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InvestmentHouse Weekend Update:

http://www.investmenthouse.com/1weekendmarketsummary.htm

- Finish to an interesting week leaves Wednesday reversal issue unanswered.
- Overall picture remains weaker though leadership is holding up.
- CPI not falling, but after rising PPI it was a relief to investors.
- Industrial production jumps 1% but most of it was cold weather utility production.
- A further test to the 200 day SMA is still likely in this correction, but leadership is providing upside plays to go along with the downside.

THE MARKET

MARKET SENTIMENT

VIX: 16.79; +0.36. Spiked to 21.25 on the Wednesday high intraday as the market undercut the prior correction low. That is getting there but is still below the highs in June (23.81). In the bigger picture that is low volatility; in ‘normal’ times it runs from 20ish to 30ish with those ends being the lows and the highs. Still some to go on the upside before the bottom is set.
VXN: 19.6; +0.81
VXO: 16.39; +1.17

Put/Call Ratio (CBOE): 1.23; +0.1. Eighteen days above 1.0. Getting ridiculous here and that means extreme. Extreme typically means change is in the offing. The other sentiment indicators are heading in the right direction (volatility, bulls/bears), but they are not there yet.

Bulls versus Bears:

Bulls: 45.5%, down from 46.2% and well off the 50.5% and 53.3% six weeks back. When it bottomed last summer it was near 36%. That is the lowest level since September 2006. Still a ways to go, but when it cracks it can tumble quickly. A 4.3 point drop is pretty salty.

Bears: 28.9%. Nice fat jumps in the bears, up from 26.9% and 24.2% the week before. Not bad after spending the first two months of 2007. The angst is rising, and as with bulls, it is not all that far from levels that sparked prior rallies. It hit a post-2002 high in that late June 2006 move (hit near 36%), eclipsing the March 2006 high (33%) and well above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005). It is not far from those 2005 levels.

NASDAQ

Stats: -6.04 points (-0.25%) to close at 2372.66
Volume: 2.14B (+18.07%). Stronger, slightly above average volume. Volume was not that strong for expiration and was below the Tuesday and Wednesday trade though those days were likely part expiration trade as well as investors positioned ahead of the weekend.

Up Volume: 899M (-98M)
Down Volume: 1.199B (+420M)

A/D and Hi/Lo: Decliners led 1.56 to 1. Rather modest, matching the session.
Previous Session: Advancers led 1.68 to 1

New Highs: 62 (-8)
New Lows: 82 (+20)

NASDAQ CHART: http://www.investmenthouse.com/ihmedia/NASDAQ.jpeg

SP500/NYSE

Stats: -5.33 points (-0.38%) to close at 1386.95
NYSE Volume: 2.072B (+37.44%). Unlike NASDAQ this was quite a volume surge. Technically distribution, but again, it was also expiration Friday and that contributed to this strong trade. But for expiration this would be one heck of a churning session below near resistance at the 10 day EMA.

Up Volume: 630.715M (-467.717M)
Down Volume: 1.397B (+1.007B). Down volume doubled up the upside trade; it was not all just an expiration phenomenon.

A/D and Hi/Lo: Decliners led 1.6 to 1. Pretty mild compared to the prior sessions. Once again we see very volatile breadth readings, running sharply higher on up sessions and sharply lower on down sessions. Recall that is what the market showed before it rolled over into the selling. Volatility, those big back and forth swings, indicate there is still no consensus in the market and thus more selling is likely.
Previous Session: Advancers led 2.44 to 1

New Highs: 86 (+2)
New Lows: 31 (+5)

SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg

As you can see, SP500 closed below the 10 day EMA after the big Tuesday selloff and the Wednesday reversal. Thursday and Friday did not answer the question as to what Wednesday was, but before this is over we still expect to see SP500 down near the 200 day SMA and that general area is likely to be where it finds the bottom. Might undercut it and really scare everyone, but somewhere in that area is the likely end of this.

DJ30

DJ30 didn’t even make it to the 10 day EMA on the rebound off the Wednesday reversal as it showed more weakness to end the week than its pattern indicated. It is still holding above 12,000, but that is going to be violated again before this ends. As with SP500 a test of the 200 day SMA is likely and indeed a move below that is likely as well.

Stats: -49.27 points (-0.41%) to close at 12110.41
Volume: 388M shares Friday versus 232M shares Thursday. Exploded higher on expiration.

DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg

Support and Resistance

NASDAQ: Closed at 2372.66
Resistance:
2376 is the April high, the former post-2002 high. Bending a bit.
2379 is the October high.
The 10 day EMA at 2385
2400ish from the late November and late December 2006 lows.
The 50 day EMA at 2425
The 90 day MA at 2436
The July/August trendline at 2447
2468.42 is the November 2006 high
2471 is the December 2006 high
2509 is the January 2007 high
2523 is price resistance November 2000

Support:
2368 is the early October handle high.
2340 is the March low
2339 – 2334
2333 is the top of the Q1 2006 trading range (the January and mid-March 2006 highs)
2316 from interim tops in January and March 2006 trading range
2300 represents some price support
The 200 day SMA at 2296

S&P 500: Closed at 1386.95
Resistance:
The 10 day EMA at 1395
1408 is the November high
The 90 day MA at 1415
The 50 day EMA at 1415
1425 is an interim high from November 1999
1432 is the December 2006 high
1440 is the mid-January high
1444 from February 2000
1453 is the late November to February up trendline
1475 from peaks in December 1999 and January 2000

Support:
1389 is the October peak.
1374 is the early March low
1371 to 1373 is the December 2000 peak and the January 2001 peak
1369 from early October 2006
1358 to 1362 mark a series of peaks from April 1999 to August 1999 high and the February
1353 to 1350 is the early October consolidation range
The 200 day SMA at 1350

Dow: Closed at 12,110.41
Resistance:
The 10 day EMA at 12,200
12,361 is the November 2006 high
The 50 day EMA at 12,382
The 90 day MA at 12,397
12,499 is the December intraday high.

Support:
12,039 is the early March low.
October high is 12,167
11,986 is price support from mid-October and the early November low.
11,940 is the March low
11,865 from the early October consolidation
The 200 day SMA at 11,822
11,750.28 is the pre-2000 all-time high
11,723 is the January 2000 closing high
11,670 is the May intraday high
11,642 is the May 2006 closing high
11,488 is the early September high.

Economic Calendar

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

March 20
- Housing starts, February (8:30): 1.44M expected, 1.408M prior
- Building permits, February (8:30): 1.56M expected, 1.571M prior
- FOMC day 1

March 21
- Crude oil inventories (10:30): +1.18M prior
- FOMC day two, policy statement (2:15)

March 22
- Initial jobless claims (8:30): 325K expected, 318K prior
- Leading economic indicators, February (10:00): -0.3% expected, +0.1% prior

March 23
- Existing home sales, February (10:00): 6.35M expected, 6.46M prior

TRANSCRIPT

Well over all we had a very interesting week in the market. The low-volume relief rally from last week ended on Tuesday with a high volume sell off. Wednesday the selling continued, but intraday the market reversed on volume to close positive. Thursday and Friday was anti-climactic as Thursday the market bounced on low volume and was down on Friday on higher volume to close out the week. The market was befuddled. It was expiration Friday, so there were some issues with that higher volume on Friday and indeed probably some of the volatility during the week was on account of expiration. Nonetheless we saw a couple of big moves during the week and the end of the week didn't resolve what that Wednesday reversal meant. It is something that indicates this leg is over, or are we going to sell off further? Thursday and Friday didn't answer that question, and we'll know more this coming week. As we discussed Wednesday night we have our suspicions as to what that day meant.

The overall picture still remains negative. We are in a correction; that has not changed. What happened this week was another down leg that looks like the beginning of another down move in this correction. Wednesday was a reversal off the session lows, but the indices finished the week below the 10 day moving average, and that's where near resistance is and that's where the move last week stalled.

We still have an overall negative picture when you look at the internals. Sure they were talking about the internals being good on Thursday, but when you look at the week over all, the internals were very poor. They were heavily biased to the downside and the negative internals were far stronger than the positive ones. For example, when you look at the internals, i.e. down volume to up volume during a bad day and when you look at the advance/decline during the negative days, they overwhelmed the positive days.

Leadership was interesting. We still have some great leadership in the market and that is always one of the final acid tests of the market. Who is up there leading things higher or it in a weak market, who is or what is leading things lower. We are still seeing metals going up. Copper hit an eight-month high this past week, China still has a lot of demand and basic materials are still doing well. We see semiconductors forming up well in the tech stocks and telecomm stocks are looking pretty good. Software is looking good as well. So, we have an overall weak pattern to the market, but across many sectors of the market, we still have some positives. There are some very good stocks in very good position that are moving up higher. This market has some strong leadership. Therefore, you have an idea there's an underlying strength still in the market.

We have underlying strength right now, but the question is if this market correction continues what is going to happen to that leadership? Most of the time, when you have a severe market correction you are going to lose a lot of that leadership. But there is a big difference here and one that is worth noting between a correction and a sharp correction at that versus a market that is trending lower turning into a long prolonged bear market type pullback. A lot of leadership won't get totally scuttled. I say a lot but I may be exaggerating a bit. However, there will be leadership that won't totally breakdown. It will use the correction to base, to pull back from good moves and set up for the next leg higher. That's what leaders do, They lead the market after a correction. So we'll see a lot of good stocks pulled back to near support or even down to the 50 day moving average and base out. Then they will start back up. We see those right now. That's what we are putting on the reports on the upside plays. We are looking for these strong stocks that are weathering this decline and indeed have done very well in weathering the first two big blows lower. The stocks are setting up to move higher and some of them are moving higher already. So we will keep an eye on it because that tells us that even though the there is probably another leg down in this correction that the overall correction thus far does not indicate that it will be very severe to the downside.

THE ECONOMY

With this pullback we have seen that there has been a lot of negatives with respect to the economy and the idea is now, gee the economy just not doing that well. We have mortgage problems, overseas problems such as China trying to slow our economy down. Industrials are slowing production in the US and we see the PMI reports lower. There are many things that have people worried. What was just basically a mid-cycle slow down has turned into fear that the mortgage issues are spreading. You also have people like Alan Greenspan talking about recession saying that the household problem could be worse than it was first indicated. This only fuels the fire. This talk is leading to some of the near-term worry with respect to what's going with the market. Friday we had the CPI, which came out well as did industrial production. The CPI after a hotter PPI on Thursday was lower, was not really lower, but it seemed lower because the core was in line at 0.2%. Now overall it was higher, but there are reasons for it being higher. One of issue was food which we talked about Thursday night.

The corn issue is going to be big for us. Ethanol is going to soak up all the corn. It hasn't really started yet because it is not producing much more ethanol. The worry is it will, and the market is pricing in that every scrap of corn that we use in the country has to be used for ethanol. This means that it will cost more to feed chickens, cows, pigs and every animal that we eat is going to cost more. That means we pay more for food. Food pricing is already starting to anticipate this and is going up.

Some of the price gains are aberrations. Energy however is not an aberration. We have a problem with energy and it's going to stay high. What we did see was apparel was still up. This is unusual. Apparel should not be up at this point and we anticipate it to fade back. Industrial production on the other hand outside of the PPI that was up 1% when it was only expected to rise .3% and it was down .3% the month before. We thought oh great we already have strengthening in industrial production and we are coming out of this just as some indicators are showing that we are going lower. This really means that we are actually going higher and things are starting to pick up again. The problem is that we had a very cold month and a lot of the gain and the lion’s share of the gain was due to the utilities having to ramp up and having to produce a lot of electricity to keep us warm. Therefore that's why we had the big gain. Another thing to consider with respect industrial production, is that this was only the second gain in 6 months. So it is not taking off right now it's still coming in for a landing. The question everyone is worried about, what we have been talking about all along and what Greenspan has been dealing with (his concerns with recession and the problems in the sub-prime market spreading out) is how rough is the correction in the economic cycle going to get.

We think that it has been just been hyped up lately. We think that a normal slowdown in the mid-cycle of an expansion is being exacerbated by these comments and some of the mortgage issues. This is normal. It is normal for an economic cycle to slow midterm. ECRI is the leading indicator one of the best leading indicator that we can compile as human beings. It shows this slow down and forecasts the slowdown, but it is also forecasting a pickup after the summer. There something that can derail that you can have the mortgage issue really and truly expand out beyond sub-prime and start hitting and impacting the middle of the road mortgages that meet the heart of the mortgages in America and that would really crimp the spending.

We can also have some insane or maybe I should say asinine ideas coming out of Congress such as the one that's filtering through right now which is putting punitive tariffs, or punitive penalties on China if the trade balance is too large or if they don't do enough with respect to the currency according to whatever Congress thinks they should be doing. That can scuttle things in a hurry and of course we also have the tax issue. During the campaign raising taxes was the last choice in raising revenues. Well it seems as though we are at the last choice without ever trying the first, second or third choices.

We are pretty certain that we are going to get some kind of increase in tax proposal over the next year. If one or worse case two of those come to be, then market could really have a problem because the economy would be having a problem down the road. This would be bad news for the economy in general. This expansion in the market it would go down first and the economy would follow.

We still think it is a mid-cycle slow down and we still think that is just been blown out of proportion by some of the events, commentary as well as the mortgages. Everyone always gets scared when mortgage default starts to rise. That's normal to worry about the consumer being able to consume. At this juncture, though it's not anything that is out of the norm considering the out of the norm rise we had in the housing market. You must remember this as well. A lot of the problems that we are experiencing right now in the mortgage market they were put in place less than two years ago, The housing market topped in summer 2005, and that's when all these very strange and fringed type mortgages started when the housing market slowed down. These types of mortgages were used by lenders to get borrowers to the table so they could make more loans, and of course generate more fees. This was a relatively recent phenomenon and not the entire boom was laced with these poor choices in mortgages to individuals who may not be able make the payments once the worm turned a little bit. That is important to keep in mind and is a matter that has been lost here. This is a late cycle part of housing boom and not the meat and the guts of the four years of gains. It is that the latter part of it so the actual damage shouldn't be that severe. This is something that everyone seems to be losing site of in the hype over the mortgages.

THIS WEEK

Well, then that gets us back to just what's happening this week as we said we can look at the charts and see that the indices have another sharp leg lower reversed but then drifted off and waffled into the end of the week and were below, near resistance at the 10 day moving average. In other words it never really answered the question as to what Wednesday meant. Was it really key reversal or was it just one of those things that expiration week during a correction we had a lot of volatility. We still think that we are going to try to test the 200 day moving average. Probably during this leg here may rally up little bit more or may blow down and bounce back. We are looking past the corrections and how the market is shaping up. We think we can get that pullback here down to the 200 day moving average. And we think that will set the low for the correction. We have a bounce back up, and we come down to test that move again. That puts us out five or six weeks and still trying to get this thing resolved. We will see some more stocks blow up during that period and will try to keep pretty tight leash on them.

The performance of a lot of our plays have been very good, so we do not want to cut them off when they are actually showing no real distribution, but just showing nice consolidation just working on their bases. Remember what we said about leaders. They will use a normal correction to pull back in base, but hold support and then power ahead. As long as our positions do that we are game. We are going to keep with them. We have seen a lot of good upside movement from energy stocks and the like. They will give us good gains even while the market corrects. Gains that we can take off the table. We get another good rally and we are looking to take them off the table. We are also looking at playing the downside. This is a correction after all. We want to take advantage of it. The moves can be very quick as you have seen. What with SBUX, SPY, DIA and CSE. There were many indices that went down they gave us quick gains so we want to take advantage of that. And if we have another blow down to the 200 day moving average it is going to happen rather quickly. We are still going to have downside plays to take advantage of that. As we often say in our seminars that greed is a powerful emotion, but fear is the king emotion. That is the one that really moves the market because that is when everyone tries to get out at once.

When the market it going up you can pick your shots and get in, but when the market is going down that is when you fear that they are going to lose the childhood College fund, the trip to the Bahamas and everyone is trying to get out the door as fast as they can. Everyone is eyeing each other from the side line and seeing if he or she is going. When they see the break they go then everyone goes because it is the herd mentality. We want to be ready to take advantage of the downside because it happens very quickly.

Again we want to also take a look at the upside and continue to do to that and look at the leadership plays. Because lets face it, we still have China despite it wanting to cool its economy, it is still sucking up a lot of the commodities and materials across the country and across the world. We want to be able to take advantage of that as well. It is not going to slow its economy overnight and as we have seen even though it tries to slow down it is picking up its imports and those kind of goods. We are going to see them perform well.

It is choppy times. We have to understand we are in a correction and as long as we know that and stay grounded in the fact that we are in a correction and we make our moves accordingly, we will come out of this in really good shape. A.) we are going to take advantage of the downturns as they happen and make us some good fast money and B.) we will be keeping an eye on the leaders. We are going to bird dog them and will be ready to move into those stocks as they show that they should be bought.

Remember we follow what the market says, we do not sit here and guess and think that this is going to happen or this looks good. That is how we get positioned and are ready to move by anticipating what the market would do. We wait to see what the market actually says and move according. This correction has a script to it varies a little. There is a little adlibbing going on every correction. They are always different. But they follow a pretty close script that it is just a correction and there is nothing at this stage to say that it is not. So we are gong to take advantage of the downside and take advantage of the upside and when we get the right moves that tell us BUY ME, BUY ME we are going to step in and buy.

Hope you have a great weekend. Hope you enjoy the video. We get a lot of popular feedback on it and we enjoy doing it. We are not going to do it all the time but maybe a couple times a week. We have a transcript available for this week so you can see the video and look at the transcript as well. I know sometime you see us on TV, but sometimes you do not. But we think it is nice to be able to put a face with a report. Again have a great weekend and we'll see you next week

VIDEO NEWSLETTER & TRANSCRIPT
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This weekend we have another installment of the video newsletter. We also have a transcript available for following along, reading on its own, or other use as you may see fit.

To view the Video Market Summary please browse to the following link:

http://investmenthouse.com/ihmedia/3172007marketsummaryvideo.wmv