Chart of the Week

NASDAQ Cumulative Advance/Decline Line



Bottom Line: Many technology stocks are approaching technically oversold levels. However, breadth on the tech-heavy NASDAQ continues to deteriorate. Thus, while an oversold bounce could occur at any time, the NASDAQ will likely work its way lower over the next few weeks.

Market Week in Review

S&P 500 1,107.30 -2.92% for the week.

U.S. stocks finished lower last week on fears over rising inflation, escalating violence in the Middle East and China's cooling economy. The NASDAQ had its largest weekly decline in two years as networking, semiconductor and disk drive stocks fell substantially. Nortel Networks, North America's biggest maker of telephone equipment, tumbled 35% after it fired its CEO because of an accounting misstatement that will cut last year's earnings in half. Furthermore, JDS Uniphase, the world's biggest maker of fiber-optic network parts, sank 28% for the biggest decline in the S&P 500. The company said it may lose more money than analysts expected this quarter. Defensive sectors, such as utilities, tobacco and pharmaceuticals all displayed relative strength for the week.

There were a few positive developments last week. Most of the economic and corporate reports were better-than-expected. As well, Genentech and OSI Pharmaceuticals soared after saying their experimental Tarceva medicine extended the lives of lung-cancer patients who no longer responded to other treatments. This is the first time any drug in this class has shown a survival benefit. United Healthcare agreed to purchase Oxford Health Plans for about $56.79/share. Finally, more than 80% of S&P 500 members have reported results and profit at those companies has climbed 27%, with 75% beating expectations. The average positive surprise has been 8%.

Bottom Line: The semiconductor index broke substantially below its 200-day moving average last week, while many other sub-sectors of technology are hovering near this key technical level. Investor psychology has deteriorated a great deal in the last few weeks as the media's obsession with negativity and terrorism over-shadow all positive news. The many exceptional economic and corporate reports have been ignored by investors for the few that have been troublesome. Even as China attempts to slow-down its scorching economy to 7% growth from 10%, investors focus on the damage this will do to companies that sell to China rather than the positive affects this will have on inflation. While inflation has accelerated from its historically low levels, it is not a problem as of yet and does not appear it will become one for the foreseeable future. Historically, stocks perform exceptionally well during periods of slightly rising inflation as companies regain pricing power, boosting profits. I also believe it is very positive for the sustainability of long-term world growth that China is addressing its problems now. This should prevent a collapse in their economy, which is what the China "bubble" bears have been predicting. Technology "bubble" stocks dropped substantially numerous times in the 90's, only to rebound to higher highs, before peaking in 2000. I think companies that sell to China will outperform for many more years before their eventual peak. These stocks are in a bad correction within a long-term secular bull move in my opinion.

Economic Week in Review

ECRI Weekly Leading Index 135.20 +.52%

New Home Sales for March rose to a record 1228K versus expectations of 1173K and 1128K in February. Builders such as Centex and D.R. Horton are confident rising employment will underpin sales, boosting the economy. A measure of the supply of homes for sale fell to the lowest since August. "Lean inventories and mortgage rates that are still low even if they have started edging up in recent weeks, suggests this is still going to be a very strong year for housing," said Ellen Beeson, an economist at Bank of Tokyo-Mitsubishi.

The Conference Board's Consumer Confidence Index rose to 92.9 in April versus expectations of 88.5 and an 88.5 reading in March. "When non-farm payrolls rise by 308,000 in a month, it's going to help consumer confidence," said Delos Smith, a Conference Board Economist.

Existing Home Sales rose to 6.48M in March versus expectations of 6.2M and 6.13M the prior month. The 5.7% increase was the second-fastest pace on record. Re-sales account for 85% of the housing market. U.S. home ownership in the three months through March set a record for the third quarter in a row.

Gross Domestic Product for the first quarter rose 4.2% versus expectations of 5.0% and 4.1% in the fourth quarter. The rise was paced by consumer spending and business investment in office equipment and software. The GDP price deflator, a measure of inflation, rose at a 2.5% annual rate, the most since mid-2001. Unadjusted for inflation, GDP rose at a 6.8% annual rate. "These somewhat higher prices will boost corporate profits, which should permit greater investment and hiring," said Rich Yamarone, chief economist of Argus Research. Higher refund checks because of last year's tax cuts and the Fed's lowest interest rate in four decades helped boost retail sales, while more orders for equipment suggest businesses are gaining confidence that may lead to more hiring, Bloomberg reported.

Personal Income for March rose .4%, meeting expectations, versus a .5% rise in February. This is the strongest three-month pace for income growth since the stock market bubble burst in 2000. Personal Spending for March rose .4% versus expectations of a .7% rise and a .4% rise in February. Spending also benefited from tax refunds and mortgage re-financings.

The University of Michigan Consumer Confidence Index fell to 94.2 in April versus expectations of 94.0 and a final reading of 95.8 in March. Violence in Iraq and record-high gasoline prices likely offset very good economic data, leading to the slight decline, Bloomberg reported.

The Chicago Purchasing Manager report rose to 63.9 in April versus expectations of 61.0 and a reading of 57.6 in March. "Inventories are very lean," Mike England, chief economist at Action Economics said. "Factories are scurrying to rebuild their stocks." The index confirms other reports that showed manufacturing continues to strengthen, Bloomberg reported.

Bottom Line: The housing market continues to exhibit extraordinary strength. While it will likely cool a bit in coming months, an improving labor market should prevent any significant weakness. However, with homebuilding stocks up about 60% over the last 12 months, further weakness in the group should be expected in the near-term within the context of a secular bull move. Consumer confidence readings remain relatively strong considering the daily barrage of negative reporting, high gas prices and recent spurt of violence in the Middle East. Moreover, consumers' exceptionally strong spending patterns over the last few weeks paint an even more robust picture of the true state of the consumer psyche. GDP growth, while not exceptional after inflationary adjustments, was very good once again and will certainly be revised upwards. The U.S. economy has grown 5.5% on average over the last 3 quarters, the best performance since the early 80's. The Chicago Purchasing Manager report is a key gauge of mid-western manufacturing activity. It is also improving at the fastest rate since the early 80's. Overall, the economic data released last week continued to paint a very bright picture of the current state of the U.S. economy. While inflationary pressures have increased, they remain relatively low and should not be a serious problem for the foreseeable future.

Weekly Scoreboard

Indices
S&P 500 1,107.30 -2.59%
Dow 10,225.57 -1.96%
NASDAQ 1,920.15 -5.89%
Russell 2000 559.80 -4.44%
Wilshire 5000 10,793.66 -2.94%
Volatility(VIX) 17.19 +19.77%
AAII Bullish % 50.0% unch.
US Dollar 90.53 -.57%
CRB 272.54 +1.17%

Futures Spot Prices
Gold 387.50 -2.10%
Crude Oil 37.38 +2.69%
Natural Gas 5.86 +3.66%
Base Metals 104.19 -2.94%
10-year US Treasury Yield 4.51% +1.12%
Average 30-year Mortgage Rate 6.01% +1.18%

Leading Sectors
Utilities +.07%
Tobacco -.09%
Energy -.12%

Lagging Sectors
Disk Drives -8.49%
Nanotechnology -11.03%
Networking -11.82%

*% Gain or loss for the week

Mid-day Update

S&P 500 1,109.74 -.37%
NASDAQ 1,926.11 -1.67%

Leading Sectors
Tobacco +.71%
Energy +.61%
Drugs +.46%

Lagging Sectors
Biotech -3.24%
Internet -3.79%
Networking -4.15%

Other
Crude Oil 37.40 +.24%
Natural Gas 5.86 -1.0%
Gold 387.50 +.10%
Base Metals 104.19 +.72%
U.S. Dollar 90.52 -.06%
10-Yr. Long-Bond Yield 4.50% -.76%
VIX 16.78 +1.39%
Put/Call .68 -28.42%
NYSE Arms 1.55 +17.42%

Market Movers
FDRY -20.2% after missing 1Q estimate and lowering 2Q forecast.
SONO +18.5% after meeting 1Q estimate and raising 04 guidance.
MCK + 9.43% after beating 4Q estimates and raising 04 guidance.
IM -26.24% after missing 1Q estimate and lowering 2Q guidance.
BOBJ -23.2% after missing 1Q estimate and lowering 2Q guidance.
SFNT -19.17% after missing 1Q estimate and lowering 2Q guidance.
CELL -18.4% after missing 1Q estimates.
APCC -18.4% after missing 1Q estimates.

Economic Data
Personal Income for March rose .4%, meeting expectations and down from a .5% rise in February.
Personal Spending for March rose .4% versus a .7% expected rise and .4% rise in February.
Univ. of Mich. Consumer Confidence came in at 94.2 versus expectations of 94.0 and 93.2 prior month.
Chicago Purchasing Manager Report for April came in at 63.9 versus expectations of 61.0 and 57.6 prior month.

Recommendations
Goldman Sachs reiterated Outperform on ROH, NFX, BIIB, MUR, ASN, SRE, AET, AVP, ACS, GCI, TRB, KRI, XOM, PFGC, MCK, DDR, AMIS, STZ, SNDK, KMI and KMR. GS reiterated Underperform on PHS, FHCC and LVLT. Citi SmithBarney upgraded FON to Buy, target $22. Citi strongly reiterated Buy on BG, target $47. MCK raised to Outperform at Bear Stearns.

Mid-day News
U.S. stocks are lower this afternoon on continued weakness in technology shares. Positive earnings surprises for the first quarter are averaging 8% above consensus expectations, leading to almost 300 basis points of upward revisions to 04 estimates. The new 04 earnings growth rate is 16.4% versus 12.7% expectations last month, Bloomberg reported. Russia's RTS Index, the world's second-best performing benchmark in the first quarter, had its sharpest monthly drop in three years amid concern over a slowdown in China and possible bankruptcy at OAO Yukos Oil. The NYSE is applying to delist Gucci(GUC) and suspend its common shares, Dow Jones reported. Donald Trump's Trump Hotels & Casino Resorts, whose auditor in March expressed doubts about its ability to survive, said it may miss a $73.1 million interest payment due Monday, Bloomberg reported.

BOTTOM LINE: The Portfolio is unchanged today as my longs are falling and shorts are mixed. The weakness in technology shares is spilling over into the entire market. I expect this weakness to continue in the short-run as investor complacency is still too high.

Thursday Close

S&P 500 1,113.89 -.76%
NASDAQ 1,958.78 -1.55%

Leading Sectors
Telecom +.14%
Foods +.13%
Insurance +.03%

Lagging Sectors
Disk Drives -2.89%
Oil Service -3.35%
Networking -3.51%

Other
Crude Oil 37.53 +.56%
Natural Gas 5.94 +.27%
Gold 388.80 +.44%
Base Metals 103.45 +.57%
U.S. Dollar 90.44 -.80%
10-Yr. Long-Bond Yield 4.54% +.86%
VIX 16.60 +1.90%
Put/Call .95 +9.20%
NYSE Arms 1.32 -30.53%

After-hours Movers
CALM +17.45% after withdrawing proposed 5M share secondary.
FLML +6.43% after meeting 1Q estimates.
VTIV +5.41% after substantially beating 1Q estimates.
FDRY -26.86% after missing 1Q estimates and lowering 2Q forecast.
APCC -10.26% after missing 1Q estimates.
BOBJ -10.78% after missing 1Q estimate and lowering 2Q guidance.
GNSS -14.92% after meeting 4Q estimate and lowering 1Q forecast.
ITMN -16.71% after making negative comments on future drug prospects.

Recommendations
Goldman Sachs reiterated Underperform on UAL, BVF, AKS and MGM. GS reiterated Outperform on DOW, CMX, DNA and AET.

After-hours News
U.S. stocks finished lower Thursday on a below-expectations GDP report, rising interest rates and concerns over the Chinese economy. After the close, Bloomberg reported that automakers boosted the fuel economy of 2004 model-year vehicles for the second year in a row. Electronic Arts, the largest U.S. video game maker, said fourth-quarter profit surged as sales climbed 29%. Sequoia and Kleiner Perkins Caufield & Byers paid about $25 million combined in 1999 for a stake in Google. The 2 firms now stand to make a return of at least 150-fold from the investment, or about $4 billion, Bloomberg reported.

BOTTOM LINE: The Portfolio rose slightly today as my shorts fell more than my longs. I did not make any afternoon changes and the Portfolio is still 25% net short. One of the new short positions I initiated today is William Lyon Homes(WLS), a small-cap homebuilder. I am keeping a 90.5 stop-loss on this position. I think rising interest rates will continue to pressure this group short/intermediate-term. The tone of the market is still very poor. With my short-term trading indicators still giving sell signals and investor complacency still relatively high, I tend to think we have more to go on the downside before an oversold bounce.