Sunday, March 14, 2004

Market Week in Review

S&P 500 1,120.57 -3.14%

The S&P 500 had its biggest weekly drop in more than five months on continued profit-taking and anxiety about terrorism following the bombings in Spain that killed almost 200 and injured over 1,400. All 10 S&P 500 industry groups declined for the week, the first time this has happened since November. The Volatility Index(VIX), a measure of investor fear, rose 26.4% for the week to 18.30, its largest weekly gain in more than a year. The AAII Bullish % dropped 13.7% to 41.29 in another sign that investor anxiety is increasing.

The week began with weakness in semiconductors on continued fears of a slowdown after Intel's mid-quarter update. The weakness quickly spread to the entire technology sector, resulting in a break through some key intermediate-term support levels on the NASDAQ. Healthcare-related companies took a beating mid-week as Tenet Healthcare, the second-largest U.S. hospital company, had its credit rating cut by S&P. As well, pharmaceutical companies fell on news of investigations and lawsuits by the U.S. government and the AARP's demands for voluntary price controls and support for drug importation. Supermarket stocks fell substantially as WalMart continues to take market share. Finally, airlines were crushed after investors concluded that the terrorist attacks in Spain, coupled with high oil prices, will lead to significant financial distress for the major carriers.

The week ended on a positive note, as the market experienced a broad-based oversold rally on Friday. Falling energy prices, falling mortgage rates and the markets technically oversold state all led to Friday's positive action.

BOTTOM LINE: The major indices sustained some pretty bad technical damage over the course of the week. My analysis leads me to conclude that the major indices may rally a bit further before a test of the recent lows. The volume on Friday's rally was light and most of my short-term trading indicators are giving sell signals from oversold positions. Company fundamentals continue to improve as stock prices drop, leading to very reasonable valuations in most sectors. Thus, while I feel the correction has a bit further to go, I do not expect significant declines from here. I will look to scale into long positions in my favorite stocks as I think this correction presents a tremendous opportunity for significant profits later in the year.

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