when the media sentiment is not overly negative. In addition, strength in crude and uptrend in emerging markets are key macro themes that are awaiting downturn catalyst. Since there is no evidence of trend break, continue to focus on stock specific ideas. As a quick reminder, here are year to date numbers: S&P 500 +9.5%, Nasdaq +12.1% and Russell 2000 +8.6%.

This upcoming week will keep many participants busy given a busy schedule in company’s earnings and economic data releases. Its vital to keep key macro themes in mind when flooded with various information.

• US 10 Year Yield: Consolidating between 5.00-5-25%. Expect more side way behavior in weeks ahead.

• Crude: Approaching highs from July 14, 2006 of $77.95. This past Friday (July 13), crude made annual highs by reaching $74.00. Now, if history repeats itself we should be nearing peak levels. Of course, that would be too easy but waiting for extended levels. Oil related stocks appear more overbought than the commodity as shown by the near-term behavior of the OSX.

• Gold: Setting up for a recovery. Gaining momentum in the near-term following a recovery from $640. Overall, maintain a neutral outlook from an intermediate-term perspective.

• US Dollar: Weakness persists, as the index nears previous lows of 2004 at $80.39. Also, not far removed from 1995 lows of $80.05. Clearly, deeply oversold and downtrend intact since 2002 peak. Look for near-term turnaround as the index is 4% removed from its 200 day moving average.

• SPX: Breaking out from recent range to new highs. Intra-day highs (1555.10) reached above 2000 highs. Psychologically this plays an important role as investors realize that we have climbed back to “topping” levels.

Actionable Ideas:

Financials: Oversold in the near-term (primarily banks) but do not present further sustainability.

C (Citigroup): An idea for those desperately seeking long exposure in the sector. Major support at $52 and positive near-term momentum.

Technology:

Semiconductors: SMH – making annual highs as the relative strength suggests further upside. Primarily, since the group underperformed most of 2006 and favorable outlook from a seasonality perspective.

AMD (Advanced Micro). Further signs of a recovery. Offers a buying opportunity and an attractive long exposure in this 3^rd quarter.

BRCM (Broadcom): Add on any pullbacks, although extended in the near-term, setting up for long-term rewards.

Telecommunications:

CCI (Crown Castle): Setting up for re-acceleration. VZ (Verizon): attractive entry point for Larger Cap investors.

Consumer Staples:

SWY (Safeway): Timely entry point. Fundamentally solid and offering timely entry point.

Healthcare: A though sector so far this year. Biotech poised for near-term recovery. Currently the following stocks are worth a look.

JNJ (Johnson & Johnson): Favored by value players given the attractive fundamentals. Holding above $62 and poised for a strong recovery.

ABI (Applied Biosystems): Timely add here. Use pullbacks as opportunity to add. A maker of life science research equipment and expected increasing sales revenue.

Media:

GMST: (Gemstar) Positive momentum and worth adding on pullbacks. See further sustainability for few quarters. Private or public its an attractive buy. In short, any pullbacks offer buying opportunity.

DTV: (Direct TV): Intermediate-term trend remains positive. Accumulate on any weakness.

Emerging Markets:

Finally, with most emerging markets reaching escalated levels and many investors seeking international ideas. Here is one that’s worth a look.

TKF: Turkish fund. As the Far East is becoming extended, Turkey can offer an attractive rotation in emerging markets.

Turkey's low level of mortgages, personal lending and life insurance sales mean that the country's financial sector should see massive growth over future years.

(Seeking alpha).

Also, the fund is 24% commercial banking and 11% Insurance. Therefore, with high exposure to financials and attractive technical pattern it is a timely emerging market idea. For those seeking stock specific ideas: The top name in the fund TKC (Turkcell Iletisim Hizmetleri A.S. ) is a provider of mobile services and trades in the NYSE.

Market Thoughts 7-9-2007

At this point, markets are awaiting a major catalyst for directional shift. Potential catalysts can be the upcoming earnings seasons combined with credit concerns. There are several big picture topics resurfacing in the marketplace. Regardless, actionable ideas are worth a closer look. To summarize, Energy/Crude related themes remain elevated and need a breather. In the next few weeks ahead, participants are allocating for second half plays. Technology and healthcare themes should offer alternative solutions for those seeking rotational opportunities. Although, financials look oversold, the looming “credit risk” is unfavorable for the sector. Again, lenders and REITS are the least favorite areas in the marketplace. Overall, communication, networkers, telcom and media offer a timely buying opportunity combined with a favorable risk/reward. (Ideas reviewed).

S&P 500: Closed at 1530, just few points away from 2000 highs of 1552.87. Again, the uptrend is intact while near-term momentum remains overbought.

Dollar (DXY): Recovery has been short-lived, as we are slightly holding above April lows of $81.29. Watch for turn in the coming months.

US 10 year yield: Consolidation between 5 and 5.20%. Look for further sideway action in the next few weeks.

Gold: Attempting to recover with first support at $640. (200 day mva 641.25).

Revisiting Crude and China:

Macro themes with perceived long-term sustainability, but poised for pullbacks especially given the current extended levels. For near-term market participants, betting against these themes can be rewarding along with corrections in the equity market. Taking a step back, reminds us of the bullish trend in emerging markets that began 4+ years ago. Although, the long-term trend remains positive for crude and emerging markets, current entry points don’t offer an attractive risk/reward.

Crude: The bullish argument resurfacing in the media. We are few points away from July 2006 highs of $77.95. Indeed, the strength continues but outside of geopolitical factors crude is nearing overbought levels.

China: FXI: (China 25 Index): Continues to make new highs. In the past two months, index has surged at a faster pace but is nearing a key inflection point. The index is 33% removed from its 200 day moving average; following a 50%+ run in the last four months. All considered we are setting up for a downside surprise for bulls.

IDEAS: Technology, Media and Telecom.

Semiconductors: SOX breaking to new highs. Next key resistance is near January 2006 highs (559.60). BRCM: Bottoming around $29/30 levels, accumulate.

SNDK: Near-term pullbacks between $48-46 range. Overall, positive outlook for second half of 2007.

Networkers: NTGR: 2+ month consolidation setting up for upside move. Accumulate closer to $34.

Communication: Group working and currently favoring JNPR. Also, MOT is oversold and poised for recovery. Also, TLAB from a long-term view offers a buying opportunity.

FNSR: After consolidating between $3-4 ranges in the past year, can work as a speculative value play.

Telco: NIHD strength continues, any sharp corrections should be a buying opportunity.

Media: CBS leadership intact, uptrend remains solid. DTV: Support around $22.50 continues to accumulate.

BLC: recent corrections offer attractive entry point. Finally, CMCSA an attractive long-term play.

Healthcare

A tricky area as Pharma and select Biotech have produced risky returns and unforeseen disappointments. Some areas remain in an uptrend. For example: PTJ Dynamic Healthcare Services Portfolio led by names such as ESRX, MHS and CI .

LLY – Looking for second half recovery. Next major resistance level is closer to $60.

ABI- If above $28 level, trend remains positive.

Market Review - July 2, 2007

Here is a quick reminder. Here are the closing values of key macro indicators at the end of Q2 2006: Crude $73, US 10 Year 5.14%, Gold $613, Nat Gas $6.13, S&P 500 1270 and DXY (dollar index) $85.

Interestingly, key macro indicators have not changed dramatically in the past year. In fact, crude, 10 year yields, gold and natural gas are very close to July 2006 levels. What is different? SPX rose significantly higher as the Dollar declined. Of course, higher stock market with weaker dollar is nothing new. An inverse relationship- which goes back to late 2002, illustrated again so far this past year. Therefore, overall big picture themes are in tact. Although, weakness in financials, especially in REITS and lenders became apparent in part I of 2007. Other key themes include: reacceleration of emerging markets, (specifically China) and increase volume private equity deals. Nevertheless, markets are complacently awaiting a trend shift. Current conditions favor a recovering dollar, correction in China, and continued downtrend in credit related themes.

At this point, the S&P 500 is poised for minor corrections. Momentum showing signs of stalling, as signaled by recent highs of 1540 on June 1, 2007. Perhaps, group selection is wiser than setting targets for the index. In any trend shift, there are opportunities in US technology themes which continue to offer attractive entry points.

MACRO REVIEW:

Crude: Expecting stabilization around $70 level. Once again, geopolitical factors sparking higher price movement. Last summers high of 77.95 a level to watch.

US 10 Year Yield: Consolidation phase around the 5% level.

Dollar: Signs of recovery that began on April 27. Bottoming process favors an upside bias for year-end.

Gold: Attempting to recover with first support at $640.

Natural Gas: Near-term, signs of bottoming closer to $6.50.

Review of key themes:

• Technology Emergence: Continue to favor semiconductors. SMH (semi etf) 6+ month of consolidation. Setting up for a recovery.
• Financial Weakness: As observed in the first half, downtrend should continue in most groups. Following any oversold bounces, further declines ahead especially in areas associated with "credit" risk.
• China extended: At these escalated levels, it is worthwhile trimming. Extremely overbought stocks are in commodity related groups.
• Media/ Telecom: A promising theme showing signs of sustainable uptrend. Accumulate on pullbacks.

As July 4^th approaches, my warmest wishes to all Americans, those sharing American values and soon to be Americans. Specifically, for those dreamers, who work hard and find ways to create capital. Happy 4^th!!!

Actionable Market Themes: 6-25-2007

As the first half draws to a close, investors can reflect on key drivers of global markets. Crude, China and Credit.

Let’s start with Crude and China. Macro themes with long-term sustainability but poised for pullbacks especially given the current extended levels. For near-term market participants, betting against these themes can be rewarding along with a broad market corrections. Taking a step back, reminds of the bullish trend in emerging markets that began 4+ years ago. Although, the long-term trend remains positive for crude and emerging markets, current entry points don’t offer an attractive risk/reward. Evidenced further by the continuation of this uptrend in the first half of this year. Therefore, the overbought argument has strong legitimacy as we enter the third quarter.

Takeaway: Bulls in Crude and China can wait for better entry points or rotate to other areas in the weeks ahead. Also, REITS and Lenders are vulnerable to downside risk. Meanwhile, select segments in Technology offer attractive entry points.

Chinese markets are reaching escalated levels, as exhibited by several indexes including FXI, (China 25 Index) which has soared close to 30 % since April 2007. FXI is overbought following a strong run at 110 range. Index is up 100% since lows in June 2006. The “bubble” in Chinese markets resurfacing as the lofty movement is clearly reflected in the charts. In regards to FXI, look for near-term correction closer to 100.

Sell-offs in China, can serve as a catalyst for overall equity downturn. For near-term traders, PTR offers an actionable trade on the short side. This particular stock reflects both themes of extended Crude and Chinese markets.

Crude: Reaching close to $70 level, as the commodity remains extended. June 21 highs of $69.85 serves as key resistance level. Of course, news driven events can serve as a wildcard. Regardless, stabilization ahead between $69-64 ranges.

Gold: A 6% drop since April 20 2007 highs. Next support level is around $640. Intermediate-term perspective suggests further downside ahead before a recovery. Also, HUI appears few months away from bottoming.

Natural Gas: Following recent sell-offs, index trying to bottom around $7 range.

S&P 500 Index is up 26% since last summer lows. Tight range forming between 1500-1540 levels. Next downside levels -1480 followed by 1460. At these levels, many bulls should look to add. In the near-term, index remains neutral as sector rotations take hold.

10 Year yield: Expecting stabilization between the 5-5.20% range in the near-term with consolidations ahead.

US Dollar: Signs of recovery since April 27 lows. Bottoming process favors an upside bias for year-end.

Canadian Dollar: Part of the global resources theme that is overbought. Early signs of peak/pause in the near-term.

REITS: MSCI Reit index is down near 20%. Currently, reaching oversold territory. Use strength to sell or add to shorts. Once again, least favorite names include, SPG, BXP, HST and VNO.

The third key theme in the market place is credit risk. In terms of US markets, credit risk continues to resurface in the market place as seen by subprime weakness, overleveraged funds and excessive bad loans. This week headlines discussed the collapse of a hedge fund which can trigger fear and reiterate the status of pending credit risks. This theme should contribute to rotation out of financial related areas. Again, lenders and REITS are at further risk.

Lenders: Short ideas in FED and CFFN. Midwest lender CFFN elevated since 2001, showing signs of stalling as earnings came in weaker. S&L’s are vulnerable at this stage, along with FED a California lender.

Technology, Media and Telecom

A pending correction in emerging markets should not discount the attractiveness of US Equity in particular technology related themes. Groups which includes semis, telecom, networkers, comm equipment and media. Continue to accumulate in the Tech, as pullbacks offer entry points to a cycle theme. Early entry points can offer further rewards for the second half of 2007

MOT: Value play, in a trading range poised for a turnaround. Above $17 – stock remains attractive for near-term entry points.

Similarly, AMD: Deeply oversold, bottoming process continues and offers opportunity to buy. Looking at $18 as the next resistance.

Market Review - 6-18-2007

MARKET VIEW: Not surprising to see money flow into commodity based assets given the decline in bond markets. At this point, look for stabilization in the US 10 year yield and recovery in the Dollar. Favor technology themes while staying away from Financials. Semiconductors appear timely here given the oversold conditions and favorable risk/rewarded offered by tech stocks at this point of the equity market cycle. At the same time, there is further risk in financial markets both on lending, credit related and REITS. Primarily, credit and interest rate concerns should reflect in financials stocks. Therefore, continue to add to shorts in REITS and Lenders.

LOOKING AHEAD: Watch for pullbacks in technology as adding opportunity (few ideas listed below). Bearish sentiment is reflected among many equity investors as bullish sentiment dropped from 40.59% to 37.30%. (According to AAII).

SPX : Since February 2007 sharp declines, index has recovered in the past 4+ months and since Mid May early indication of stalling/consolidation. From various angles, the overbought argument is intact but sentiment reflects negative readings. Plus, majority players are expecting recession this year based on econ data at this junction. Net/Net: Despite the noise out there--various opportunity in this market on theme specific trades. In these times, it remains important to breakdown the Macro events into actionable parts.

US 10 yr yield: Near-term becoming overbought. Looking ahead, expect yields to consolidate between 5-5.20% range. In terms of bonds, (TLT and IEF) too early to buy and rather late to short. Therefore, look for further consolidation ahead.

Crude: Geopolitical unrests driving prices closer to $68. Overall, expect consolidations despite doubts associated with global events. Although, the last two summers produced higher oil prices there is a heavy resistance around the $70 range. Therefore, as the dust settles in geopolitical/supply concerns that should open opportunity for further pullbacks. Bottom-line: Consolidation ahead despite recent headlines and upside bias.

US Dollar: Recovery intact since the late April lows. Looking ahead from a cycle perspective “weak dollar” policy nearing late innings. Again, betting on a recovery for months ahead. Noteworthy, to follow recent recovery that is slowly inching higher.

Yen: Yet to see a recovery last week but remains oversold. Next key support level approaching February 2002 lows.

Gold: Further consolidation ahead, range forming between $640-680. Look for further pullbacks before reacceleration. Near-term downtrend in tact since April 20^th highs.

Weakness in Financials: Resurfacing mortgage headlines should offer further shorting opportunity in lenders. Early peak among lenders as evidenced by declines since March 2007. (For example, SOV). Also, Midwest lender CFFN elevated since 2001, showing signs of stalling as earnings came in weaker. S&L’s are vulnerable at this stage, along with FED a California lender. The cycle is reaching a peak, favorable odds for breakdown given the over-leverage credit cycle. Certainly, talk of subprime and foreclosures can drive more money out of this group. Again, revisit shorts as the risk of takeouts are slowing.

RWR: Wilshire Reits index: stalling since mid February and struggling to recover. Least favorite REITS include, SPG, BXP, HST and VNO. Use strength as opportunity to short in the near-term. Also, for those that have an existing long position -- would use next upside move as opportunity to exit.

IDEAS:

• Semiconductors: Last summer tech demonstrated early signs of recovery. Currently, similar patterns taking hold. Semi’s reaccelerating. AMD remains oversold at these levels as INTC breakout in the near-term. From a long-term cycle there are opportunities to add here and participate for an upside move.
• SMH: Showing strength versus technology sector. Poised for a recovery this summer. Also, attractive odds versus the broader market. Next key target, January highs closer to $40.
• SNDK: Accumulate on pullbacks closer to $44-42 range. Positive momentum intact.
• JNPR: Since last summer, a turnaround story. Second phase of recovery continues. Add on pullbacks closer to $22. Attractive longer-term play especially for the second half of the year. Also, an exposure to security software companies and displaying signs of leadership in its group.

MOT – Deeply oversold with growing pessimism. Attractive around the $18 as stock continues to bottom. Far removed from 200 day mva. Current levels offer relatively better entry point. Chart attached ,

Media: GMST – breaking out recently, a favorite name in the media space. Although stretched in the near-term, there is sustainability in this name which suggests adding on any declines.

CMCSA: From long-term view, remains attractive. Entry point: $26/24 range offer a timely buying opportunity. Early stages of media cycle resurgence therefore the long-term reward is attractive relative to near-term pullbacks.

Healthcare: CYH – Continues to trade in a narrow range between $40-36. Looking for breakout, as a defensive play (hospitals).

Market Outlook: 6-11-2007

Market Outlook:

• US 10 yr yield rising a key macro focus as it continues to make headlines. A strong run since mid March as it reached high of 5.24%. At this point yields appear extended in the near-term and looking for stabilization around the 5% level. For equity players, this is a great macro excuse to sell as rising rates suggest heavier competition for stocks.

• Similarly, Canadian dollar continues to surge equally as stated last week. This theme stems from the strength in commodity based currencies. Along with rising global rates as seen in New Zealand last week.

• Crude: Overall key trading range remains between $62-66. In the near term, expect a pullback and further sideway/down action this summer. Again, outside of geopolitical concerns we should see stabilization closer to $60.

• Yen deeply oversold and signs of further recovery which can have an impact on equity markets. Given the inverse relationship between declining Yen and Rising S&P 500, any upside movement in the Yen can cause shrinking liquidity. This inverse relationship remains intact as it began in the1990's and resumed in 2003. At this junction of the global cycle, we are poised for shifts in macro trends. The Bank of Japan is expected to meet soon and at this point an oversold Yen is attractive bet for a recovery along with the dollar which continues to bottom.

• Gold: Slightly broke near-term support at 660. Next key level at 640. Intermediate-term range forming between 680-640, with major psychological level at 600.

• Taking about cycles… As emerging markets become extended, look for rotational flow into developed markets. US and European stocks are attractive especially after underperforming in the past few years. Favorite themes are telecom and communication technology as a counter balance to commodity related themes. Also, healthcare names offer some bargains as the group attempts to bottom. Be selective in stock selection in pharma group especially with the additional litigation risk.

• Weakness in Financials. REITS: further signs of weakness along with the broad market correction. RWR: Wilshire Reits index: stalling since mid February and struggling to recover. Least favorite REITS include, SPG, BXP, HST and VNO. From a cycle perspective, the group is setting up for sharper corrections. Use strength as opportunity to build short positions. RWR short exit levels: 90 and 92. Side note: Wisdom Tree launched two ETF’s composed of global REITS. This indicates to me that we are nearing some sort of a top at pricey levels.

• Financials: XLF- Peaked on May 31 from overbought conditions. Similar to peak in February around 38. Generally, weakness in financials serves as a leading indicator for the broad markets. Expect further downside in the month ahead. Relative strength weakness in financials vs. S&P 500. A continuation of a weak trend since early this year.

• Utilities, similar to REITS, feeling the impact of rising yields. XLU: peaked on May 25, as it continues to retrace. Trim on any strength in the near-term.

Looking Ahead:Early view of Semiconductors: Group has underperformed the market in most of 2006 and early part of 2007. AMD attractive with exit at $13.50. SNDK: 3+ month of sideway action now poised for recovery.

Communication: Similar to AMD’s oversold chart, XXIA offers some buying opportunity above $8. NTGR: Add on any weakness uptrend remains intact.

MOT: Continues to trade around oversold levels. Interesting take --CIBC believes investors should focus on product portfolio and margin progress, yet not look for a game-changing model.

Networkers: PXQ - Dynamic Networking Portfolio – Strength continues as etf makes new highs. Although it appears extended, there are few names of interest when sell-off’s persists.

ATHR: Accumulate closer to $25-27 range. SONS: Add closer to $7. FFIV: trend remains positive.

Media: CMCSA - Accumulate closer to $26/25 range on pullbacks. MCCC - elevated in the near-term, add on pullbacks. BLC- Looking for it to stabilize $22-20 range.

Connecting Dots 6/4/2007

6/4/2007

• “Extended” charts versus high bearish readings
• Rising 10 year yield
• Inflation concerns versus attractive equity valuation
• Favorable entry point in US Technology

Quick Summary:

Markets might appear extended but investor psychology remains negative. There are opportunities to profit in select themes. While adding stocks on watch list and trimming in select areas. Rising yields is a key macro event and inflation concerns are worth tracking. Continue to favor Tech, Media, Telco, and communication related areas.

Equity Markets:

March 2000 highs in the S&P 500 currently stand at 1552.87, as we closed few points away at 1536.34. In one sense, we have recovered back to those highs after seven years and serves as a “resistance” level. On the other hand, positive influences in the market continue to emerge. Similarly, there are opportunities in areas that peaked in 2000 ie. Large Cap Technology. Once again from a cycle perspective – Technology offers attractive ideas.

Currently, one might assume that the bearish camp is “sick” of fighting the tape but that’s not the case when reviewing sentiment data. Surprisingly, the bearish readings (according to AAII) increased to 48%. Also, Market Vane data points out over 65% bearish reading vs. less than 25% bulls. Therefore, despite what appears to be extended levels, psychological readings have a significant negative bias. I would use this opportunity to buy attractive themes.

At the same time, inflation risks are in the market place. Cost of borrowing is relatively cheap and a stock market upswing with declining currency can taint the euphorically bullish market. These arguments have been laid out by bears for a while and only time will tell.

Historical Perspective: The first week of June during the 3rd year of the Presidential Cycle is the strongest part of a strong month.

Bond Yields / Currency:

In the month of May, the US 10 year yield recovered significantly. A strong run from 4.64% while closing Friday at 4.95%. Similarly, the Canadian dollar surge along with the 10 year yield. An interesting correlation that is worth tracking. Perhaps, foreigners are switching out of the US 10 yr driving prices higher. Also, the marketplace might suggest inflation with the rise of yet another asset class.

US dollar holding in above a key long-term support level. Further weakness in the Yen as it made new lows. In other words, the downtrend continues.

Commodities:

Crude: Continues to face a strong resistance around $65. Outside of geopolitical forces, maintain a negative/neutral bias going into this summer. Looking for a recovery closer to $60. (near 200 day mva.)

Gold: Near-term entry opportunity closer to 660. Oversold in the near-term but not sure on the upside potential. Poised for recovery in the near-term w/ next exit around 680.

Financials:

REITS last week surged higher driven by takeout events. Regardless, continue to have a negative bias given the run up and lack of sustainability ahead. The faith is tied to macro events.

Again, not favorable to add at this point of the cycle.

Technology:

CSCO- emerging here at oversold levels.

FFIV- With all time highs at $160, stock continues it uptrend from a long-term view. Accumulate closer to $80.

JNPR- Breaking above $24 with next resistance at $28. Attractive entry point.

NT- Climbing out of $24 range with positive momentum.

NTGR-Although extended in the near-term, the longer-term outlook remains positive. Accumulate on pullbacks.

FDRY- Similarly, strong run recently with further pullbacks offering attractive entry points

COMS-Part of the networkers theme. Positive trend building despite choppy trading patterns.

Interesting Take:

This is the very first time in modern history that we've seen a prolonged worldwide interval of equity arbitrage. That's where you borrow money to buy equity, earning more from the equity than you owe in interest on the borrowed money. The arbitrage comes in three forms: corporations buying other corporations for cash, corporations buying some of their own shares for cash and private equity investors buying corporations using mostly borrowed money. The arbitrage has to do with the fact that the earnings yield on equities (earnings divided by price) is often more than the after-tax cost of money (which is, roughly, two-thirds of whatever your long-term interest rate is).

Ken Fisher 05.07.07 Forbes.com

Summer Perspective:

Summer Perspective:

Supply of shares in the equity markets continues to shrink with increasing takeouts and buybacks. Clearly, not a new observation as stated several times before. Lack of supply causes markets to go higher and puts further pressure on short positions. Despite technically overbought markets, there is an upside bias from various angles. And mainly, no compelling reason for investors to cash out heavily. Earnings look good for the most part and sideline players are ready to add to long positions. Also, sentiments are not insanely bullish as the bearish camp maintains their view. For example, the NASDAQ short interest soared by22% this month. This displays that a negative market view is not that differentiated.

At the same time, the faith of private equity should take longer to materialize. This can be an additional hurdle for short positions. Regardless, there are theme specific opportunities both in macro and stock specific trends.

Given the difficulty of timing pullbacks, I continue to watch for a recovery in the US 10 year and US Dollar.

10 year yield: Continues to rise. Next resistance is 4.90 a peak level from January 26. Uptrend intact, and expect further upside move despite overbought conditions.

Crude: 3+ month trading range between $62-66. Outside of a geopolitical risk, I except prices to stabilize at current range.

Natural Gas: Narrow range 7.81 (15 day mva) and 7.10 (200 day mva). Expect further consolidation with heavy resistance at $8.

Gold: Near-term trend remains negative. Following the 691 highs in April. Looking for support around 640. (635-- 200 day mva).

Canadian Dollar: Strength continues with next resistance level at 0.95. Those were last visited in 1976 as the recovery continues from 2003 cycle lows.

Yen: Deeply oversold with lows closer to mid February.

AMD: continue to favor the recovery from oversold levels. Also, it is the 3^rd heavily shorted stock in the S&P with a 5% increase in short interest since April.

SNDK: Holding above support level at $40. Slowly, continue to build long position.

XLV: Healthcare ETF- Favor long position. On a relative basis, the index underperformed the S&P 500 and poised for a recovery.

A chart that stands out is the Powershare Nanotech portfolio. PXN - Lux Nanotech Portfolio In examining the components that make up the index, FLML stood out.

FLML: A French drug name with nanotech exposure. Recent surge took a slight breather, and offers attractive entry point.

Media: (From a long-term trend remain positive)

CMCSA :growing short interest. Accumulate closer to $26.

MCCC:Long-term trend remains positive. Continue to add on any weakness

CBS: Recent highs with positive momentum. Favorable part of a cycle recovery.

BLC: Again, weakness should create further buying opportunity. Despite recent gains on a realtive basis favorable upside outlook.

Market Observations

Market Observations:

Summary: 10 year yield rising slowly, as it sits around 4.80 range, perhaps a negative catalyst for markets. Select tech longs reviewed. Early signs of vulnerability in REITS.

Key level: SPX is approaching March 2000 highs of 1552.87. Few years ago, an illusive mark but here we are few points away. I am sure this will get press as a follow up to Dow Jones new highs. The overbought argument is becoming old news but charts illustrate something else. The NASDAQ, is more than 2X removed from 2000 highs. This makes a compelling case for underinvested technology stocks. Regardless, of broad market theories and hype, there is opportunity in technology. I suspect quality stock selection at current levels can be sustainable for year-end returns. (Healthcare as well). Unlike, other areas of the market, tech related stocks are relatively attractive to weather unexpected macro risks. Technology has become a broad sector therefore continue to favor niche areas within the sector.

CNTM (communication, Networkers, Telco and Media). Sticking to the 2007 game plan:

MOT: Slowly recovering, patience required for higher reward. Remains too removed from 200 day mva.

COMS: Strength continues to develop. Add on pullbacks.

SNDK: Holding above support level at $40. Slowly, begin to build long position.

SIMO: Oversold in the near term offers an attractive entry point.

AMD: remains positive and poised for near-term recovery.

In media, BLC and CMCSA. Add on any pullbacks. Continue to favor the media theme for the rest of the year.

MCCC bottoming from a long-term perspective.

Financials are a weak point in the market and this week the REIT short ideas began to materialize.

Reits: RWR: Wilshire Reits index: Stalling since mid February and struggling to recover. Least favorite REITS include, SPG, BXP, HST and VNO. From a cycle perspective the group is setting up for sharper corrections.

XBD: Stalling around 260 levels, a sign of slowing leadership in the group.

US 10 year yield – At a higher end of previous trading range. 4.40-4.80. After consolidating for several months upsides move developing. Currently removed from 5.25 level reached in the summer of 2006. Impact on equity markets: Keep an eye on this recovery and its sustainability as a macro catalyst. If yields recover accelerates, it might fuel a market downturn.

Crude: Tight trading range between $60-$65. Overall, uptrend remains in tact, given the run from Q1 lows of $50 to recent highs around $65. Perhaps further consolidation ahead with a positive bias.

Natural Gas: Slowly trending higher as it approaches key resistance level at $8. Next hurdle point is near the $10 range.

Dollar: Remains oversold, interesting to watch the relationship with 10 year yield in the near-term. Perhaps, both are poised to move higher from “dead” levels.

Gold: Near-term downtrend continues with further correction from overbought levels. Took out recent support level of 660.

Lesson learnt and further confusion ahead

Lesson learnt and further confusion ahead:

Quick summary: Looking ahead to second half opportunities, retail shorts, healthcare longs, macro influences and myths.

Equity Thoughts:

Given the elevated levels at current conditions, one has to readjust second half expectations. At this point, there are areas to add on pullbacks. In revising the 2007 thesis, I like communication, media, networkers and telco. Also, healthcare is an interesting play that can create upside potential with sustainability. As sated last week, there are opportunities in Healthcare – Continue to favor XLV. Consumer offers few trades, mainly focused on the short side.

So sticking with risk/reward here are few points.

Reits: RWR: Wilshire Reits index: Stalling since mid February and struggling to recover. Least favorite REITS include, SPG, BXP, HST and VNO. From a cycle perspective, a strong run and setting up for a sharper correction.

Retail: Continue to watch FDO as it faces heavy resistance around the $33 level. Following recent recovery stock is vulnerable despite net positive analyst view.

Other names to watch as short candidates --KSS, SHLD and TJX.

Healthcare: In terms of large cap names: AMGN, BMY and MRK – monitor for second half long ideas and enter on pending pullbacks.

Insurance: another area to consider given its recent pullbacks. – Specifically, the group has underperformed the S&P 500. An area to add, especially relative to other groups in financials.

Technology: Semi’s- AMD – deeply oversold with support at $15. It has been a value trap before but interesting comments from NVDA’s managment.

We are seeing the sell-through of AMD processors picking up significantly in this channel, and I am sure many of you see that as well. And it reflects the fact that it's replenished the channel with Athlon processors. It is now price positioned in the right place and it’s a great product. There is no reason why it went so, and so we are expecting the pick up again.

Chart attached below.

Energy: XLE- uptrend remains intact, strong run up in the past two months. Next resistance of 243.97 – May 4^th highs. OSX long –term strength continues- One can trim on pullbacks but above 180 – the long term cycle is intact.

Macro/Levels:

Crude: Key resistance at $66 level –momentum slowing. Range forming $62-66 levels. Expect down/pause action in the near-term.

10 year yield: Intermediate-term trading range between the 4.40-4.80 level. In recent near-term trading there is a close range 4.62 and 4.68. Lets not lose focus on the uptrend that started 4.00

DXY-Dollar index: Recovering from April 27 lows of $81.26. Next near-term resistance closer to $83. As stated before, I am expecting further recovery from deeply oversold levels.

Gold: Near-term downtrend continues with further correction from overbought levels. Next support rests around the 660 level with a momentum attempting to bottom. At early stages of a pair trade with declining gold and recovering dollar.

Commentary:

Despite growing bearish sentiment due to extended markets – the upside move has paid off for those who stayed long. Especially, a differentiated view from consensus. A study showed that 60% of individual investors were expecting a recession. Such a high number versus other periods and more than institutional participants. A lesson learned but does not deny the overbought levels.

Clearly, this “extended” market just keeps going higher as many don’t want to admit mistakes. Interestingly, the growing bearish sentiment has driven an increase into money market funds. With fewer participants in equity market, the market keeps going higher without the influence of net bearish “pundits”. Lets not confuse traders with media. The first quarter displayed the disconnect between noise and actual data.

From a macro level, oil stalled at $65 range, econ-talk is interpreted as positive news for markets, and overall net positive earnings. Important to watch a recovery in the dollar, 10 year yield behavior and cooling of emerging markets. Regardless, the simple question is profit taking versus adding on pullbacks. A global perspective offers the building bubble of credit and increase in major asset classes. Although, not actionable these points are accepted and as close to reality.

Group Ideas and Equity market review

Equity Markets: Supply of stocks in the marketplace continues to shrink. This week contributed to that theme as we saw further M&A announcements and takeout speculations. Also, better than expected earnings contribute to positive market action. This leads to additional buying or more of less compelling reason to sell.

Argument for an “overbought” market over recent weeks has left many wondering or giving up. SPX remains extended and poised for a pause around 1500. Given stabilizing geopolitical risks, neutral Fed stance and non-outrageous oil prices –these factors have been favorable for the markets.

In terms of stock behavior, an impressive rally (new highs) with consensus bullish agreement. Complacency can be a near-term concern, as the pull/call ratio retraced from overly bearish levels in February. Since 2005, we continue to make new highs according to NASDAQ new highs/lows data. This clearly coincides with the behavior of the most groups as participation across the board. Therefore, a very bullish run and euphoric self fulfilling upside move.

Dollar: On the radar once again. Same message as the last few weeks. Remains oversold and poised for a short-term recovery.

Gold: Approaching April 20^th highs of 691.40. A key resistance level while the all time highs remain at 725 reached last May. Expecting pullbacks in the near-term, even if Gold makes new highs for the year. Intermediate-term data appears stretched.

Yields: 10 year continues to trade in a close range between 4.60-4.80. Taking a step back, the uptrend remains intact since July lows of 4.00. Looking for further consolidation with an upside bias.

Crude: Near-term stretched with heavy resistance at $65 level. At this point, looking for a consolidation back to the $60 range.

Econ: Interpretation of markets remain positive but not clear if majority bulls understand or rank data outcomes towards decision making. Plenty of revised numbers, unclear interpretation and political related factors which are difficult to decipher. Federal Reserve developing a plan to control inflation.

GROUPS:

XBD: Broker/Dealer Index – recovering back to key resistance level of 259.23. Despite weak first quarter, the group has recovered previous losses and currently attempting to breakout. Watch resistance levels as indication of buyers or interest in this segment of the financials stocks.

In financials, REITS continue to make new highs and are elevated in the current cycle. It is difficult to deny the positive trend but from a cycle perspective, the group does not offer attractive entry points. Note: Dow Jones REIT index, has failed to recover back to February 2007 highs. It illustrates that buyers are staying on the sidelines and momentum is waning.

Stock Specific: vulnerable REITS: SPG: Watch the 115-110 range where momentum is slowing. BXP: Stalling 120-115 range with consistent low volume. HST: Slowing momentum with support level at $25. VNO: Attempting to breakdown around the 120 level.

Retail: RLX- Index pausing at current levels with two key resistance levels. First, 530 followed by 538.53 (Feb 20 highs). Failing to make new highs and displays vulnerability across the sector. Similar chart profile is seen in PMR (Dynamic Retail Portfolio). For example, KSS –sharp decline, SHLD- broke down, TJX –downtrend in tact.

Actionable Idea in the near-term

Family Dollar -FDO: Back to heavy resistance at $33. Double top to previous highs with weak momentum.

Groups/Stocks:

Technology: Few interesting charts: NVT-attempting to bottom, OTEX- uptrend intact, ULTI-positive uptrend since mid 2006, SMSI-consolidating around $14 and FLIR-on pullbacks.

Biotech: Continues to work and a strong run in the past two months. A stock specific play in general. Looking for pullbacks as opportunity to add. Stock speicifc names include: MYGN, ABI and TECH.

Healthcare Review: First quarter 2007, has seen a breakout in healthcare. Especially, pharma an area which has underperformed in recent market cycle. XLV- healthcare etf broke out recently. Chart attached below. (click to enlarge).

AMGN: Attempting to bottom while it remains oversold. Accumulate closer to $60.

BMY: Add on pullbacks closer to $29 range.

MRK: Among the top weights in the sector, MRK has established its leadership and that stands out.

Here are the top weights in the S&P healthcare.

	Name	Symbol	Index Weight
1	Pfizer Inc.	PFE	11.65%
2	JOHNSON & JOHNSON	JNJ	11.33%
3	Merck & Co. Inc.	MRK	6.83%
4	WYETH	WYE	4.69%
5	ABBOTT LABORATORIES	ABT	4.63%
6	Amgen Inc.	AMGN	4.52%
7	UnitedHealth Group Inc.	UNH	4.44%
8	Medtronic Inc.	MDT	3.77%
9	Bristol-Myers Squibb Co.	BMY	3.70%
10	Eli Lilly & Co.	LLY	3.57%