Replies to post #6136 on Sector Investing

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Major Market 3 Year Weekly Charts with the SOX and BKX Industry Indices included because of the importance of these indices to the market overall:

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Current Conditions Typical of Market Peak

http://www.comstockfunds.com/index.cfm?act=Newsletter.cfm&CFID=23275222&CFTOKEN=92431320&...

A study of past bull and bear cycles indicates that cyclical peaks and troughs exhibit repetitive and consistent behavior that helps determine whether the stock market is closer to a top or a bottom. Market bottoms typically are accompanied by low valuations, highly negative investor sentiment and an easing monetary policy. By way of contrast, market peaks usually exhibit high valuations, positive investor sentiment and and tightening monetary policy. In addition, by definition market peaks occur following substantial gains while bottoms occur after significant declines. In our view the current status of these factors strongly indicate that current market conditions are much more typical of a top than a bottom. Valuations are high, investor sentiment is positive, the Fed is tightening, and the market has risen significantly over the last three years.



For about 100 years through the late 1990s the P/E ratio of the S&P 500 ranged between a high of about 22 and a low around 8, with an overall average of about 15. In the late 1990s bubble the P/E ratio soared to over 40, and has now declined to 18.3, a valuation that is still in the high end of its historical range. If the P/E ratio drops only to its long-term average of 15, the market decline would amount to 18%, even assuming the current record earnings levels remain intact. Furthermore a decline in the P/E to 8 would result in a severe market drop of 54%. (In the post-war period bear market declines have averaged about 30%.) On the other hand if the market does not drop sharply, the valuation problem is likely to be resolved only by a multi-year trading range resulting in little or no net gain. In the past, investments made at the upper end of the P/E ratio range have resulted in anemic returns even over periods as long as 20 years.



The current market is also characterized by optimistic investor sentiment despite the worries about Iraq, terrorism and high energy prices. According to Investors’ Intelligence 57% of market letter writers are now bullish and only 23% bearish, numbers that are typical at bull market peaks. At bottoms, on the other hand, the percentage of bulls is generally under 25% while bearish sentiment is more than 50%. The percentage of cash as a percentage of assets in equity mutual funds is now only 3.9%, the bottom of a 40-year range encompassing a high of about 13% and a low of around 4%. In addition the current VIX volatility index is now at 11.9, indicating a lack of investor concern about market risk. Over the last 15 years VIX has fluctuated in a range between 10 and 47. Although we prefer factors that can be measured, even on an anecdotal basis it is easy to see the rampant bullishness in the media and on the Street. Viewers of financial TV shows are well aware that it seems extremely difficult to find enough bears for a vigorous debate



Turning to monetary policy, the Fed has hiked the funds rate by 25 basis points 13 times over the last 19 months bringing the rate up to 4.25% from its low of 1%. Since the Fed came into being in 1913 the vast majority of tightening phases have been followed by bear markets. These bear markets generally did not end until after a policy of ease was well under way as investors at the start of a move toward ease typically become more concerned with the prospect of falling earnings than with the intricacies of Fed policy. When the market finally turns up in response to Fed ease it is only after a significant decline, negative investor sentiment, and far lower valuations.



In our view current high valuations, optimistic investor sentiment and tightening Fed policy mean that market risk is extremely high and potential rewards on the low side. In saying this we are well aware that a large segment of the Street and investing public believe that this time it’s different; that people who believe this are often intelligent and well-informed; and that they present seemingly logical arguments. However, the belief that this time is different has always been the case put forward at market peaks. That is why the peaks occur in the first place. Publicly traded markets of any kind simply cannot soar to high levels without a widespread belief that those levels are justified. Once that happens, though, the potential risk/reward ratio shifts heavily to the downside, and that is where we think we are today.

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WEEKLY OUTLOOK Jan 23
By Chris Tyler, Optionetics.com
1/23/2006 7:00 AM EST

WEEKLY SUMMARY

http://optionetics.com/articles/article_full.asp?idNo=14092

The trading week officially showed four business days on the calendar; however, it was the last three trading sessions that had market participants going through an extra hard spin cycle. For the four day period, the market—as represented by the S&P500 ($SPX) and tech-heavy NASDAQ ($COMPQ)—showed some debilitating losses of 2.03% to 2.99% on heavy trading activity.

Some might be rethinking the adage, “the trend is your friend” after the very aggressive and volatile price activity of the past three sessions. The week opened up to little official news in Tuesday’s trade, but geopolitical news had the February crude contract jumping to over $67 a barrel and causing slight profit-taking on below average volume in the major averages. In contrast, the next three sessions offered up extreme volatility, the likes of which haven’t been seen in more than a year. Wednesday offered up a tumultuous price gap in the NASDAQ before rallying to close strongly within the day’s range. Thursday went on to deliver upside trade-thru conditions marked by accumulation, but an investor about-face in Friday’s session had the markets closing aggressively lower on the day and for the weekly period.

In Wednesday’s session, the NASDAQ witnessed an opening price drop of about 1.5% and looked reminiscent of the Internet boom. Disappointing results and guidance from both Intel (INTC) and Yahoo (YHOO) weighed heavily on investors’ early decisions to aggressively reduce equity exposure. Pressure increased caused by escalating geopolitical tensions over Iran’s nuclear ambitions, militant problems in Nigeria (the world’s 8th largest oil exporter), and an unsightly sequel to the treasury yield curve inversion. Also reminiscent of days gone by (and not a welcome memory at that), allegations surfaced of earnings tampering overseas. A Japanese Internet high-flier and crowd favorite called Livedoor sent the Nikkei tumbling on the news and forced an early closure of the exchange.

Thursday offered up the market’s first batch of generally decent earnings and positive guidance from companies releasing. Meanwhile, economic and geopolitical news was mixed, but the market essentially shrugged off concern in favor of the reports. After the declines of the prior two sessions, it may have looked like an ideal pullback situation. News of Osama bin Laden threatening the U.S. with fresh attacks, a weaker-than-expected housing starts report and a wage-inflation threat as evidenced by a hard decrease in the weekly initial claims figures were no match; with the end result being a broad-based trend day with institutional accumulation. Not even news of the DOJ requesting search data from institutional favorite and Internet heavyweight Google (GOOG) could keep bargain hunters, shorts covering and fresh longs from the buy side. Helping investors locate their wallets were well-received reports out of Advanced Micro (AMD), Merrill Lynch (MER), QLogic (QLGC), eBay (EBAY), and Lam Research (LRCX).

While the blinders were well-worn Thursday, participants decided to go for clarity with different eye gear in Friday’s trade as the major averages suffered their worst single-day performances in more than a year. An all-too-familiar Mulligan of earnings disappointments with names like Motorola (MOT), Citigroup (C) and General Electric (GE) had investors quickly turning tail and trumping the prior session’s donning of the party horns. With seemingly no end in sight to the week’s geopolitical threats, fresh 25-year highs of nearly $569 in gold (close 554, down 3 on week) and a four month high of 68.80 in the Feb crude contract (close 68.35 up 4.44 on week) continued to weigh on investors’ collective thoughts and actions. Also, with a continuation of the yield curve inversion the stage was set for what became a session-long retreat into fresh weekly lows and key intermediate support zones.

As for some of the other market-moving catalysts and potential factors of importance going forward; we can highlight the generally bullish, bearish and the outright perplexing.

Bullish
CBOE Volatility Index ($VIX) sees a price spike of nearly 22% and largest in 8 months
Short-term very oversold into key intermediate testing zone for most major averages
Uncertainty, selling conviction…sounds like an inversion of recent activity
CNBC ‘the voice of concern’. From Dow 11K alerts to the S&P500 Largest Drop Since 2003
‘Google 2000’ nowhere to be found
Bearish

Yield Curve inversion bounces back into the spotlight
13-week cycle highs in place off October lows
Elliott Wave 5 counts and Fibonacci resistance look confirmed in many major averages
4-year cycle lows are set to occur in 2006
Presidential 2nd year stock market woes
5 days of distribution over four week period has many IBD investors sidelined as of Friday and manyother intermediate traders close to towel throwing
Spin Factor & Mixed

Oil politics is very much all the rage on the airwaves
Spike in the CBOE Volatility Index is off historic low levels of investor complacency
Investor conviction over uncertainty will need to be replaced

ON TAP THIS WEEK

Thus far with about 20% of the S&P500 ha

ving reported, earnings are coming in 13% over the same quarter in the year ago period. While that figure is on track to match analyst estimates, the guidance thus far has been a major disappointment and one of two primary catalysts for the market’s sell-off this past week. After more than 2.5 years of strong percentage increases the adjustment to shrinking earnings growth is currently being played out from the sell side.

Another potentially alarming trend for earnings hounds is that companies are beginning to say no to Wall Street’s guidance game. Names such as Intel (INTC), Motorola (MOT) and Citigroup (C) all issued statements this week advising of changes related to how and what information between earnings reports would be disseminated. According to some analysts this could lead to more volatility in stock prices down the road, as investors’ will have less clarity into a company’s numbers until they are presented on the actual release date.

Iran will continue to share headline space with corporate reports this week. Just how real or unreal investor concerns turn out to be, is very much open to debate. As for economic reports, the weekly claims figure may carry more significance than usual. Last week’s reading suggested further tightening of the labor market and one that is near the theoretical ‘full employment’ threshold. Further tightening leads to the possibility of wage inflation and price pressures that could be harmful to corporate profits down the road.

Monday:
Economic: Leading Indicators (.2%)
Earnings: B of A (BAC), Ford (F), Energizer (ENR), American Express (AXP), Texas Instruments (TXN), E*Trade (ET), Neurocrine (NBIX), Lone Star (LSS), Ariba (ARBA)

Tuesday:
Economic: NA
Earnings: 3M (MMM), Coach (COH), EMC (EMC), Imclone (IMCL), Agere (AGR), BJ Services (BJS), Headwaters (HW), United Tech (UTX), Corning (GLW), Netflix (NFLX), Ryland (RYL), Sun Micro (SUNW), STMico (STM), Trimble Nav (TRMB)

Wednesday:
Economic: Weekly Crude Inventory
Earnings: Amerada Hess (AHC), Allegheny (ATI), General Dynamics (GD), Ameritrade (AMTD), AmerisoureBergen (ABC), Maxim (MXIM), Wellpoint (WLP), SAP (SAP), M-Systems (FLSH), Altera (ALTR), Harman (HAR), Juniper (JNPR), Novellus (NVLS), Qualcomm (QCOM), Silicon Motion (SIMO), Stanley Works (SWK), TALX (TALX), Trident (TRID), Varian (VAR)

Thursday:
Economic: Weekly Initial Claims (300K), Durable Orders (1.0%)
Earnings: Amgen (AMGN), Cardinal Health (CAH), Celgene (CELG), Caterpillar (CAT), Cypress (CY), Dow Chem (DOW), Honeywell (HON), MarineMax (HZO), Lockheed (LMT), Nokia (NOK), OptionsXpress (OXPS), Pantry (PTRY), Peabody (BTU), Potash (POT), Verisign (VRSN), Affymetrix (AFFX), Bebe (BEBE), Emulex (ELX), Getty (GYI), Halliburton (HAL), Foundry (FDRY), Massey (MEE), Openwave (OPWV), PortalPlayer (PLAY), SanDisk (SNDK), Stryker (SYK), Sierra Wireless (SWIR), Tempur-Pedic (TPX), Western Digital (WDC)

Friday:
Economic: GDP (2.9%), New Home Sales (1235K), Chain Deflator (2.6%)
Earnings: Chevron (CVX), FPL Group (FPL), Black & Decker (BDK), HCR Manor (HCR), IDEXX (IDXX), Procter & Gamble (PG), T.Rowe (TROW), Manpower (MAN)

TECHNICAL PICTURE

You’re certainly not hearing it here first, but with Friday’s precipitous drop, the markets (except the IWM) are short-term oversold. This corner doesn’t qualify the description of oversold with indicators. However, I’m more than certain that with the spike of more than 20% in the implied volatility levels and lots of hand wringing, fun-factoid headlines about index losses at CNBC; that we do have pretty solid confirmation of that fact. On a side note, was a good part of the volatility related to options expiration, rather than the headline-driven uncertainty? That’s a question that this corner is pondering after Friday’s session. Considering all the bullishness and clarity of the prior two weeks and all of the associated directional bets, it certainly has my attention as a worthy thought.

While this corner pointed out Wave 5 highs, Fib resistance zones and 13-week cycle changes ahead of the pack and still sees lower prices in the scheme of things, you won’t find this corner looking for shorts out the gate this week. In the short-term the bias is geared towards positioning directionally long off panic selling that has taken the market into key intermediate support zones. It should be noted that intermediate-term traders are holding their collective breathe at this time as the trend as defined by IBD sits on the edge of the technical abyss. With the 50-Day MAs being tested and enough distribution (5 days over 4 weeks) to have many of these players already turning to cash, any further downside and heavy selling will certainly have the ‘Confirmed Rally’ as being all but over.

With the speed and conviction (ahem) with which participants like to play the game these days, we can only wait and see how and what will actually qualify and for how long that might last. As was the case coming into Friday’s trade, any upside goosing will be viewed with something other than rose colored glasses and the possibility to locate resistance shorts in the coming days. With volatility levels percolating, spreading off directional risk makes for a stronger trade in many products. In this environment directional fly’s or verticals are thought to be a good approach to market positioning with less initial risk and the opportunity and flexibility to adjust the trade.

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Leavitt Brothers Forks for you:

http://www.leavittbrothers.com/freestuff/

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Amateur Investors Weekend Market Analysis:

http://www.amateur-investors.com/Weekend_Market_Analysis_Feb_11_06.htm

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The Impact Of An Inverted Yield Curve
February 16, 2006 | By Jim McWhinney

The term yield curve refers to the relationship between the short- and long-term interest rates of fixed-income securities issued by the U.S. Treasury. An inverted yield curve occurs when short-term interest rates exceed long-term rates. From an economic perspective, an inverted yield curve is a noteworthy event. Here we explain this rare phenomenon, discuss its impact on consumers and investors, and tell you how to adjust your portfolio to account for it.

Typically, short-term interest rates are lower than long-term rates, so the yield curve slopes upwards, reflecting higher yields for longer-term investments. This is referred to as a normal yield curve. When the spread between short-term and long-term interest rates narrows, the yield curve begins to flatten. A flat yield curve is often seen during the transition from a normal yield curve to an inverted one.


Figure 1 - A normal yield curve

What Does an Inverted Yield Curve Suggest?
Historically, an inverted yield curve has been viewed as an indicator of a pending economic recession. When short-term interest rates exceed long-term rates, market sentiment suggests that the long-term outlook is poor and that the yields offered by long-term fixed income will continue to fall. More recently, this viewpoint has been called into question as foreign purchases of securities issued by the U.S. Treasury have created a high and sustained level of demand for products backed by U.S. government debt. When investors are aggressively seeking debt instruments, the debtor can offer lower interest rates. When this occurs, many argue that it is the laws of supply and demand, rather than impending economic doom and gloom, that enable lenders to attract buyers without having to pay higher interest rates. (To learn more, see Forces Behind Interest Rates and Trying To Predict Interest Rates.)



Figure 2 - An inverted yield curve: note the inverse relationship between yield and maturity

Impact on Consumers
In addition to its impact on investors, an inverted yield curve also has an impact on consumers. For example, homebuyers financing their properties with adjustable-rate mortgages (ARMs) have interest-rate schedules that are periodically updated based on short-term interest rates. When short-term rates are higher than long-term rates, payments on ARMs tend to rise. When this occurs, fixed-rate loans may be more attractive than adjustable-rate loans.

Lines of credit are affected in a similar manner. In both cases, consumers must dedicate a larger portion of their incomes toward servicing existing debt. This reduces expendable income and has a negative effect on the economy as a whole. (See ARMed And Dangerous, Mortgages: Fixed-Rate Versus Adjustable-Rate and APR vs APY: How The Distinction Affects You.)

Impact on Fixed-Income Investors
A yield curve inversion has the greatest impact on fixed-income investors. In normal circumstances, long-term investments have higher yields; because investors are risking their money for longer periods of time, they are rewarded with higher payouts. An inverted curve eliminates the risk premium for long-term investments, allowing investors to get better returns with short-term investments. When the spread between U.S. Treasuries (a risk-free investment) and higher-risk corporate alternatives is at historical lows, it is often an easy decision to invest in lower-risk vehicles. In such cases, purchasing a Treasury-backed security provides a yield similar to the yield on junk bonds, corporate bonds, real estate investment trusts (REITs) and other debt instruments, but without the risk inherent in these vehicles. Money market funds and certificates of deposit (CDs) may also be attractive - particularly when a one-year CD is paying yields comparable to those on a 10-year Treasury bond. (For further reading, see Getting To Know The Money Market and Why do interest rates tend to have an inverse relationship with bond prices?)

Impact on Equity Investors
When the yield curve becomes inverted, profit margins fall for companies that borrow cash at short-term rates and lend at long-term rates, such as community banks. Likewise, hedge funds are often forced to take on increased risk in order to achieve their desired level of returns. In fact, a bad bet on Russian interest rates is largely credited for the demise of Long-Term Capital Management (LTCM), a well-known hedge fund run by bond trader John Meriwether. (For further reading, see Corporate Bonds: An introduction To Credit Risk.)

Despite their consequences for some parties, yield curve inversions tend to have less impact on consumer staples and healthcare firms, which are not interest-rate dependent. This relationship becomes clear when an inverted yield curve precedes a recession. When this occurs, investors tend to turn to defensive stocks, such as those in the food, oil and tobacco industries, which are often less affected by downturns in the economy. (For further reading, see What are defensive stocks? and Recession: What Does It Mean To Investors?)

Conclusion
While experts question whether or not an inverted yield curve remains a strong indicator of pending economic recession, keep in mind that history is littered with portfolios that were devastated when investors blindly followed predictions about how "it's different this time". Most recently, short-sighted equity investors spouting this mantra participated in the "tech wreck", snapping up shares in tech companies at inflated prices even though these firms had no hope of ever making a profit.

If you want to be a smart investor, ignore the noise. Instead of spending time and effort trying to figure out what the future will bring, construct your portfolio based on long-term thinking and long-term convictions - not short-term market movements. For your short-term income needs, do the obvious: choose the investment with the highest yield, but keep in mind that inversions are an anomaly and they don't last forever. When the inversion ends, adjust your portfolio accordingly.

For further reading, see The Impact of Interest Rates On REITs.

By Jim McWhinney

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THE DOW REPORT
Dow Theory Clears the Secondary Hurdle

http://www.financialsense.com/Market/wrapup.htm

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ThinkEquity Partners downgraded shares of Intel Corp (INTC : Intel Corporation INTC 20.62, +0.01, +0.0%) to sell from accumulate, and cut its price target to $16 from $26. The broker believes Intel is building inventories, is losing share -- particularly in servers -- and will likely be negatively impacted by pricing cuts. Intel shares fell 0.8% in the pre-open.

http://www.marketwatch.com/News/Story/5zRQg5tt3T3kplmqpzzTd9Q?source=blq/yhoo&dist=RNPullDown&am...

Stock futures got a lift after data showed that U.S. consumer prices increased a larger-than-expected 0.7% in January, led by higher energy, food and housing costs. The core consumer price index, which excludes food and energy prices, increased 0.2%, as expected.

RtS

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Technical Analysis: Nasdaq Sees Its Shadow
By Paul Shread

It may be three weeks after groundhog day, but the Nasdaq (first chart below) sure acted like it was today — the index saw its shadow and popped right back into its hole. Let's see what happens in the next few days after that failed breakout. On one hand, the index's ability to break through that was a positive, but the failure to hold the breakout on a closing basis could embolden sellers. 2270 is short-term support, and 2290-2295 is resistance. The S&P (second chart) remains stuck at major resistance at 1295. Support is 1282-1285 and 1273-1275. The Dow (third chart) stalled once again at the top of a three-month broadening pattern at 11,150, with 11,200 the next resistance above that. That is a potential topping pattern, so it's one to keep an eye on. Support is 11,050, 11,000 and 10,960. Longs bonds (fourth chart) remain undecided here.

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AXYS Charts





http://finance.yahoo.com/q/ks?s=AXYS

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Intel sees Q1 revenue lower than expected
Fri Mar 3, 2006pm ET

http://yahoo.reuters.com/news/articlehybrid.aspx?type=comktNews&storyid=urn:newsml:reuters.com:2...

NEW YORK, March 3 (Reuters) - Intel Corp.(INTC.O: Quote, Profile, Research), the world's biggest chip maker, on Friday warned that its first-quarter revenue would likely fall short of expectations, citing weaker-than-expected demand and a dip in market share.

Intel said in a statement that its revenue would be between $8.7 billion and $9.1 billion. Previously the company had forecast revenue in a range of $9.1 billion to $9.7 billion.

As a result, the company said it no longer stands by its previous outlook as stated in January.

Intel, based in Santa Clara, California, said it expects its first-quarter gross margin to be hurt by the change in revenue. Expenses are also expected to be lower than previously forecast due to lower spending.

Shares of Intel fell 1.5 percent to $20.18 in trade on the Inet system before the Nasdaq stock market opening.



© Reuters 2006. All Rights Reserved.

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Technical Analysis: Outside Day
By Paul Shread

An "outside day" for the Nasdaq (first chart below) today, trading both above and below yesterday's trading range. Coming on the heels of a long rally, such volatility could set up a reversal. Time will tell. Also of concern is a potential head and shoulders top in the Nasdaq 100 (second chart) and bearish rising wedges in both indexes. All in all, a rare bearish set-up for the market over the last few years. Let's see if the bulls can pull this one out. Resistance on the Nasdaq is 2328-2333, and 2295 is major support. The S&P (third chart) faces major resistance at 1295-1300, and support is 1282-1284 and 1275-1276. The Dow (fourth chart) has support at 10,960-11,000 and 10,915, and resistance is 11,100 and 11,160. Long bond yields (fifth chart) are nearing a 52-week high.

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Amateur Investors Mid Week Update:

http://www.amateur-investors.com/Mid_Week_Market_Analysis_3_8_06.htm

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InvestmentHouse Weekend Update:

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

- Jobs report gives market an excuse to bounce; this time relief move sticks.
- Non-farm jobs continue to grow as more job seekers re-enter the market.
- Jobs report doubles chance of third rate hike in June even as other indicators continue to soften.
- Defensive stocks dominating the rebound, but there are still growth leaders holding well.
- Wall of worry versus macro economic themes pushing market around near the post-2002 highs.

Stock rebound manages to hold into the close.

The jobs report was stronger, and in the current Fed-induced anti economic strength mindset you would expect that news to further weaken stocks. After six straight down sessions on NASDAQ and five out of six on SP500, however, the market was oversold and needed to come up for air at some point. Thus even though the strong jobs data indicates further Fed action, indeed starting to once more build in an additional 25 BP to 5.25% on Friday, the market latched onto it and rebounded. Apparently good economic news can be good news if you have been beat up enough.

Stocks rallied early, held up through a mid-afternoon, pre-weekend selling attempt, and bounced into the close. Breadth was strong as the small and mid-cap indices worked with the large caps. Volume was up on NYSE but lower on NASDAQ. The up volume was not that solid either; NYSE trade came in well below average even with the rise in trade and NASDAQ volume fell below average for only the second time in 9 sessions. Stocks were moving but they lacked punch, not what you want to see on an up session, particularly after sellers used stocks as punching bags the prior week.

The rebound had a defensive flavor to it, literally, as defense stocks continued to provide some leadership. Health related stocks and consumer staples gained as well, adding more to the defensive nature. The move was broader than that, however, and most sectors enjoyed a rebound. With the volume and defensive flavor, it definitely had the look of a relief bounce.

Technically there was some healing. NASDAQ managed to hold its 2006 range, bouncing off an undercut of 2250, roughly the bottom of its three month lateral move. Always good to see support at the bottom of a range hold. SP500 held the 50 day EMA, trying to put in a higher low and turn a failing double bottom with handle (that was shaping into a double top) into an ascending triangle. Given the several mutations on SP500 you can understand why we always say a chart pattern is just a pretty picture until it makes the move that seals the deal. Though volume was mediocre, SP500 shows some better price/volume action the last half of the week.

SP500 remains the best behaved index, bouncing off the 50 day EMA and its up trendline after coming back down for a test when the upper channel line reined it in. It mid-cap compadre, the SP400, is not as well-mannered, falling through its 50 day EMA last week and trading just back to that level Friday. SOX remains the black sheep. It crashed through the 50 day EMA to start the week, sold lower, and made no attempt to rebound Friday. All it could manage was a hold at 500, right in the middle of the range of December peaks. It is always kind of lame to play up a hold of support when the rest of the market bounced. You have to be pretty weak when all you can do is not sell more when the rest of the market is bouncing. Not quite the picture of health. That said, it is due for a bounce as well, and as the market bounces some more early this week it could finally get some legs underneath it.

All in all we still have to read this as a relief move thus far. Breadth was solid but volume was weak, market leadership was defensive, and we saw more leading growth stocks break down last week and continue to sell Friday (e.g., BRCM, MRVL). The market can still bounce more in relief; there was quite a lot of selling last week as the indices finished lower despite the Friday gains. SP600 and SP500 held support and bounced, showing better action toward the weekend. Thus there is some life in the market, but it is going to have to spread out if this bounce is going to turn into something that can lead to a new break higher. The outside influences (e.g. the Fed, energy), however, have not changed, and when the relief bounce relieves the oversold condition the market will be challenged to move further.

THE ECONOMY

Jobs report continues to strengthen, luring more into the workplace.

Non-farm payrolls advanced 243K versus the 210K expected as the jobs market showed strength across the board. The December/January period was written lower by 18K, but the average over the past three months is 186K, more than enough than the 150K or so needed to just keep even. At the same time the unemployment rate rose to 4.8% from 4.7%. How can it do that? Because the workforce climbed 335K in February as more workers were lured into the market by all of the headlines over jobs the past couple of months. Remember, up until Q4 of 2005 the economy and the jobs market in particular was still considered puny and weak. Something got into the water apparently, because all of the sudden the economy is strong, the jobs market solid, and everyone is worried about overheating.

That, of course, plays into the Fed’s hands. It is able to control the market best, or at least get away with its overly tight policies, when everyone buys off on its version of the facts. What are these facts? That jobs, wages, and consumption cause inflation. In other words, when people finally start to realize some prosperity from a recovery the Fed assumes inflation is coming. Jobs are getting a bit more plentiful now and wages are finally starting to rise, showing a 3.5% annual gain in February, the best year over year rise since September 2001. While most would call that prosperity, at this point in a Fed rate hiking campaign it is called inflation pressure.

Market building in even more rate hikes after the jobs report.

The Fed sounded good heading into the new year, having just about wrapped things up. Housing is slowing, jobs and wages are growing modestly, businesses are still investing and thus ensuring supply will remain strong. Importantly, the real measures of inflation, the core CPI and PCE indicate no inflation. Very similar to 2000 when there was no inflation and the economy was starting to soften despite being labeled ‘white hot’ every day in every financial rag.

Of course that did not stop the Fed, and the market knows that. That is why Friday the odds of a third 25BP hike in June (after 25 in both March and May) doubled from 10% to 20%. In the big picture that is still low, and this far out it is not as accurate because so many things can change. It does, however, show the mindset, i.e. that the Fed will continue hiking rates until it slows things down.

That is a far cry from the good game the Fed was talking in the fall and on into Q4. There was a lot of talk about being almost done and the Fed even put into its minutes that it was well aware of the ‘one hike too far’ syndrome. Well, we all know we should not eat that last scoop of ice cream or make that last ski run when we are tired or stay out in the sun just another 15 minutes, but we do. The Fed, sadly, acts no differently than just regular old humans. Thus it has a well documented history of raising rates too far. You don’t see the extra pounds from the ice cream or the nasty sunburn until after the fact, and that is just what happens with rate hikes. If you wait to take remedial action once you see the problem it is too late. Funny. That is what the Fed says about inflation: if you wait until you see it, you are too late. For some reason, however, it cannot see the other side of the equation: if you keep hiking until you see significant slowdown, you are too late as well and we all pay the price for another significant economic slowdown or recession.

THE MARKET

MARKET SENTIMENT

VIX: 11.85; -0.83
VXN: 17.62; -0.17
VXO: 11.66; -0.61

Put/Call Ratio (CBOE): 0.87; -0.08. The week showed a close over 1.0 and two closes of 0.90 or better. That is not enough extreme readings to indicate a rebound, at least from this secondary indicator.

Bulls versus Bears:

Bulls and bears rose again last week and for the second straight week have surpassed the levels in May and October 2005 that signaled bottoms in the market ahead of rebounds. That remains a positive for the market, but even high levels while the market was at the breakout point recently was not enough to push the market higher. The closer bulls and bears come to each other the better potential for a bottom. Thus far it is not making the difference. We have to keep this in its place: it is a secondary indicator. It tells us to watch for signs of a turn. It does not declare a turn on its own.

Bulls: 42.7%. Edging higher from 42.6% the prior week. Bullishness had been diving hard, dropping from 45.3% and 48.9% the week before. Quite a drop from 60.4% hit at the start of the year. It has undercut the prior two lows that helped kick off their own rallies.

Bears: 31.3%. Another solid push higher from 30.8%. Bear growth continues to slow, down from prior weekly climbs from 25.5% to 27.7% to 29.5%. Already has surpassed its readings from the two prior market bottoms in May and October 2005 (30% and 29.2%, respectively).

NASDAQ

Stats: +12.32 points (+0.55%) to close at 2262.04
Volume: 1.779B (-11.32%). NASDAQ finished the week on lower trade with a gain. That is not bad price/volume action, it is simply not good action that shows accumulation of stocks. The week started poorly with a distribution session then tried a higher volume reversal on Wednesday. This is middle of the road at best, but it also comes after a high volume intraday reversal two Fridays back when NASDAQ tried to make the breakout but turned around intraday. It was unable to make anything positive of that, but at least it showed only one clear distribution session in response. That leaves it basically neutral with respect to accumulation as it enters this week attempting a rebound off the bottom of its 2006 range.

Up Volume: 1.127B (+432M)
Down Volume: 619M (-659M)

A/D and Hi/Lo: Advancers led 1.9 to 1. Decent breadth but not blowout.
Semiconductors are acting as a drag.
Previous Session: Decliners led 1.47 to 1

New Highs: 100 (+13)
New Lows: 55 (+11)

The Chart: (Click to view the chart)

NASDAQ opened slightly higher Friday, but it was selling again right off the bat, undercutting 2250 and reaching to the February closing lows (2239). It found its footing at that point, however, and rebounded to post a solid if unspectacular gain. It tested the 50 day EMA (2269.45) on the high, but it never seriously threatened that level. Volume was running lower, and the positive close was about all it could do on the session. Given the week, we have to be happy with that. The 2250 level is a rough line of demarcation for NASDAQ as it represents the December highs and the February lows. A break below this level and it heads toward 2219, the August 2005 high and the breakout point from its longer 2 year ascending triangle. It is important for the index to hold that breakout. In the bigger picture, if that breakout fails that indicates serious slowing ahead. For now NASDAQ is holding its new higher range for 2006, and we take that as a positive though we also know the move has been weakening with leadership techs and chips breaking their trends.

SOX (-0.24%) gave up a gain on the close, but it also managed to hold some support at 500, roughly the mid-point of the December 2005 highs. Hard to call it a positive session given it could not rally with the rest of the market and given it has now posted 7 consecutive losses. Definitely oversold, and this hold at support suggests it will try a bounce if the rest of the market can continue the upside move this week. Big names, however, are still falling in the semiconductors, e.g., BRCM, MRVL, TXN.

SP500/NYSE

Stats: +9.35 points (+0.73%) to close at 1281.58
NYSE Volume: 1.602B (+2.86%). As noted, price/volume action improved on NYSE after the Monday distribution. The action was solid, then turned weaker as NASDAQ improved, and has now turned to the better as NASDAQ again wanes. Wednesday and Friday it showed those upside gains on rising volume, and that always suggests buying. It was enough to hold SP500 at the 50 day EMA for now, but it will have to continue improving to drive it higher toward the breakout. As of yet there is not the conviction necessary to drive it higher given all of the external negative influences.

A/D and Hi/Lo: Advancers led 2.44 to 1. Very solid advance as large and small caps rebounded. Given SP500 and SP600 held key support, the advance was significant.
Previous Session: Decliners led 1.22 to 1

New Highs: 123 (+34)
New Lows: 45 (+4)

The Chart: (Click to view the chart)

SP500 started the session below the 50 day EMA (1274), but spent most of the session climbing higher, recovering the 10 and 18 day EMA (1281) after failing to take those levels out on the Thursday rebound attempt. SP500 traded around the December highs (1275) all week and then made a more definitive move higher after holding that key level. The price/volume action improved following the Monday distribution session; indeed, the upside volume that followed was stronger, at least on Wednesday when SP500 made its most dramatic move of the week, i.e. the intraday reversal. If it can make this move stick it will have put in a higher low and set up an ascending triangle after threatening with that double top. Still has to complete the move, but looking much better. The leadership is still in flux, however. Big defense (military) is doing well (in a war, if the economy goes lower at least the defense companies will get orders) as are healthcare and drug stocks, also defensive issues (everyone needs healthcare), and consumer staples (you have to eat, keep clean, etc.). Those are helping drive the action along with, strangely, financials. Those are contradictory but thus far they appear to be working together.

SP600 (+1.22%) was the clear market leader as the small caps held the up trendline and the 50 day EMA (370.61) and bounced on that rising NYSE volume. They were primed to come back after bumping into the upper channel line of the uptrend and running out of steam. Primed to lead higher again, but whether the rest of the market will follow on to a breakout is a big if right now. Almost textbook perfect technical action right now within its trend.

DJ30

The blue chips were leaders as well though it was more of a cessation in the selling of the ‘growth’ stocks in the index than a surge of strength. The strongest stocks in the index are defensive, but if you are a Dow fan you cannot argue with the move: Held the 50 day EMA (10,932) mid-week, made a higher low, and is rallying toward the recent highs (11,159). No volume, however, but with NYSE showing stronger trade it is livable.

Stats: +104.06 points (+0.95%) to close at 11076.34
Volume: 257M shares Friday versus 266M shares Thursday.

The Chart: (Click to view the chart)

MONDAY

The economic data continues to roll in after the jobs report with retail sales, regional manufacturing data, Fed Beige Book, CPI, housing starts, industrial production and Michigan sentiment. Good. We were worried what with the Fed, rising interest rates, oil, Iran, Iraq, port security, and worries over removal of tax incentives that the market would not have anything to push it.

The issue for us this week is just how much ‘umph’ the Friday move has in it. Wednesday the market reversed but Thursday it could not carry through. Now the market has shown a more substantive move. Will the buyers step in and further the rally after the shorts started to cover following more than a week of selling?

There is certainly a wall of worry to climb out there with so many potentially adverse issues facing the market, and stocks tend to climb those walls. Great. Indeed, SP500 and SP600 made strides along that line Friday, and NASDAQ even held the bottom of its range and bounced. The market is certainly trying to hold the line and move back up; SP500 and SP600 with their higher lows may even try another breakout. The news is not great, but if this move continues it shows some underlying strength that cannot be ignored.

We will see if it continues, and if it can show strength as it does. What concerns us is the themes that are running through the market, themes we have seen before at turning points. We discussed them last week as the market showed another bought of weakness. Indeed, this back and forth action from hot to cold and the quickly shifting price/volume action from strength to weakness between NASDAQ and NYSE is part of that. The economy, after lingering perceptions it was lagging well behind other recoveries, is suddenly seen as too strong. This even as leading indicators show softening. Not reversals threatening a crash, but the same weakness we saw in 2000. That was survivable, but the Fed got too aggressive at the wrong time. The Fed was ready to wind it up and go home, but now the market is pricing in even more hikes. Growth sectors are getting cut low while defensive sectors take the lead. This is a very important macro overlay to the action we are seeing.

You can always tell there is something up when you are winning consistently and then hit a series of losers. That is the time to back off and see where how the market resolves the issues. We have been paring positions the past two weeks while trying to focus in on those starting to show new leadership as well as those leaders that have taken a pause, are still in great shape, and then show us a continued move.

We are going to continue looking at potentially emerging leadership as well as leaders taking a breather and are now ready to move higher again. We will enter cautiously, however, moving in piecemeal, not trying to take the entire position at once. This is typically the way we work into positions anyway, e.g. buying more on the test of a breakout or a pullback to near support. That way the stock continually proves to us that it is worthy of our hard-earned money.

The current environment makes it even tougher, however, because the market’s action shows it doesn’t know which way it wants to go. That forces us to be quicker on the kill button and thus susceptible to seeing a position rebound as the market heaves back and forth, trying to decide where it wants to go. Some call it getting whipsawed. We just say it sucks. Thus we are trimming positions, exercising caution as the primary concern. In this kind of market you can get hurt easier than you can get rich, so caution is the key.

We are still going to look at many possible plays; in this market you take a look at what is looking good, watch them all, and see what sticks. You can make up your mind to ride out the volatility, letting positions dip low, but the problem with that right now is the common themes with prior market peaks and the potential for a more serious meltdown. A modest undercut becomes a real issue if the Friday rebound was just a head fake or a one day wonder and the indices head lower. Indeed, one day wonders are the hallmark of a very weak market, i.e. one where one upside day will be enough after a week of selling to set the stage for another week of selling.

We are not there yet and Friday showed some strength, particularly on SP500 and SP600, a rather odd mix for the end of an economic expansion. Indeed, those two improved their internal action after the Monday slow start to the week. That means we are going to look at those emerging leadership groups (the ones that move; not the ones where a dollar gain is a good month’s work) as well as those leaders that continue to show the strength we like to see. Of course, we are also going to have some downside plays; there are simply too many stocks breaking down to ignore this side of the action.

Support and Resistance

NASDAQ: Closed at 2262.04
Resistance:
The 50 day EMA at 2270
2273 is December 2005 closing high.
The 10 day EMA at 2275
2278 is December 2005 intraday high.
The 18 day EMA at 2278
2288 from December 2000 low.
2328 from the May 2001 peak
The January high at 2333
3015 is the December 2000 peak and the October 2000 low

Support:
A minor peak at 2249 is still holding.
2218 from August 2005 peak

S&P 500: Closed at 1281.58
Resistance:
The 18 day EMA at 1281
The 10 day EMA at 1281
The late January peak at 1285
The January high at 1295
1297.57 is the recent February high.
1315 is the May and May 2001 peaks
1324 to 1329 from the October 2000 lows.

Support:
The 50 day EMA at 1274
The December highs at 1275 (intraday) and 1273 (closing)
1264 from the December 2000 lows
1254 is the February low
1248 to 1250 is the bottom of the November/December 2005 range
1245 is the August 2005 peak
1241 is the September 2005 peak

Dow: Closed at 11,076.34
Resistance:
11,159 is the February high.
11,176 – 11,186 from April 2000
11,350 from the May 2001 peak.
11,401 from the September 2000 peak.
11,425 from April 2000 peak

Support:
11044 is the January high.
The 10 day EMA at 11,018
The 18 day EMA at 11,007
10,985 is the March 2005 intraday high
10,965 from Q4 2000 and November/December 2005
10,931 is the November 2005 high
The 50 day EMA at 10,926
10,890 is the December 2005 closing high.
10,868 is the December 2004 high
10,705 from the July/August 2005 peaks to 10,682 that is the September 2005 high

Economic Calendar

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

March 14
- Retail sales, February (8:30): -0.7% expected, 2.3% prior
- Retail sakes, ex-autos (8:30): -0.3% expected, 2.2% prior
- Current account, Q4 (8:30): -$217.9B expected, -$195B prior
- Business inventories, January (10:00): 0.3% expected, 0.7% prior.

March 15
- New York PMI, March (8:30): 18.0 expected, 20.3 prior
- Net foreign purchases, January (9:00): $56.61B prior
- Crude oil inventories (10:30): 6.76M prior
- Fed Beige Book (2:00)

March 16
- Building permits, February (8:30): 2.128M expected, 2.216M prior
- Housing starts, February (8:30): 2.03M expected, 2.276M prior
- CPI, February (8:30): 0.1% expected, 0.7% prior
- Core CPI (8:30): 0.2% expected, 0.2% prior.
- Initial jobless claims (8:30): 303k prior
- Philly Fed, March (12:00): 12.6 expected, 15.4 prior

March 17
- Industrial production, February (9:15): 0.7% expected, -0.2% prior
- Capacity utilization, February (9:15): 81.3% expected, 80.9% prior
- Michigan sentiment, preliminary March: 89.5 expected, 86.7 prior.

[ReturntoSender]

Amateur Investors Mid Week Market Analysis

http://www.amateur-investor.net/Mid_Week_Market_Analysis_3_14_06.htm

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From Briefing.com: 4:20 pm : On the heels of last week's strong performance, Monday's market took a breather. The major averages traded in mixed, tightly range-bound fashion for most of the session, and they kept within close proximity of the unchanged mark. The Dow and S&P booked modest losses, while the Nasdaq registered a moderate gain.

The absence of a fresh catalyst helped halt the market's advance. For a Merger Monday, the M&A front was a light one. Reports were limited to a possible sale of Michaels Stores (MIK 38.35 +4.39) and Prudential PLC's (PUK 26.22 +2.27) rejection of Aviva PLC's takeover offer. Some M&A related news that did spur action was Verizon's (VZ 34.22 -0.19) indication that it does not intend to purchase Qwest (Q 6.79 -0.15) or Alltel (AT 65.45 -1.11). The company asserted that buying Vodafone's (VOD 22.35 -0.16) 45% stake in Verizon Wireless is its priority. Qwest and Alltel did not fare well, and their declines were behind the Telecom sector's 0.7% fall.

Overall, the corporate front was relatively uneventful. Amongst the most attention-grabbing were reports of Wal-Mart's (WMT 47.76 +1.07) plans for its ramped-up Chinese expansion, and General Motors (GM 20.85 -0.28) nearing a deal with the UAW. Wal-Mart helped the Consumer Staples sector (+0.3%) maintain positive footing. Healthcare (+0.2%), another defensive area of the market, demonstrated relative strength today. Both sectors had lagged during last week's broad-based rally, but enjoyed some renewed (albeit modest) buying interest today. A pair of pharmaceuticals received some added attention: Eli Lily (LLY 57.42 +0.33) rose following Barron's positive feature of the stock, and Schering-Plough (SGP 19.33 +0.85) enjoyed an analyst upgrade and announced an exclusive collaboration and licensing agreement with P.T.C Therapeutics.

Following their sharp pullbacks on Friday, prices across the energy fell significantly. Crude led the decline and dropped close to 4%. The declines have come alongside reports that inventory is at seven-year highs and following OPEC's reduced demand forecast. However, geopolitical concerns should continue to support prices. We remain bullish on the sector for that reason, as well as on account of tight market conditions and underlying fundamentals. BJ Services' (BJS 31.55 -1.25) reiterated guidance spoke to those points today. The company, which is a suggested holding in our portfolio for active investors, reaffirmed expectations for 20-25% top line growth and 45-52% EPS growth for FY06. Due to today's energy price action, selling across the sector was pervasive and took even that stock lower. The Energy sector levied a market-dragging 1.7% loss.

Despite some continued improvement within the Treasury market, rate-sensitive areas did not take a bullish cue. Instead, they experienced some consolidation of last week's solid gains. The Financial sector recovered just before the bell, but it closed at the flat line and did little to boost the market. Utilities fell 1.2%, and homebuilders were weak across the board. Some caution ahead of this week's housing data added to the latter area's decline. In a broader sense, anticipation of a few key items contributed to the market's performance today. This evening, Fed Chairman Bernanke will speak to the Economic Club of New York. Investors are anxious to gain insight into monetary policy, but, in our view, it is highly unlikely that the Chairman will provide any clues. The FOMC's policy decision will be announced next Tuesday. We continue to expect two more rate hikes, and we believe that the possibility of a third should not be dismissed. Anticipation ahead of tomorrow's Producer Price Index also contributed to the market's cautious stance. It's apt to be somewhat anticlimactic, though, because the Consumer Price Index has already been released. With respect to today's economic calendar, Leading Indicators was the only item. The data checked in relatively in-line with expectations, and had little effect on the stock and bond markets.

Aside from the Consumer Staples and Healthcare sectors, Technology (+0.4%) was another area that managed to sustain a gain. Particular pockets of strength included Yahoo, Oracle, and Google. Yahoo (YHOO 30.44 +0.37) was named Piper Jaffray's internet stock pick of the week, Oracle (ORCL 13.72 +0.12) attracted buyers ahead of its earnings report, and a federal judge ruled that Google (GOOG 348.19 +8.40) does not have to turn over consumer search data to the DoJ. Additionally, a rebound in semiconductors lent muscle to the sector's, and the Nasdaq's, outperformance. DJ30 -5.12 NASDAQ +7.63 SP500 -2.17 NASDAQ Dec/Adv/Vol 1508/1525/2.0 bln NYSE Dec/Adv/Vol 1840/1441/1.41 bln

12:28PM Applied Materials correction (AMAT) 17.50 +0.01 : Today's 6:26 comment regarding a change in membership of AMAT's Audit Commitee has been updated to more clearly indicate that Charles Y.S. Liu resigned as a member of the Audit Committee of its Board of Directors, not from the Board of Directors itself.

9:05AM QuickLogic expands Intel relationship by providing companion for Intel LAN group (QUIK) 5.02 : Co announces that they are expanding their relationship with Intel (INTC) by providing a companion device based on QuickLogic's QuickPCI family of programmable bridge controllers to connect Intel's PXA processor with Intel's wired Ethernet controllers.

11:37 am Eli Lilly (LLY)

57.48 +0.39: Over the weekend, Eli Lilly & Company was mentioned positively in Barron's, echoing the bullish outlook on LLY that we established last week on our Investor service. Given the company's growth outlook, "Lilly's current valuation still provides an attractive entry point," according to CSFB analyst Catherine Arnold who has an Outperform rating on the stock. Arnold sees the stock hitting $64 over the next 12-to-18 months, representing an increase of 15%, with upside expected to come from "underappreciated sales growth and leverage potential." Lilly has launched nine new products since Nov. 2001, more than any of its competitors and reflecting management's commitment to R&D, which last year accounted for 25% of total revenue and surpassed $3.0 bln for the first time ever. The Indianapolis-based company has five products targeting diabetes, osteoporosis, brain cancer and coronary problems that could be launched by the end of the decade and could potentially become blockbuster drugs with sales of over $1.0 bln if they get FDA approval.

HSBC Global Research analyst Kevin Scotcher voiced an even louder opinion on the stock, suggesting shares could possibly hit $81 within two years, a 42% premium from Friday's closing price, as a full-stage drug pipeline that is "key to sustaining growth over the long term" is expected to transform sales over the next five years.

The fact that Lilly has no major patent expirations until 2011, unlike that of rival Merck (MRK) whose cholesterol drug Zocor will be subject to generic competition when its U.S. patent expires in June, underscores our promising outlook for Lilly. Strangely, shares of Merck, despite continued litigation over its painkiller Vioxx, have climbed 11% in 2006 compared to a paltry 1.0% advance for shares of Lilly, which has paid about $700 mln to settle as many as 8,000 claims by plaintiffs charging that Zyprexa, Lilly's best selling drug with $2.5 bln in fiscal 2005 sales, had caused their diabetes.

With the major legal cloud, which has hung over the stock for years, being lifted, coupled with no immediate patent expiration threats and more aggressive R&D spending than its peers resulting in a potentially robust pipeline of new drugs, we view Eli Lilly as an attractive investment idea.

-- Brian Duhn, Briefing.com

10:13 am Wal-Mart (WMT)

47.38 +0.69: Wal-Mart Stores said it plans to hire 150,000 people in China over the next five years as it prepares for a major store expansion, according to The Wall Street Journal. While the world's largest retailer recorded sales of $312 billion in 2005, with approximately 80% generated in the United States, slowing growth and increasing regulatory hurdles in local communities have made international expansion an important part of the company's growth strategy.

The Bentonville, Arkansas-based retailer, which currently has 56 stores in China, expects to open 20 new stores in the country this year. Although it trails other global retail chains, such as France's Carrefour SA, which had 78 stores in China at the end of 2005, the company is rapidly training new staff to accelerate the expansion and to boost growth in the region.

Wal-Mart is currently not on the Ministry of Commerce list of the largest retailers in China, with respect to sales, according to the report. The company now employs about 30,000 people in the country, but that number is expected to grow substantially over the next few years as Wal-Mart continues to shift focus to China and other new markets.

Amid concerns of slowing growth at home, Wal-Mart shares have slipped more than 7% in the past twelve months. However, with new growth opportunities overseas expected to help drive future growth, the current multiple of 17.8x trailing twelve month earnings appears attractive for long-term investors and underscores the value proposition we highlighted on our Bargain Hunting column last October.

--Richard Jahnke, Briefing.com

09:21 am General Motors (GM)

21.13: On the heels of Friday's announcement that last year's net loss was $2 billion more than originally reported, the board is now asking for an investigation into the uncovered accounting errors, according to the Wall Street Journal. The board is seeking a full investigation into the cause behind the errors, which delayed the filing of its annual report and may delay the sale of its financing arm, GMAC. Further, according to the article, newly-elected board member Jerome York, who is backed by billionaire Kirk Kerkorian, has been successful in implementing parts of their turnaround strategy, persuading directors to cut their pay and the dividend by 50%.

Separately, there is speculation circulating that talks between GM and Delphi, the bankrupt auto parts manufacturer, are making headway. This weekend, GM negotiators were pursing a new cost-cutting initiative as senior officials met with United Auto Workers (UAW) and Delphi in the hope of securing an agreement on voluntary early-retirement packages, according to people familiar with the matter. According to a Delphi spokeman, Lindsey Williams, the talks have been "constructive, but we're not at the point of announcing anything." He hoped to be back at the negotiating table today.

GM's shares have been hovering around the $21 per share levels for the past few days, after falling to a near-term low of $19.21 on March 3rd. Share performance will remain news-driven as fundamentals remain cloaked in uncertainty. At this point, the risk is that the accounting issues will defer the sale of GMAC, which GM desperately needs. A resolution with Delphi will certainly be a catalyst for shares, but we still suggest investors proceed with caution.

--Kimberly DuBord, Briefing.com

09:11 am Williams-Sonoma (WSM)

42.46: Williams-Sonoma, the operator of 188 Pottery Barn stores, reported Q4 (Jan) earnings that were in line with Wall Street's forecasts. Excluding a $0.07 charge to consolidate its Hold Everything business into other existing brands, parent company Williams-Sonoma reported fourth quarter earnings of $1.09 per share, which was at the high end of management's previously reaffirmed guidance range of $1.07-1.09. The Street was looking for $1.05.

The company cited significant progress in its emerging brands, competitive advantages created throughout a more efficient supply chain network and the rolling out of new sourcing and logistical strategies designed to reduce customer returns, replacements, and damages. Gross margin, however, slipped 80 basis points to 44% due to higher inventory shrinkage, increased direct-to-customer shipping costs, expenses associated with daily store replenishment and increased markdowns. Net revenues rose 12% year/year to a record $1.21 bln (consensus $1.22 bln) and same-store sales rose 5.8% from a year ago.

Entering 2006 management remains focused on the three long-term strategic initiatives that have transformed the financial performance of WSM over the last several years -- driving sustainable top-line growth, increasing pre-tax operating margins as a percentage of net revenues, and enhancing shareholder value. Management announced plans to further utilize its strong cash position and to reflect its confidence in future profitability by returning value to shareholders in the form of the first cash dividend in its 23-year history as a publicly-traded company. Alongside a quarterly dividend of $0.10 a share that will be paid on May 24 to shareholders of record as of the close of business on April 26, the company's board also authorized a new two million share buyback program.

In an effort to drive sustainable top-line growth in its core brands, via the addition of 24 net new retail locations during the year, management forecasted Q1 and Q2 revenues of $789-803 mln (consensus $803.28 mln) and $858-872 mln (consensus $872.58 mln), respectively. For fiscal 2006, management expects adjusted earnings to grow 14-17% year/year to $2.15-2.19 (consensus $2.04) on revenues of $3.89-3.96 bln (consensus $4.01 bln), representing a year/year increase of 10-12%.

--Brian Duhn, Briefing.com

08:54 am Michaels Stores (MIK)

33.96: Shares of Michaels Stores are trading sharply higher in pre-market action, gaining more than 13%, after the arts and crafts retailer said it is exploring strategic alternatives to boost shareholder value, including a potential sale of the company. Michaels also announced that President and CEO Michael Rouleau is retiring, and that Jeffery Boyer and Gregory Sandfort will serve as co-presidents.

Chairman Charles Wyly, Jr. said, "We have completed a thorough review of the company's position, as well as the opportunities Michaels stores faces over the near and long term. With a rapidly evolving retail market, we are focused on all opportunities to enhance the strength of the Michaels business, attract new customers and more effectively respond to - and shape - their changing arts and crafts interests, even as we continue to build a world-class retail organization and infrastructure."

Michaels has retained JPMorgan as its financial advisor in this process, which it expects will take a "number of months" to complete. It also noted that there is no guarantee that a transaction will result and that it does not plan to disclose developments regarding its exploration until its board has approved a specific transaction.

Michaels Stores has increased its market capitalization from $310 million to approximately $4.5 billion over the past decade. As of January 28, the company was debt-free and had more than $450 million in cash and cash equivalents. Its shares, which are down 22% since last June, are trading at roughly 19.0x trailing twelve month earnings, which is in line with their 10-year historical average.

--Richard Jahnke, Briefing.com

08:45 am PetroChina (PTR)

98.80: Oil prices are retreating in electronic trading despite another attack on pipelines in Nigeria that cut another 75,000 barrels per day of output. With crude supplies fast approaching their highest levels in seven years, concerns over supply disruptions from Iran or Nigeria have eased. Crude for April delivery declined 36 cents, or 0.6%, to $62.41 per barrel. The upside in prices is being capped by record crude stocks.

Today PetroChina, China's largest oil producer, posted the largest profit of any Asian company, according to Bloomberg, on high energy price realizations. Net income increased 28% to 133.4 billion yuan ($16.6 bln) in 2005, or 0.75 yuan per share. This compares to last year's revised profit of 103.8 bln yuan, or 0.59 yuan per share. The result came in below analysts' average estimate of 139.6 bln yuan. Sales rose 39% year/year to 552.2 bln yuan. Profits ranked fourth in the world for an oil company, behind Exxon (XOM), BP Plc (BP), and Royal Dutch Shell, and surpassing Chevron (CVX).

The Beijing-based company projects its crude oil output will rise 5% this year to 826.6 mln barrels with gas production of 1.41 trillion cubic feet. Total output may grow to 1.06 bln barrels of oil equivalent. According to Bloomberg, only 2% of that growth is coming from fields in China.

China's insatiable appetite for crude is propelled by its surging economy, which is expected to grow 8% this year. According to the International Energy Agency, China's oil consumption, second only to the US, is expected to rise 5.9% this year to almost 7 mln barrels a day - two times the growth in 2006. In order to keep up with an economy that grew nearly 10% last year, China plans to seek out acquisitions outside its boarders to expand oil and gas reserves. CNOOC's (CEO) bid for Unocal (UCL) last year sparked a political firestorm in Washington that eventually led to the Chinese withdrawal. This was just a prelude to what is to come. These state-run enterprises are being pressured by the government to secure new opportunities, which we anticipate will include properties mainly in SEAsia.

--Kimberly DuBord, Briefing.com

09:40 am Covad: Needham & Co upgrades Hold to Buy. Target $3. Firm is saying they have become increasingly convinced that Covad mgmt will aggressively execute on its goal of making the company EBITDA-positive in Q3'06, and that the current leverage in DVW's earnings model could get us there sooner rather than later. They also believe that Covad's deepening ties with Internet service providers such as EarthLink could potentially expand to other major portals, as their relations with the RBOCs and mainstream broadband providers become increasingly contentious.

09:39 am CBRL Group: BB&T Capital Mkts downgrades Hold to Underweight . Firm is saying once the tender auction and the Logan's divestiture are completed, they believe the stock is more likely to trade down from current levels than up.

09:30 am Extreme Networks: Prudential upgrades Underweight to Neutral. Target $6. Fimr believes that a new product cycle around the BlackDiamond 12K platform and an improving financial position should limit downside. Firm also believes that the co may represent an attractive takeout candidate for financial or strategic buyers attracted to its upcoming products or solid financials, along with the ability to bring exposure to the metro Ethernet market at an attractive valuation relative to FDRY and CSCO.

09:29 am Evergreen Solar: RBC Capital Mkts downgrades Sector Perform to Underperform . Target $11. Fimr is saying that they believe the loss of the primary silicon supplier for their Marlboro facility will negatively impact margins through FY06. Longer-term, their established concerns on valuation, dilution and competition remain.

09:29 am NBTY Inc: RBC Capital Mkts upgrades Sector Perform to Outperform. Firm upgrades based on their view that NTY can realize meaningful margin expansion with only modest improvements in industry demand. Firm believes earnings momentum is likely to accelerate faster than expected over the next 2-3 qtrs. As a result, they see potential for upside to fiscal 2006 consensus estimates.

09:28 am Ultimate Software: Ferris Baker Watts initiates Buy. Target $26. Firm is saying that ULTI will be the major beneficary of the ongoing adoption of on-demand HR and payroll services. Firm anticipates the co will gain increasing market share in the mid-market segment given the superiority and lower price of its UltiPro product. Firm says co has yet to fully realize the benefits of cost efficiencies associated with the subscription model and anticipate strong annual recurring revenue growth with recurring revenue contributing between 75% and 80% total revenues in the long term, leading to accelerated earnings growth over the next three to five years.

09:26 am Pixelplus: WR Hambrecht initiates Hold. Firm intitates based on a significantly improved valuation since the IPO and their concerns over visibility into and the back-end loaded nature of wins at some of the co's expected higher volume customers and the practical cost-competitive advantage of the 3T vs. 4T architecture.

09:25 am DepoMed: WR Hambrecht initiates Buy. Target $12. Firm is saying that DepoMed's portfolio, which features two diabetes products, currently has two FDA approved products with estimated $100 mln U.S. sales potential, and a potential $1 bln diabetic neuropathic pain product moving into Phase 3 trials featuring the first once-a-day gabapentin with a profile they believe could be superior to Xenoport's (XNPT) gabapentin pro-drug which has 2x DEPO's valuation. In their view, either DEPO is significantly undervalued, or XNPT overvalued, or both.

09:22 am Crocs: Thomas Weisel initiates Outperform. Firm is saying that behind the unique combination of comfort, function and value, Crocs has found appeal across all age groups and genders. They believe Crocs' addressable market is more than $13 bln, supported by the quirky and charming brand image and rapid rise to prominence that have created a media stir.

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Bleak US Economic Outlook?
Investors Insight Publishing
Monday, March 27, 2006

http://www.investorsinsight.com/otb_va_print.aspx?EditionID=299

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510 is the number to watch on the SOX according to Amateur Investors:

http://www.amateur-investor.net/Mid_Week_Market_Analysis_3_29_06.htm

ALGO be damned! Lets have a rally. Note that the INDU turned south today but not the NYA which is in breakout mode and often leads the broader INDU:

http://www.investorshub.com/boards/read_msg.asp?message_id=9078884

RtS

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COTD - Median House Prices:

Recent press reports suggest that the US real estate market is slowing. For some perspective, today's chart illustrates the US median price of a single-family home over the past 35 years. Thanks, in part, to low long-term interest rates, the trend over the past decade has been impressive. Not only have housing prices been increasing at a rapid rate, the rate at which housing prices have been increasing has been increasing. So while the recent softness in the real estate market has resulted in a lower median price for a single-family home, the real estate market as a whole has not yet broken below trend. Stay tuned...

Notes:
- What are our latest indicators and studies saying about future real estate and stock market trends? Find out now with the exclusive & highly regarded charts of Chart of the Day Plus.

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KAEPPEL’S CORNER: The Best of Times and the Worst of Times
By Jay Kaeppel, Optionetics.com
4/4/2006 11:00 AM EST

http://optionetics.com/articles/article_full.asp?idNo=14583

I embarked on an interesting experiment a week ago. I went on vacation to Florida and for six full days I had no access to a computer. Pretty gutsy, huh? I refer to it as “beach therapy.” Sure, I woke up in a cold sweat a few times muttering something about “May Soybeans” one night and “Fidelity Select Energy” the next. But, surprisingly, all in all it went pretty well. Even more surprisingly, my portfolio wasn’t wiped out while I was away. And while I am sure that I missed an opportunity or two in the interim, I think it was worth it in the end. I'm back, I feel good and I’m tan to boot. Not bad for a week’s work. I consider this one of the benefits of relying primarily on a systematic approach to trading. While I’m away the systems that I have in place kind of take care of things for me.



Anyone who has read my work in the past knows that I am fond of the saying “There is always a bull market somewhere.” In fact, I like it so much that I wrote an article by that very title on 3/8/06 (see There’s Always a Bull Market Somewhere). Based on this theory I have done a lot of work with systems that involve trading industry groups and as a surrogate, sector funds. In the 3/8 article I detailed one of the simplest yet, interestingly, one of the most effective methods I’ve ever developed for investing “where the bull market is.” In a nutshell, I prefer to invest in the strongest funds in the hope that they will continue to outperform the market. Still, one question I often get is “does in ever make sense to invest in weak sector funds?” The hope is that by buying into a sector when it is “oversold,” you might be able to garner large profits in a short period of time when the sector rebounds. Does this make sense? More importantly, does it actually work? Let’s take a look.

THE BEST OF TIMES, THE WORST OF TIMES

In the past I written in several places about a strategy I developed that I call “The Best of Times, The Worst of Times” strategy (sounds pretty dramatic, eh?). The idea is to build of portfolio of top performing sector funds combined with several funds coming off of a period of under performance. In other words, instead of trying to decide whether one should be in the areas that are currently performing the best OR taking a shot at riding a rebound in oversold sectors, the idea is to do both concurrently. As you have undoubtedly deduced by now, there are two parts to this strategy. They are, ahem, “The Best of Times” and “The Worst of Times.” Let’s take a look at these two components separately.

THE BEST OF TIMES

“The Best of Times” portion of this strategy works exactly like the Pure Momentum System I detailed in the 3/8/06 article, with two important exceptions. First off, the Pure Momentum System ignores Fidelity Select Gold [FSAGX] completely. The Best of Times system will include FSAGX in the portfolio if it is one of the top ranked funds.

The other exception is that the Best of Times system is updated quarterly while the Pure Momentum System is updated at the end of every month. While updating once a month is not terribly onerous in my opinion, for some reason I have encountered many people who are reluctant to “trade too often” when it comes to Fidelity Select sector funds. This is typically due to the fact that Fidelity imposes a 0.75% fee for trades that are not held for at least 29 days. While this is almost never a factor when using Pure Momentum, there can at times be something said for giving things a little longer to play out rather than adjusting every month. With this in mind, “The Best of Times” strategy works as follows:

At the close of trading each quarter (March 31st, June 30th, September 30th, December 31st), identify the five Fidelity Select sector funds which have performed the best over the previous year (technically I look at 240 trading days).
Buy the top five funds and hold them until the end of the next quarter.
So, basically, there are four adjustment periods every year. Some quarters there is a lot of turnover in the portfolio, some quarters there are one or two changes, and occasionally there are no changes at all. That’s all there is to it.

THE WORST OF TIMES

I did a study awhile back which looked at buying the worst performing sector funds. For those of you who want to believe in the “buy ‘em when they’re down” approach, the news is not good. The results were dismal. The approach I looked at actually underperformed a buy-and-hold approach. And I hate the buy-and-hold approach. The problem as I see it is simply this. As I discussed a few weeks ago, changes to fundamentals for a given industry typically take a long time to play out, both on the upside and the downside. So, typically, rushing in to buy the “dog” industries while they are “still barking” is a bad idea. Still, nothing goes down forever (Okay, the horse buggy industry has yet to rebound). So when does it make sense to “buy ‘em when they’re down”? From my research the answer to that question is “after they’re not down anymore.”

So here is the theory. The fundamentals for Industry X deteriorate. Industry X embarks on a prolonged decline. That includes of course, the prices for the stocks in that industry. Eventually the fundamentals and the stock prices bottom out. Over a period of time, while market players wait to see if the fundamentals are in fact taking a turn for the better, the stocks in the industry, and the industry as a whole, start to form a base. This can go on indefinitely, but the research that I’ve done shows that a year is about right. Ultimately, after a prolonged decline and a year to base, the fundamentals improve and the industry group begins to advance. That’s the theory I worked with anyway. The next step was to develop a method to take advantage of this pattern. Here’s what I came up with:

At the end of each quarter, identify that sector funds that performed the worst over the two year period ending one year ago. In other words, on 3/31/06, we want to find the funds that performed the worst between March of 2003 and March of 2005. By so doing we have identified the sectors that have suffered the most – or as is the current case, were up the least - during that period. We have also given these sectors 12 months to bottom out and form a base. The hope is that they will soon emerge as good performers once again.
Buy the five worst performers from the period described above and hold them until the end of the next quarter.
THE RESULTS

The results for the two components of this approach, as well as the combined results, appear in Table 1.

Year
Best of Times Portfolio
Worst of Times Portfolio
Combined Portfolio

1993
+19.9%
+31.6%
+25.8%

1994
(-6.7%)
+12.0%
+2.7%

1995
+36.7%
+37.6%
+37.2%

1996
+18.9%
+20.0%
+19.4%

1997
+27.5%
+9.7%
+18.6%

1998
+14.5%
+11.5%
+13.0%

1999
+109.7%
+14.3%
+62.0%

2000
(-20.1%)
+38.8%
+9.3%

2001
(-1.3%)
+4.9%
+1.8%

2002
(-2.3%)
(-8.6%)
(-5.4%)

2003
+20.0%
+48.4%
+34.2%

2004
+18.6%
+6.7%
+12.6%

2005
+29.6%
+4.0%
+16.8%

2006* +7.2%*
+5.5%*
+6.4%*





Average +20.4%
+17.8%
+19.1%

Std. Dev.
31.3%
+16.6%
17.8%

Reward/Risk


0.651


1.072


1.073


Table 1 – Best of Times, Worst of Times Results
* - through 3/31/06

A few points of interest regarding the results in Table 1:

On an annualized basis, the Best of Times outperformed the Worst of Times by 2.6 percentage points per annum (+20.4% versus +17.8%).
On a year-by-year basis, the Worst of Times has actually outperformed the Best of Times 7 out of 13 calendar year. This argues well for the idea of using both systems in conjunction (i.e., it is essentially impossible to “predict” which system will perform the best in the quarter or year ahead).
The Worst of Times experiences only about 52% as much volatility as the Best of Times (an annual standard deviation of 16.6% versus 31.3% for the Best of Times).
The combined systems generated only 1.3% less return per year than the Best of Times alone, but did so with only about 56% as much volatility as the Best of Times alone (17.8% annual standard deviation for the combined portfolio versus 31.3% for the Best of Times alone).
The combined portfolio held up well during the 2000-2002 bear market, actually showing a small profit despite always being fully invested. The worst calendar year was 2002 with a manageable loss of –5.4%.
The current portfolios are as follows:



The Best of Times
Gold [FSAGX]
Brokerage [FSLBX]
Energy Services [FSESX]
Natural Resources [FNARX]
Energy [FSENX]

The Worst of Times
Pharmaceuticals [FPHAX]
Biotech [FBIOX]
Health Care [FSPHX]
Software [FSCSX]
Paper & Forest [FSPFX]

Chart 1 shows the top performer over the past 12 months, which is Select Gold [FSAGX]. Chart 2 shows the worst performer from the March 31st, 2003 through March 31st 2005 period, which is Select Pharmaceuticals [FPHAX]. It is interesting to note that although it was the worst performer for that period it actually showed a small profit. It just so happened that that gain was the smallest gain of any Fidelity Select sector fund during that period.


Chart 1 – Fidelity Select Gold [FSAGX]


Chart 2 – Fidelity Select Pharmaceuticals [FPHAX]

SUMMARY

One of the most useful things that any investor or trader can do is to realize that there is no “one best way” to approach the markets. Many system developers spend years attempting to develop that one great system that always makes money. And time goes by and their search continues. In many cases it is ultimately a combination of ideas that allows successful investors to achieve their maximum success. The Best of Times, the Worst of Times System is by no means flawless. Still the real point is that it illustrates just one way to combine two different objective and reasonable approaches into one method that has consistently beaten the market over the years and with reasonable volatility.

To search for previous articles written by Jay Kaeppel, please click here.


Jay Kaeppel
Staff Writer and Trading Strategist
Optionetics.com ~ Your Options Education Site
Visit Jay Kaeppel’s Forum

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InvestmentHouse Weekend Update:

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

- Jobs report doesn’t phase stocks, but rising rates gut a Friday rally attempt.
- Fear of flying: why we are conditioned to fear prosperity.
- A little bit of history repeating, but maybe not.
- Money supply and interest rate advance remain positives.
- Friday price fade was strong but leadership still positioned to move after this pullback.

Stocks shake off jobs report but bond market sell-off bleeds over into equities.

As expected, the jobs report was stronger than expected, but futures rallied after wages showed little headway, coming in lower than forecast. Stocks opened higher out of the gate with NASDAQ, SP500 and SP600 pushing to new post-2002 highs. We were concerned an early jump might flare out, but also felt that the recent NASDAQ break higher and SOX’ rebound would help support an early move. That did not happen.

Stocks were up early, but bonds started to fade quickly. Yields pushed higher and higher with the 10 year closing at 4.98% and the 2 year at 4.90%. The 30 year has already crossed the 5% threshold, closing at Friday at 5.05%. As the 10 year definitively broke through 4.80%, stocks again started to suffer.

After that quick start the slide began. Within the first hour SP500 had slipped back below 1310, its March resistance point, as it and the other indices were on route to a steeper decline. Two and one-half hours into the session and stocks basically hit their bottom for the session, SP500 struggling to hold its 18 day EMA for the next 4 hours. After that long consolidation attempt by all of the indices, however, stocks found no traction and a modest bounce attempt faded into the close. That left the indices basically closing on their session lows, never a good indication as it shows there were simply no buyers willing to risk an over the weekend commitment with new positions.

Volume was tame, coming in lower on both NASDAQ and SP500. Sellers were definitely in control Friday, but they did not overrun the market. Indeed, volume was lower than the recent upside sessions, and thus despite the point losses it was more a lack of buyers willing to commit than sellers dumping shares. Thus Friday did not represent some seismic shift in the recent action. Sure the upside move on SP500 was on lower volume than we wanted, but the downside volume Friday was even lower than that. Again, it was a lack of buyers as opposed to a new onslaught from sellers.

In addition, NASDAQ, SOX and SP500 held their near support after their upside moves. Indeed, NASDAQ held its recent breakout over the January high, easing back on lower, below average volume. That was the action many leading stocks showed, i.e. fading back to near support.

You can moan about the Friday action as indeed many on the financial stations did, and with the low volume move higher on SP500 the past 4 weeks you do have to view the market action with caution. Still, the volume indicates no real selling and the holds at near support suggest the same. Holding the breakouts on low volume also sets up new buy points when the market holds and starts to rebound. Indeed, ahead of earnings announcements a pullback is a good thing, taking the fluff out of runs and setting stocks for further upside. There is always risk associated with a big point drop and earnings just around the corner, but with continued strong leadership and the overall light pullback volume, the big investors have not changed their mode from overall accumulation. That makes low volume pullbacks to support make for entry points ahead.

THE ECONOMY

Conditioned to fear prosperity . . . and jobs.

Over the Greenspan years (and indeed it can be tracked back to the 1929 Fed) the US citizenry has been lectured by its parental overseers (the Fed, the federal government) and seconded by certain segments of academia that it is basically a group of irresponsible spendthrift children. Who can forget Greenspan’s repeated mantra of the late 1990’s, i.e. the ‘runaway consumer.’ Because of this supposed uncontrollable need to satisfy our every consumption whim we are told that the Fed has to watch every other area of the economy, and if it gets ‘too hot’ according to the Fed then action is necessary.

Thus when the economy, after a so-called jobless recovery, finally starts producing job growth 3 years into a recovery, we are told and almost blindly accept that lagging indicator as an indication the economy is too strong and must be reined in. Friday added additional burden on the consumer as March non-farm jobs came in at 211K (190K expected and 225K prior, down from 243K) and the unemployment rate fell to 4.7% from 4.8% (4.8% expected). Wages rose just 0.2% versus the 0.3% expected and 0.4% upwardly revised February reading. That was supposedly the savior of the report as it supposedly suggests tame inflation.

Red herring. Jobs are not an inflation indicator. Jobs are good. We are supposedly at or near full employment. That is not an inflation problem, that is an employment problem. The theory is workers become scarce and employers have to pay more to get the desired personnel. Those higher wages are spent, driving up prices.

That is hogwash. Rising wages don’t equate with rising inflation anymore than a strong housing market. As we have said before, it is the overall level of liquidity that determines whether inflation occurs. If there is so much excess money in the system that money is spent regardless of underlying supply then prices rise. Thus, rising wages in and of themselves is not inflation. Employment and wages can play a role, but it is just one very small part of a huge overall monetary equation that has to have many other factors fall into place to contribute to inflation. In short, wages in and of themselves cannot cause inflation. High employment in and of itself cannot cause inflation.

Despite economic reality the Fed has done a good job of brainwashing the media regarding inflation. Greenspan was a chief promoter of obfuscation regarding economic reality. He openly admitted he didn’t want to be clear. He even commented that surprise was sometimes good for the financial markets. Very cloak and dagger. That way he had free rein to make rate moves without much question from other authorities. Too many blindly accepted Greenspan’s ‘prosperity indicators’ of inflation. Then when the Fed wrecked the economy in 2000 they were so fully invested in the Greenspan approach that very few stood up and said that Greenspan’s fear of prosperity approach was simply wrong both in theory and in fact as shown by the crash.

Ready to make the same mistakes: tightening into a mature expansion and a gasoline-induced slowdown even as the Fed’s work is done.

This is important because right now the environment regarding the economy is very similar to 2000. There is an aging expansion that is still doing fine on its own but that is being pressured by the Fed even as the economy shows some signs of age.

ECRI is the best leading indicator basket when it comes to predicting economic trends. ECRI’s FIG (Future Inflation Gauge) shows that inflation peaked in October 2005. It is down four of the past five months and is at an 8 month low. We wrote in January about how ECRI’s readings were telling us inflation was peaking and that the next few months would show the answer more clearly. It is doing just that, bearing out the early indications. Moreover, ECRI’s economic measures show a global industrial slowdown is taking root even as current commodity prices jump higher. That seems incongruous to some: prices rise because demand rises. If prices are still going up then surely demand is still expanding. What often happens, however, is that prices outpace economic activity, reaching levels that cause a drop off in economic activity. That is what ECRI is reading.

If that does not sound right to you, consider gasoline prices last fall just after the Gulf storms. When price hit $3/gallon there was a very real and noticeable drop in demand for gasoline and in consumer buying. Despite all of the talk today about a recovering Japan and Europe, these soaring commodities prices can quickly undermine them. How many times did Japan start to emerge from its depression just to get knocked back by rate hikes or a spike in oil? Prices do reach a point of inelasticity with respect to demand.

Unfortunately, the common belief fostered by the Fed and accepted by too many is that good job creation and strong economic activity necessarily leads to inflation. We even heard some financial anchors Friday talking about ‘wage inflation’ based on the recent stronger job gains. This kind of sloppy, bandwagon reporting makes it all too easy for disasters such as 2000 to occur again.

What the truly leading data shows us is that the Fed’s work is done. It is time to be careful and nurture an aging expansion and some new life around the globe and that means looking down the road to what will happen as opposed to what has happened. At the very least the Fed should pause ahead of what will clearly be $3/gallon gasoline this summer, see how the resulting demand destruction impacts the economy, and then reconvene to decide if any more work is required. Good, forward-looking common sense. That is precisely why the Fed likely won’t do that.

The Fed, the federal government, and the Fed ring-kissing economists, duped the general public in the late 1990’s and 2000 into believing we were too prosperous. As a group we let them destroy much of our future, and now, just when we are starting to rebuild it they are ready to repeat the same mistakes. Bernanke may surprise us, but that is betting against the odds. Our representatives need to know what we think now. We have to demand more accountability from public servants that have so much control over our lives. Call your congressmen and senators and just let them know you are watching, what you expect, and that you care. That goes a long way, further than you would think.

Some positives linger: bond yields up, money supply strong.

While the Fed should at least close the books for a few months to see how the economy and indeed the world economies respond to rising commodities prices, there are some continued positives.

Bond yields continue to rise on their own, finally responding to the Fed’s pushing over the past two years. Is it suddenly a recognition of the Fed’s actions or is there something else at work pushing rates? That is what the market is pondering, particularly now the 10 year has moved through 4.8%. It is also another reason, however, that the Fed’s work is done or should go on hold for now.

In the late 1990’s and early 2000 the Fed was not only raising interest rates, but in early 2000 it started aggressively lowering the money supply pool. In fact, it drained it dry. It recalled all of its money it flooded the system with ahead of Y2K and more. Venture capital dried up, small businesses could not get loans; basically the worst nightmare possible for an economy. We all know the results.

Right now the Fed has not crimped money supply here in the US, and that is one of the complaints from some pretty sage economy watchers such as Steve Forbes. Rates are higher, but there is still plenty of money available. Higher rates crimp demand, but if excess money is still present it will be put to use. That is the opposite of the post-2000 years: the Fed lowered rates to start 2001 but it did not appreciably increase money supply nor did it take banks off of restricted status. Thus even though rates were lower you couldn’t get money even if you wanted it.

M2 money supply has steadily increased since early 2004 from $6.2T to $6.8T thus far this year. M3, the broadest measure of money, is up even more, rising from 9.0T to 10.5T over the same period. Thus even as the Fed raises rates it is not taking money out of the system. That means the money is still there if you want to pay for it. That allows businesses to tap money if they need it. The key becomes a balancing act of the rates: are they at the right level to sustain an expansion but not flood the economy with too much money and spark inflation. With the obstacles heading the economy’s way as noted, time to stop the hikes and see how it fares.

THE MARKET

MARKET SENTIMENT

VIX: 12.26; +0.81. Jumped Friday, but in the big picture, still at the low end of the range for the past year. We are not concerned about volatility unless it starts to spike higher. After these long periods at low levels, when volatility climbs sharply that is a sign a rally is over. That is the opposite of the conventional wisdom you hear on the tube, but after long periods of low volatility in a rally that is how things start to reverse.

VXN: 15.88; +0.25
VXO: 12.01; +0.97

Put/Call Ratio (CBOE): 0.91; +0.13. Good climb in put activity on the first significant price dump in 2 months. That still shows a bit of fear and also plenty of downside speculation that the rally cannot last. Good for a contrarian indicator.

Bulls versus Bears:

Bulls: 49.5%. Sharp jump from 46.7% after pausing for a week. Bulls have picked up steam the past three weeks as the talk about a surging economy and new index highs swells the ranks. Still below the 55% considered bearish, but well up from the 42.3% low that undercut the two prior lows in May and October. It helped due the trick in sparking this run.

Bears: 27.8%. Down from 28.3% last week and 33% on the high this cycle. Still well above the 20% level below which is considered bearish for the market. It started this move just above 20%, the threshold level. Bears surpassed the readings from the two prior market bottoms in May and October 2005 (30% and 29.2%, respectively).

NASDAQ

Stats: -22.15 points (-0.94%) to close at 2339.02
Volume: 2.042B (-7.43%). Solid trade but below average trade as NASDAQ fell back. Volume rallied on up sessions coming into the Friday selling. As discussed above, we are not too worried about that action. NASDAQ has shown good accumulation into that move and a strong volume breakout two weeks back. Sellers were in control for the day but not for the move.

Up Volume: 449M (-961M)
Down Volume: 1.493B (+729M)

A/D and Hi/Lo: Decliners led 2.18 to 1. The move higher the past week was led by the large cap techs and was narrow. That was a weakness for the NASDAQ. Friday the selling was generalized over the index but again, volume was much lower.
Previous Session: Decliners led 1.06 to 1

New Highs: 178 (-30)
New Lows: 44 (+6)

The Chart: (Click to view the chart)

NASDAQ gapped higher and ran to a new post-2002 high (2375.45) but could not hold the move. Indeed, it hit its high in the first 15 minutes before turning over. It spent the last 4.5 hours of the session hugging the 10 day EMA (2338). That is its first level of near term support and also keeps it holding the breakout over the January high (2333) it made two Wednesdays back. While the point loss was more than you like to see in one session, there was no distribution. We expect NASDAQ to hold near this level, perhaps testing the 18 day EMA (2326) on the low before resuming its move.

SOX (-1.84%) gave back ground as well, and though it was the downside leader percentage-wise, it was relatively not as big a loser in the past given SP500 lost 1% and SP600 lost 1.2%. In any event, despite the Friday loss, SOX had a good week with a solid advance starting with Monday. Wednesday and Thursday were particularly strong as SOX cleared the 50 day EMA (512.34). It came back to tap that level on the Friday low before a modest rebound. We wanted it to clear 525 first and then test, but it is doing that now, setting up the break through 525. We don’t have a problem with that, and indeed we like this test as it gives us some good entry points on chip plays not to mention a great set up for a nice upside option play on SOX itself.

SP500/NYSE

Stats: -13.54 points (-1.03%) to close at 1295.5
NYSE Volume: 1.527B (-2.91%). Volume was lower and remained below average as SP500 broke the 18 day EMA but SP600 held support. Not a major breakdown, but SP500 was subject to potential upset with that lower volume rise. Still, the lower volume indicates the sellers were not overwhelming the index.

A/D and Hi/Lo: Decliners led 4.17 to 1. This was ugly as the NYSE indices were sold across the board, large cap to small cap. If this had occurred after a slide lower you would conclude it had hit an extreme and indicated a rebound.
Previous Session: Decliners led 1.33 to 1

New Highs: 163 (-52)
New Lows: 108 (+40)

The Chart: (Click to view the chart)

SP500 was whacked Friday, falling through the 18 day EMA (1299.57) and just managing to hold onto its breakout above the January and February highs, tapping at the October/March up trendline on the low. Significant point drop somewhat mitigated by the lower volume. Given the downside momentum it may not hold the January high absolutely and may undercut it intraday and test the 50 day EMA (1289) before trying to rebound. Even that keeps SP500 in its recent February/March uptrend. In short, the Friday point drop was not great but it was far from a disaster.

The small cap SP600 (-1.21%) sold as well but it tapped its 18 day EMA (389.53) on the low and rebounded modestly. That keeps it roughly at the upper channel line as it makes its test of the solid March upside move. If it holds here that would be a sign of real strength.

DJ30

DJ30 struggled with SP500, fading back to the late March low at 11,100 and roughly at the February high (11,159). That keeps the blue chips in their October/January uptrend and easily above the 50 day EMA (11,082). It also made a lower high on the move, not the greatest action but also not a death knell. Looking for a test of the 50 day this week and possibly the trendline and from there we see what kind of guts it has. Volume was up Friday but marginally and still well below average. Like the odds for a hold and a bounce barring some really crappy earnings and guidance.

Stats: -96.46 points (-0.86%) to close at 11120.04
Volume: 256M shares Friday versus 240M shares Thursday.

The Chart: (Click to view the chart)

MONDAY

Earnings season officially kicks off this week and that will be the focus but not the only data. Despite the all hallowed jobs report last Friday there is plenty of important data such as retail sales (got a preview this week and they were not good), Michigan sentiment, and industrial production hit the wire. Likely overlooked but the most important batch of news for us are the business inventories released on Thursday. Last week saw wholesale inventories rise 0.8% versus the 0.5% expected and 0.2% in January. Overall sales continue to outpace inventory growth 9% year/year versus 6% year/year. Still we are looking for signs that is reversing as the economy slows some. Thus the inventory data over the next few months becomes more important particularly with the ECRI readings.

Even with the economic data, earnings along with the usual suspects of earnings, energy, interest rates, and Fed-speak will be the most closely watched events of the week. Friday gave the market a good jolt just ahead of earnings, taking out some of the recent gains. It is always good to go into earnings a bit lower.

The declines combined with the lower overall volume and the pullback in leaders will give us some opportunities as earnings start. Energy was a surprise Friday; the rest of the market dropped, but energy did not get any money, instead falling with everything else. Many of those leaders held near support as well, however, and we will be looking at them as well. These low volume pullbacks to near support are always something we like; we view it as opportunity to enter some leaders. The key is what kind of pullback it is. The current one was sharp Friday and raised the apprehension level but it did not do much technical damage. Again, to us that spells opportunity. The market still has issues with gasoline rising in the summer, but we are going to keep watching the accumulation versus distribution to see if the big money is still buying. If that is the case, these pullbacks are a positive.

Support and Resistance

NASDAQ: Closed at 2339.02
Resistance:
2477 is the January 1999 peak
2493 is the February 1999 peak
2523 from the December 2000 low
3015 is the December 2000 peak and the October 2000 low

Support:
The 10 day EMA at 2338
The January high at 2333
2328 from the May 2001 peak
The 18 day EMA at 2326
The recent high at 2325
The 50 day EMA at 2299
2288 from December 2000 low.
2278 is December 2005 intraday high.
2273 is December 2005 closing high.
A minor peak at 2249
2240 is closing low in recent range.

S&P 500: Closed at 1295.50
Resistance:
The 18 day EMA at 1300
The 10 day EMA at 1302
1311 is the March intraday resistance on this move.
1315 is the May and May 2001 peaks
1324 to 1329 from the October 2000 lows.
1358 to 1362 mark a series of peaks from April 1999 to August 1999 high and the
February 2002 low at 1360.
1371 to 1373 is the December 2000 peak and the January 2001 peak

Support:
1297.57 is the recent February high.
The October/March up trendline and the January high at 1295
The 50 day EMA at 1289
The late January peak at 1285
The December highs at 1275 (intraday) and 1273 (closing)
1264 from the December 2000 lows
1254 is the February low
1248 to 1250 is the bottom of the November/December 2005 range

Dow: Closed at 11,120.04
Resistance:
11,159 is the February high.
The 18 day EMA at 11,176
The recent March highs at 11,329 to 11,335
11,350 from the May 2001 peak.
11,401 from the September 2000 peak.
11,425 from April 2000 peak

Support:
11,097 is the last peak from the February top.
The 50 day EMA at 11,082
11,044 is the January high.
10,985 is the March 2005 intraday high
10,965 from Q4 2000 and November/December 2005
10,931 is the November 2005 high
10,890 is the December 2005 closing high.

Economic Calendar

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

April 12
- Trade Balance, February (8:30): -$68.0B expected, -$68.5B prior
- Crude oil inventory (10:30): 2.11M prior
- Treasury Budget, March (2:00): -$71.2B expected, -$71.21B prior

April 13
- Business inventories, February (8:30): 0.3% expected, 0.4% prior.
- Export prices ex-agr., March (8:30): 0.1% prior
- Import prices ex-oil, March (8:30): -0.5% prior.
- Initial jobless claims (8:30): 299K prior
- Retail sales, March (8:30): 0.6% expected, -1.4% prior.
- Retail sales ex-auto (8:30): 0.5% expected, -0.6% prior
- Michigan sentiment, prelim., April (9:45): 88.5 expected, 88.9 prior

April 14
- Capacity utilization, March (9:15): 81.4% expected, 81.2% prior
- Industrial production, March (9:15): 0.5% expected, 0.7% prior.

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Some Worry 1st-Quarter Stock Rally Is Over
Sunday April 9, 9:35 pm ET
By Michael J. Martinez, AP Business Writer
Some Analysts Worry That Stock Market May Already Be Fizzling After 1st-Quarter Rally

http://biz.yahoo.com/ap/060409/wall_street_week_ahead.html?.v=3

NEW YORK (AP) -- Wall Street's first-quarter rally could already be fizzling.
On a technical basis, the major indexes last week failed to meaningfully break out of their recent trading ranges. Yes, the Nasdaq composite index reached consecutive five-year highs on Wednesday and Thursday -- and then gave it all back and then some Friday.

For the market's number crunchers, such "technical resistance" is a bad omen. And while discerning trends solely through trading averages can be akin to reading tea leaves, the fact that the major indexes have retreated off these highs is never a good sign.

As a practical matter, there's really no reason for investors to push stocks substantially higher. Last month's Federal Reserve statement on the economy was clear -- rates will continue to rise, at least for one more session, and for as long as the economy shows strength. And the economic data back up that notion, as the economy appears to be growing at a solid pace, with more people getting jobs and buying power.

Investors would like to see slow growth, so rates remain stable and companies can borrow money to expand without worrying about higher interest costs. Lower rates would be good for consumers, too, especially those with credit card debt and adjustable-rate mortgages.

And while earnings season -- which starts this week -- is customarily a boon to stocks, some analysts fear that bullish profit forecasts and outlooks issued last month have pushed investors to buy up the stock ahead of the actual reports, which means the stock prices we're seeing now already have positive earnings "baked in." That could result in modest selloffs even if earnings are good.

So whether you believe in technical number-crunching or the market's fundamental psychology, there's little evidence either way for a major breakout.

Last week, investors seemed content to stand pat ahead of Friday's strong job creation report, and sell off after it to leave the major indexes unchanged. For the week, the Dow Jones industrials rose 0.1 percent, the Standard & Poor's 500 index edged up 0.05 percent and the Nasdaq slipped 0.03 percent.

ECONOMIC DATA

The economic reports coming out this week are unlikely to help the market out of its funk. Perhaps the most telling number will be the University of Michigan's closely watched consumer sentiment index, due Thursday morning. The index is expected to come in at 88.5, slightly lower than March's 88.9 reading.

A higher-than-expected number could increase interest rate fears, while signaling only a short-term benefit for the economy given consumers' high debt and lack of savings.

The nation's trade deficit is expected to narrow slightly, from $68.5 billion in January to $68 billion in February. The Commerce Department report, due Wednesday, could pressure stocks if the deficits continue to climb.

EARNINGS

The first-quarter earnings season officially kicks off Monday afternoon, with the first Dow Jones industrial, Alcoa Inc., reporting its results. The rest of the week, however, will bring few earnings reports with market-moving potential.

A number of newspaper companies, including The New York Times Co., Tribune Co. and Knight-Ridder Inc., will report in the week ahead. Knight-Ridder's prospective acquirer, McClatchy Co., will issue its quarterly results Thursday morning, and is expected to earn 68 cents per share, down slightly from 69 cents per share a year ago. McClatchy has seen its stock price tumble 34.2 percent from its 52-week high of $74.50 on April 15, 2005, closing Friday at $49.05.

In the tech sector, Advanced Micro Devices, reporting Wednesday afternoon, has had better fortunes, more than doubling from its 52-week low of $14.08 on April 29, 2005, to close Friday at $33.69. The chip maker is expected to earn 29 cents per share for the quarter, compared to a 4-cents-per-share loss a year ago. With Intel Corp. and other tech heavyweights yet to report, AMD's earnings could move the entire semiconductor sector.

Electronics retailer Circuit City Stores Inc., reporting Wednesday morning, could benefit from the strong sales reported throughout the retail sector during the first quarter. Circuit City is expected to earn 77 cents per share, up from 58 cents per share a year ago. The company's stock is up 70.4 percent from its 52-week low of $14.47 on April 15, 2005, closing Friday at $24.65.

EVENTS

The nation's bond markets will close by 2 p.m. Eastern time Thursday, and both stock and bond markets will be closed Friday in observance of Good Friday.

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SENTIMENT JOURNAL: Investors Turn Cautious Amid Weak Market Action
By Frederic Ruffy, Optionetics.com
4/14/2006 10:45 AM EST

http://optionetics.com/articles/article_full.asp?idNo=14653

Market Internals: The Dow Jones Industrial Average ($INDU) rose three times and added 17 points in the holiday-shortened week of trading, but the gains in the industrials mask otherwise weak market action. On the New York Stock Exchange [NHNL], market breadth was negative throughout the week, with advancers trailing decliners during three of four trading sessions. Up volume outpaced down volume only twice. Meanwhile, the NYSE New High New Low Index [NHNL] sank into the red. It fell from +170 last week to –127 on Thursday (with 61 stocks rising to new 52-week highs and 188 falling to new lows.)

In NASDAQ trading, the Composite Index ($COMPQ) fell two times for a 13-point loss. Internals were mixed with advancers trailing decliners during two of four trading sessions. However, overall volume during the second half of the week was unimpressive and followed three days of relentless selling that began on Friday. As we can see from the table above, NASDAQ down volume totaled more than 1.2 billion shares during three consecutive trading sessions. On Tuesday, up volume trailed down volume by a margin of almost four-to-one. In sum, although the Dow rose during the latest week of trading, the gains in the average hide relatively aggressive selling along with deteriorating market internals on both the NYSE and the NASDAQ.

Sentiment Data: By some indications, investors have taken notice to the recent period of market weakness. The CBOE Volatility Index ($VIX), the market’s fear gauge, rose during four consecutive trading sessions, from 11.13 last Wednesday to a two-month high of 13 on Tuesday. Similarly, the NASDAQ Volatility Index ($VXN) rose from 15.63 to a one month high of more than 17 during that time.

Meanwhile, investor appetite for call options seems to be waning. The ISE Sentiment Index [ISEE], which measures call purchases divided by put purchases (x 100) on the International Securities Exchange [ISE], fell to only 105 on Thursday. Although the index might have been distorted somewhat due to the low volume associated with the holiday, a reading of 105 represents a 52-week low for the index. Figure 1 shows the ten-day average of the ISEE. At only 146, it is at the low end of its recent range.

Figure 1: ISEE Ten-Day Average

While the ISEE and the VIX indicate that the investors are a bit more defensive than in the recent past, not all indicators point to rising levels of bearish sentiment. For example, the latest survey from Investors Intelligence showed an increase in bullishness. The survey reports that 53.2% of those polled are bullish and only 24.5% are bullish. The survey hasn’t been this lopsided since January 25.

So, although the latest market decline has stirred up a bit more angst, the overall sentiment picture remains mixed. It is still not offering much of a guide regarding which way stocks might be headed. In this situation, I generally defer to the technical action of the market for guidance. Unfortunately, as was noted in the two opening paragraphs, the market action from that perspective has turned somewhat negative.

Frederic Ruffy
Senior Writer & Index Strategist
Optionetics.com ~ Your Options Education Site

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From Briefing.com: 4:30PM Intel beats by a penny, beats on revs;guides Q2, Y06 below consensus (INTC) 19.56 +0.17 : Reports Q1 (Mar) earnings of $0.23 per share, $0.01 better than the Reuters Estimates consensus of $0.22; revenues fell 5.2% year/year to $8.94 bln vs the $8.87 bln consensus. INTC reports gross margin 55.1% vs 56.0% street expectation. Co issues downside guidance for Q2, sees Q2 revs of $8.0-8.6 bln vs. $8.77 bln consensus. Co sees Q2 gross margins of 49% vs. 54.4% street expectations. Co issues downside guidance for FY06, sees FY06 revs of $37.6 bln vs. $38.0 bln consensus. Co sees FY06 gross margins of 53% vs. 55.6% street expectation.

4:28PM Qualcomm reports in-line Q2, issues generally in-line guidance (QCOM) : Reports Q2 (Mar) earnings of $0.41 per share, excluding non-recurring items, in line with the Reuters Estimates consensus of $0.41; revenues rose 34.4% year/year to $1.83 bln vs the $1.81 bln consensus. Co issues upside guidance for Q3, sees EPS of $0.36-0.38 vs. $0.37 consensus; sees Q3 revs of $1.77-1.87 bln vs. $1.76 bln consensus. Co issues in-line guidance for FY06, sees EPS of $1.53-1.57 vs. $1.56 consensus; sees FY06 revs of $7.1-7.4 bln vs. $7.18 bln consensus.

4:25PM eBay reports in line; reaffirms Q2 and FY06 guidance (EBAY) 40.35 +1.47 : Reports Q1 (Mar) earnings of $0.24 per share, excluding non-recurring items, in line with the Reuters Estimates consensus of $0.24; revenues rose 34.7% year/year to $1.39 bln vs the $1.39 bln consensus. Co reaffirms Q2 guidance, sees non-GAAP EPS of $0.22-0.23 vs. $0.24 consensus; sees Q2 revs of $1.37-1.415 bln vs. $1.42 bln consensus. Co reaffirms FY06 guidance, sees non-GAAP EPS of $0.96-1.01 vs. $1.03 consensus; sees FY06 revs of $5.7-5.9 bln. The non-GAAP effective tax rate in Q1-06 was 29%, consistent with 29% for Q1-05 and an increase from 28% for Q4-05. The higher effective tax rate for Q1-06 as compared to Q1-05 results primarily from shifts in the company's geographic mix of business.

4:20PM Rambus misses by a nickel, beats on top line (RMBS) : Reports Q1 (Mar) earnings of $0.02 per share, $0.05 worse than the Reuters Estimates consensus of $0.07; revenues rose 19.2% year/year to $47.2 mln vs the $46.5 mln consensus.

4:20 pm : The market closed higher for a second straight day, showing resilience in the face of renewed inflation fears, rising bond yields and record oil prices, as strong earnings across the board ultimately sidelined the bears. Before 8:00 ET, all signs pointed to the market adding to its biggest gain in nearly a year, as the bulk of earnings reports since yesterday's close either matched or surpassed Wall Street's forecasts. In fact, of the 12 Dow components reporting this week, the five blue chips posting results this morning all beat expectations.

Be that as it may, investors struggled throughout the session to find a silver lining, especially after today's higher than expected increase in core CPI countered yesterday's tame inflation read at the wholesale level. March core CPI rose 0.3% -- the largest increase in core prices since last March, inching the year/year increase in core CPI to 2.1% from 2.0%. Since nothing is more important than consumer inflation and incoming economic data remain the most important determining factors for Fed policy, Wednesday's inflation data rekindled the chance of two more rate hikes, underpinning a sense of nervousness in both the stock and bond market.

Even though the CPI report provided only one month of data, as alluded to by midday comments from San Francisco Fed President Janet Yellen, potential signs of a firming trend argued that yesterday's enthusiasm on Fed policy may have been a bit premature. When it was all said and done, though, the market's ability to avoid a logical pullback again reflected more underlying bullishness than we anticipated, especially as oil prices closed above $72 per barrel for the first time ever and the yield on the 10-yr note climbed back above 5.00% -- concerns that underscore our Neutral market view.

On the earnings front, United Technologies (UTX 62.80 +3.90) was the standout, beating estimates by three cents and boosting its FY06 outlook, which plays into our Overweight rating on Industrials. The sector also got a lift from General Dynamics' (GD 69.41 +2.96) solid report, which helped to offset consolidation in Honeywell (HON 43.53 -0.63) which hit a 52-week high yesterday ahead of its strong report. Providing even more market support was Energy, which was up 1.5% as oil prices gained more than 1.0% to $72.17 per barrel following an unexpected draw down in weekly crude inventories. Another strong earnings report from Grant Prideco (GRP 54.12 +4.70) -- a suggested holding in our Active Portfolio, was another source of sector support as it helped the Oil & Gas Equipment group extend its 26% year-to-date advance and underscored our Overweight rating on Energy.

Internet Software & Services (+3.4%) -- the day's third best performing industry group after Yahoo! (YHOO 33.54 +2.24) reported strong results -- helped the Nasdaq outpace its blue chip counterparts but only enough to help the Tech sector finish relatively flat on the day. Also helping offset weakness in storage and hardware was strength in semiconductor. The latter group got a lift after Texas Instruments (TXN 34.45 +0.45) beat estimates and boosted guidance coupled with late-day gains in Intel (INTC 19.56 +0.17) ahead of its earnings.

The brokerage group got a boost after Jefferies (JEF 68.86 +5.27) posted a 59% jump in profits and E*Trade Financial (ET 26.86 +0.94) caught a bid ahead of its earnings report. A rebound in Multi-line Insurance, which had been the tenth worst performing S&P industry group in 2006 before Allstate's (ALL 54.82 +2.87) upbeat outlook, also helped Financial post a modest gain and offset weakness in rate-sensitive bank stocks. Treasuries, which showed a muted response to the FOMC minutes yesterday, gave way to selling pressure at the first hint of inflation persisting. The yield on the 10-yr note (-10/32) closed at 5.02%.

Health Care, however, was the biggest drag on the market as lighter than expected Q1 revenues from Amgen (AMGN 68.30 -2.67) and Pfizer (PFE 24.82 -0.11) offset a solid report from Gilead Sciences (GILD 65.13 +3.29).BTK +0.9% DJ30 +10.00 DJTA +0.5% DJUA +0.3% DOT +0.8% NASDAQ +14.74 NQ100 +0.4% R2K +1.1% SOX +1.8% SP400 +1.0% SP500 +2.28 XOI +0.9% NASDAQ Dec/Adv/Vol 1166/1800/2.13 bln NYSE Dec/Adv/Vol 1324/1956/1.75 bln

4:17PM Vishay believes complaint filed with respect to upcoming annual meeting is without merit (VSH) 15.60 -0.10 : Co announces that on April 11, 2006, a complaint against VSH and the members of its Board of Directors was filed in the Delaware Court of Chancery opposing VSH's proposal at its upcoming annual meeting of stockholders to authorize a new Class C common stock and to amend VSH's charter to give the directors the exclusive right to determine the size of the board. The annual meeting is scheduled for May 11, 2006. The plaintiff asks the court to enjoin the annual meeting, to invalidate the authorization of the Class C shares and the charter amendment, and to enjoin any issuance of Class C shares. VSH believes the complaint is without merit and intends to vigorously oppose it.

3:27 pm CBOT Holdings (BOT)

118.75 -1.25: Shares of CBOT Holdings - parent company of the Chicago Board of Trade - were little changed Wednesday following word that the company's first-quarter profit grew 69% as the result of increased market-data prices, rates per contract and record volume in the period. The company, which went public last October, said net income in the first quarter increased $14.3 million to $35.1 million, compared with the $20.8 million seen in the first quarter of 2005. First quarter 2006 earnings per diluted share were $0.66, beating the Reuters Estimates consensus estimate of $0.61.

CBOT Holdings President and CEO Bernard Dan said during a post-earnings call with analysts that the company's expansion of the company's operating margin to 41% from 31% in the comparable quarter last year highlights the effectiveness of the CBOT's overall business model and strategy. He said that strategy includes the creation of derivatives on already-existing products such as options on gold and a $25 Dow Futures contract. Senior Vice President and CFO, Glen Johnson, said during the call that it was a successful quarter for the company both on the top line and bottom line. Baseline and other costs grew only 5% during the same time period, a notably slower pace than revenue growth and a major reason for higher 2006 operating margin.

With today's high of $126.73, shares came within just under $8 of the $134.50 all-time high. The stock has partaken in the erratic price moves common to the exchange sector. Volatility is likely to soon drop a bit, however, after a lockup on exchange member shares ends Apr. 22 and the number of outstanding shares increases to about 16 million from around 3 million. CBOT Holdings, which has a market cap of about $6.38 billion, is also set to hold its annual meeting May 2, and is likely to stress the growth it's seen during this quarter to bring in new investors and offset profit taking by exchange members.

--Christine Marie Nielsen, Briefing.com

3:10 pm Coca-Cola (KO)

41.63 +0.33: Following Coca-Cola's fourth quarter earnings report, we indicated that we liked the stock from a risk/reward standpoint. In the wake of Coke's first quarter report, we continue to feel the same way, as a number of the trends seen in the fourth quarter carried over to the first quarter.

Specifically, Coca-Cola reported solid volume growth, posting a 5.0% gain across its global operations that was led by its success in North America, Latin America, and the emerging markets that included China, Turkey, and Russia. The 5.0% growth, which is ahead of its long-term target, was a derivative of 3.0% unit case volume growth in its carbonated beverage business and 11.0% unit case volume growth in its non-carbonated beverage segment.

First quarter revenues were basically flat with last year at $5.23 billion, having been impacted by a 4.0% increase in gallon sales, a 1.0% benefit from pricing and mix, a 2.0% decrease from structural changes, and a 3.0% negative currency adjustment. Its first quarter profit increased 10% to $1.11 billion, or $0.47 per diluted share, including a $0.02 per share impact related to asset impairment charges and investments in the bottling operations in Asia. Excluding those items, earnings of $0.49 per diluted share came in a penny ahead of analysts' expectations, according to Reuters Estimates.

All in all, the market seems relatively pleased with Coke's solid, if not spectacular, performance. With the launch of new products like Black Cherry Vanilla and Tab Energy, along with a new media campaign in North America and increased marketing investment, Coca-Cola appears to be on a good path to deliver on its objectives. Whether that ends up impressing the market remains to be seen, but with Coke's forward P/E multiple of 18.3x being well below its historical multiple, we'd argue that it is a reasonably-priced opportunity for a patient-minded investor seeking a defensive-oriented investment in a diversified stock portfolio.

--Patrick J. O'Hare, Briefing.com

2:51 pm Honeywell (HON)

43.54 -0.62: Boosted by strength in its aerospace and automation divisions, Honeywell International posted first quarter profits that widely exceeded Wall Street's forecast. In the quarter, the diversified manufacturer earned $436 million, or $0.52 per share, up nearly 22% from $358 million, or $0.42 per share, last year. Excluding $0.10 per share for environmental, litigation, and net repositioning charges, earnings totaled $0.61 per share. According to Reuters Estimates, analysts on average were expecting the company to earn $0.49 per share.

Revenue for the period increased 12.3% year/year to $7.24 billion. The results reflect growth in Honeywell's aerospace, automation and controls, and specialty materials businesses, offset by declines in transportation systems, which was hurt by the impact of foreign exchange and the exit of certain businesses. In aerospace, which accounted for roughly 36% of the top line, revenue increased 5% to $2.63 billion, as a 10% gain in commercial sales offset a 1% reduction in defense and space sales. Automation and control revenues of $2.37 billion were up 19%, driven primarily by a 15% contribution from acquisitions and organic sales growth of 4%. Meanwhile, revenue for specialty materials surged 44% to $1.15 billion, helped in large part by the impact of acquisitions and divestitures, as well as organic sales growth of 7%.

Honeywell's first quarter results, highlighted by strong organic growth, margin expansion, and better than expected earnings, represents a strong start to the fiscal year, and further supports our bullish outlook on the Industrials sector. Building on this performance, as well as its solid position in attractive industries, such as aerospace, the company, which also said it closed its $508 million acquisition of First Technology during the quarter, said it remains confident in its outlook for 25% to 30% earnings growth in 2006. According to Reuters Estimates, analysts have pegged full year earnings at $2.47 per share on revenue of $30.07 billion.

--Richard Jahnke, Briefing.com

1:47 pm J.P. Morgan Chase (JPM)

42.72 +0.12: JP Morgan Chase, the nation's third largest bank by assets, on Wednesday said its first quarter profits rose 36% from a year ago, propelled by its credit card and wealth management businesses. Specifically, the New York-based bank earned $3.08 billion, or $0.86 per share, compared with $2.3 billion, or $0.63 per share, a year earlier. The results, which topped analysts' forecast of $0.83 per share, according to Reuters Estimates, included an after tax benefit of $341 million from lower credit losses, offset by expenses related to the company's adoption of new stock compensation accounting rules, the repositioning of its treasury portfolio, and merger-related costs.

On the top line, first quarter revenue rose 11.6% to $15.2 billion, with solid growth in credit card services, wealth management, and investment banking, which reported record quarterly revenue of $4.7 billion. Credit card revenues increased 10% to $1.9 billon and revenue from wealth management increased 19% to $2.97 billion. Meanwhile, unlike other large banks, which recently reported outsized gains from trading, revenues from principal transactions fell 1% to $2.6 billion.

In retail services, mortgage banking fees slipped 33% to $241 million, reflecting the impact of rising interest rates on the once-booming housing market. Additionally, net interest income, or the income generated from lending and deposits, declined 3% to $2.6 billion, due primarily to the narrowing of the spread between short and long-term interest rates.

JP Morgan benefited in the quarter from diversification in its business, as gains in wealth management and investment banking offset weakness in its retail banking operations, due to the impact of rising interest rates and a narrower spread. Additionally, the company was helped by lower than expected credit card losses as a result of the new bankruptcy law that went into effect last fall. Overall, JP Morgan's latest results validate our Market Weight rating on the Financial sector. In that space, we continue to favor Goldman Sachs (GS) due to its premier status in investment banking amid increased M&A activity, but J.P. Morgan continues to hold appeal of its own, as discussed in a Bargain Hunting profile last October.

--Richard Jahnke, Briefing.com

11:58 am United Technologies (UTX)

62.64 +3.74: Shares of United Technologies traded sharply higher on Wednesday after the Dow component, which manufactures Otis elevators, Pratt & Whitney aircraft engines, and Carrier conditioners, posted better than expected first quarter results, and issued upside guidance for the fiscal year.

For the most recent quarter, United Technologies earned $768 million, or $0.76 per share, up from income of $651 million, or $0.64 per share, in the same period last year. According to Reuters Estimates, analysts were expecting the Hartford, Connecticut-based company to post earnings of $0.73 per share.

Revenue for the period rose 13% year/year to $10.62 billion, reflecting solid organic growth and the impact of recent acquisitions, particularly Kidde which was acquired in early 2005. On average, analysts were forecasting revenue of $10.42 billion. United Technologies said its top line was helped by 9% organic growth, in spite of lower revenues at Sikorsky due to a five-week strike, which has now been settled. With the exception of Sikorsky, which saw sales fall 15% during the quarter, all of the company's other business units reported revenue gains. Additionally, the company said cost reductions and improved productivity continued to fuel margin expansion at its Carrier and UTC Fire & Security divisions.

On the back of the strong quarterly results, which supports our Overweight rating on the Industrials sector, United Technologies raised its full year earnings outlook. The company now expects earnings to be between $3.50 and $3.60 per share, up from its previous forecast of $3.40 to $3.55 per share. The current consensus estimate calls for earnings of $3.54 per share. Given the company's strong start to 2006 and positive outlook for the current year, investors should continue to look for solid performance as business conditions remain favorable.

--Richard Jahnke, Briefing.com

11:00 am IBM (IBM)

83.31: The market has been awash in solid earnings results from the sector over the last day increasing optimism over profit growth for stocks. The granddaddy of them all, IBM, kept up with the trend, reporting a three cent upside in the first quarter buoyed by sales in the Emerging Markets and cost cutting initiates. The world's largest computer services company reported net income of $1.71 bln, or $1.08 per share from $1.4 bln, or $0.84 cents in the prior year. Revenues fell 9.8% to $20.7 bln after the company sold off its PC business, excluding the sale revenues would have been flat.

IBM has been going through a major restructuring trying to shore up earnings through job cuts (14,500 in total) and divestments in order to focus on higher margins segments. Global Services revenues were $11.6 bln vs. the street's expectation of $11.45 bln, up 14% y/y. Pretax service margins widened by 320 basis points to 9.7%. Strength in the quarter came from Tivoli and Websphere software, Microelectronics, and BTO and xSeries servers. Hardware sales fell 32% to $4.6 bln, but excluding the sale, rose 3%. Software sales grew 2% to $3.9 bln.

Overall, the quarter was mixed given the flat top line, but the earnings improvement cannot be discounted. The strong services bookings bode well for revenue growth ahead, buttressed by further restructuring savings assisting earnings outlook. IBM's restructuring initiatives are clearly paying off which raises the bar in earnings growth for the year. The stock is trading at 14.8x well below its 5-year average of 21.1x.

--Kimberly DuBord, Briefing.com

10:44 am Amgen (AMGN)

68.65 -2.23: After the close on Tuesday, Amgen said its first quarter earnings climbed 17% from a year ago, driven by strong demand for its anemia and arthritis-fighting drugs. However, sales at the Thousand Oaks, California-based biotechnology company fell short of analysts' expectations, sending shares lower during the regular trading session.

Net income for the period increased to $1 billion, or $0.82 per share, up from $854 million, or $0.67 per share, a year earlier. Excluding stock compensation expenses and other special items, earnings were $0.91 per share, three cents better than the Reuters Estimates consensus of $0.88 per share.

On the top line, total revenues increased 14% year/year to $3.2 billion, with product sales of $3.1 billion up 14%. Analysts, however, were expecting the company to record revenue of $3.3 billion, according to Reuters Estimates. Excluding the impact of foreign exchange, total product sales increased 16%. Sales in the United States totaled $2.6 billion, an increase of 15% from the year ago period, while international sales rose 10% to $556 million. In terms of products, worldwide sales of anemia drugs Aranesp and Epogen increased 24% to $893 million and 4% to $604 million, respectively. Combined worldwide sales of cancer treatments Neulasta and Neupogen grew 13% year/year to $896 million, while sales of rheumatoid arthritis drug Enbrel, which was affected by slowing market growth and increased competition, increased 11% to $658 million.

Earlier, Amgen lifted its outlook for the year with earnings now expected in the range of $3.60 and $3.70 per share, including anticipated costs for the company's $2.2 billion acquisition of Abgenix. The company noted that has high expectations for panitumumab, an experimental drug for the treatment of colon cancer it gained when it acquired Abgenix, getting approved by the Food and Drug Administration and becoming a best-selling medicine. Analysts on average are expecting full year earnings of $3.62 per share on revenue of $14.3 billion, according to Reuters Estimates.

--Richard Jahnke, Briefing.com

09:46 am Grant-Prideco (GRP)

52.40 +2.98: It has been a rough ride for shareholders of Grant Prideco over the last month as the stock, prompted by concerns over the company's conservative outlook, tumbled from highs. We reiterated our bull position, suggesting investors take advantage of the market's nearsightedness and add to positions as the outlook for the industry remained quite strong. Grant Prideco's first quarter confirmed our suspicions the company was just taking a conservative stance last quarter, as net profits doubled to $92.4 mln on sales growth of 42% to a record $122.3 mln.

The quarter was fueled by strong demand as well as beneficial pricing and mix that resulted in operating margins exceeding 30% in each of its three primary operating segments. The company closed the quarter with a total backlog of over a billion dollars - up 24% in just one quarter.

Continued strength in drilling activity and demand from new rigs entering the market prompted the world' largest manufacturer and suppler of oilfield drillpipe to raise expectations well above expectations. The company sees second quarter earnings of $0.66-$0.68 per share versus the consensus estimate of $0.62. It raised full year estimates materially to $2.75-$2.85 per share, compared to consensus which currently stands at $2.60 - but not for long. The blowout quarter and upside guidance have given GRP a notable boost in early trading, which should not deter buyers. The first quarter results from this oil services company gave an indication of just what is possible in terms of market potential as the company reaps the benefits from robust activity across the energy patch. The picture keeps getting better.

--Kimberly DuBord, Briefing.com

09:08 am Yahoo! (YHOO)

31.30: Yahoo shares surged in pre-market activity, after the Internet giant posted first quarter earnings that matched Wall Street's target, as its advertising business demonstrated solid growth and user numbers continued to climb. With shares down roughly 25% since the beginning of the year, due primarily to concerns that the Sunnyvale, California-based company is losing search engine market share to rival Google (GOOG), the latest results reflect solid growth across the board and set the stage for improved investor sentiment.

For the first quarter, Yahoo posted earnings of $159.6 million, or $0.11 per share, including $71 million of stock compensation expense. That is down from net income of $204.6 million, or $0.14 per share, in the same period last year, but in line with analysts' expectations, according to Reuters Estimates.

Revenue for the period totaled $1.57 billion, up 34% from $1.17 billion a year earlier, as marketing services revenue increased 35% and fees revenue increased 25%. Revenue excluding traffic acquisition costs, or the commissions paid to advertising partners, was $1.09 billion for the quarter, a 33% increase compared to $821 million for the same period last year.

Based on the strong first quarter results and improved growth, Yahoo reaffirmed its fiscal 2006 outlook for revenue of $4.60 to $4.85 billion, excluding traffic acquisition costs, with free cash flow and capital spending in line with its previous forecasts. Analysts on average are looking for full year revenue of $4.76 billion, according to Reuters Estimates. For the current quarter, the company said it expects revenue to range between $1.08 and $1.16 billion, ex-TAC, versus the consensus estimate of $1.14 billion.

The latest results and continued search monetization improvements support a positive outlook for the company at the currently depressed price level. At the current level, Yahoo shares are trading at roughly 42.3x forward earnings, compared with 46.2x for Google.

(Disclosure: Briefing.com has a business relationship with Yahoo)

--Richard Jahnke, Briefing.com

08:57 am Texas Instruments (TXN)

34.00: Texas Instruments has been one of our favorite large cap stocks within the semiconductor space given its product portfolio, healthy end-market demand trends, and operating leverage. The company's first quarter results simply confirmed our position further.

The company generated revenues of $3.33 bln, which were flat sequentially, on strong demand for high-performance analog and DSPs that helped offset seasonal weakness in DLPs and other semis. Per share profits of 33 cents met expectations, while the mid point of the company's guidance for both earnings and revenues surpassed current expectations. TI's continued strong performance warrants a higher multiple; therefore, we would continue to suggest investors step in despite the recent run up in shares.

The company stated revenues from chips used in next-generation 3G networks doubled from last year. Its comments mirrored those of Motorola and Nokia, which cited strong growth trends for handset chips in the emerging markets. Nokia (NOK), which recently raised its growth forecasts, is one of TI's largest customers. It's not just the telecommunications industry where TI is experiencing growth. The consumer electronics business, for which TI sells chips used in TVs, digital cameras, and printers, also remains strong. Semiconductor orders in the quarter rose 20% to $3.6 bln.

First quarter gross margins rose to 50.1% of sales, up from 44.9% in the prior year and breaking the 50.0% level for the first time ever. The expansion is related to the divestiture of its sensor business, as well as a richer product mix. Overall, the quarter was solid on all fronts from orders to inventory. Most likely, the Street will raise its expectations given TI's outlook.

Texas Instruments is well positioned to benefit from growth trends in key product areas within the wireless market, from 3G to broadband and digital television, that support higher prices. Coupled with continued cost controls, that will likely produce healthy profit growth. We have argued for an Overweight rating for Technology since September based on the migration towards "everything portable, everything digital" that underpinned our positive view on communication IC manufacturers like Broadcom (BRCM) and TXN.

--Kimberly DuBord, Briefing.com

08:40 am Motorola (MOT)

24.08: The motormomentum continued in the first quarter for Motorola, which reported global handset shipments of 46.1 million and achieved share gains across all markets. However, shares sold off following the release due to the market's disappointment with the lack of operating leverage at Motorola despite sales growth of 23% to $10 bln. Net income slipped to $686 mln, or 27 cents per share, from $592 mln, or 28 cents a year earlier. That was in line with the consensus estimate.

The upside for the quarter was the impressive sell through within the handset business during a typical down season, which demonstrates the strength of the Motorola family of products. The world's second largest mobile phone maker indicated strength continues to be driven by the RAZR products and indicated the new SLVR is tracking ahead of RAZR by historical comparisons. Volumes of the new PEBL doubled sequentially. MOT gained 4.8% in market share over the previous year. Q1 handset operating margins were flat at 11% despite lower ASPs of $139, which lends credence to the idea of profit acceleration even as mix shifts to the low end.

The negatives in the quarter for Motorola came from a significant drop in margins within its network business. Government and Enterprise revenues and operating margins also came in below expectations due to a slowdown in federal spending. These businesses weighed heavily on the quarter, as operating margins shrank to 8.9% from 10.5% in the prior year. The company forecasts Q2 EPS of $0.30-$0.32 on sales of $10.3-$10.5 bln.

While we would have liked to see more leverage in the quarter, we remain committed to Motorola due to its compelling product portfolio and continued market share gains, as order and product momentum point to a strong fiscal year. We currently have an Overweight rating on technology, which includes a positive outlook on the communication-related markets. Motorola offers a compelling risk/reward profile at 18.1x forward earnings, near the low end of its historical range, and a 1.5x price to sales ratio. This compares to NOK at 18.1x and 2.1x, respectively.

--Kimberly DuBord, Briefing.com

10:11 am HCC Insurance: KeyBanc Capital Mkts / McDonald initiates Buy. Target $39. Firm is saying that the co has an enviable track record of 13.1% CAGR book value growth and projected ROE of 15.1%. Firm also states that co's conservative fiscal management has resulted in a superior balance sheet. Firm says that co has demonstrated an uncanny ability to successfully expand in the specialty insurance markets and that successful strategic acquisitions have been the cornerstone of HCC's profitable growth.

10:10 am Seagate Tech: Bear Stearns downgrades Outperform to Peer Perform. Firm also lowers their CY06 year-end fair value est to $28-$31 from $34-$38. While they continue to view STX's strategic move to acquire MXO favorably and remain positive about the long-term prospects for the drive industry, they note STX's weak outlook and negative data points at the margin, which, coupled with pending integration of MXO, could temper STX's near-term performance. Also, while both WDC and KOMG are likely to see weakness, firm maintains their Outperform for both, since WDC is likely to gain share from MXO/STX merger (though lower pricing could offset some upside) and KOMG should benefit from the uptick in demand at WDC and continued constraints in media.

10:10 am CSX Corp: UBS reiterates Buy. Target $76 to $86. Firm upgrades based on strong Q1 results. Firm states that the key take away for the sector from the co's Q1 results is that the rail pricing story still has momentum and hasn't even begun to decelerate.

10:09 am AmBev: UBS reiterates Buy. Target $52.27 to $56. Firm ups target due to new F.X. assumptions and changes to the firms operating projections for all co's countries. Firm also states that they also are updating prjections to reflect the recently announced transaction to acquire control of Quinsa, including related charges to their co share buyback and debt projections.

10:08 am Alliant Tech: UBS reiterates Buy. Target $90 to $96. Firm is saying a recent mgmt meeting and model review, the firm is increasingly confident in their above consensus EPS estimate and believe ATK is poised to break out of recent trading range. The firm says near term catalysts that they believe could break ATK out of recent trading range include: 1) move higher in consensus estimates, particularly FY08; 2) increase in share repurchase activity given large 5 mln share authorization and 3) acquisition activity as ATK has been quiet since P.S.I deal in Oct 04.

10:06 am Kingsway Fin: Ferris Baker Watts initiates Buy. Target $26. Firm is saying that given the co's investment leverage, KFS has the capacity to earn an 8-10% ROE, even with zero underwriting profits. Firm expects co to grow book value per share at a rate of 14% for the next 10 years. In the near term, firm believes that the co should work through the operational and reserve issues that have been plaguing it in recent years.

10:06 am Republic Airways: Prudential reiterates Neutral. Target $14 to $17. Firm ups target following noting Continental announced the selection of Chautauqua Airlines, a subsidiary of Republic Airways, to operate up to 69 Embraer regional aircraft. The firm says assuming Republic is transferred all 69 aircraft, this would amount to a 40% increase from the estimated 2006 calendar year end fleet count of 171 aircraft by the time all the aircraft are fully assimilated sometime in calendar year 2008.

10:05 am Cymer: Needham & Co upgrades Hold to Buy. Target $61. Firm ups rating and price target following better than expected results. The firm says they have been concerned that the shift to immersion lithography would put a damper on the A.S.P gains associated with the shift to shorter wavelength, higher A.S.P tools. The firm says that has indeed happened but the increased volume of units has more than offset the stall in A.S.P momentum the co is experiencing. The firm says they surprised that units have grown as much as they have to get to record orders of $136.5 mln.

10:03 am Texas Instruments: Prudential reiterates Overweight. Target $38 to $40. Firm is saying that gross margins will continue to expand beyond the previous peak, distributor inventories declined in each of the 5 previous quarters and were at unusually low levels, channel inventory turns declined only slightly from just over 7 to just under 7, and TI silicon and margins in low end phones are comparable to midrange phones because of increased integration and expanded content. Firm thinks low-end handset growth increases visibility into TI's top line.

10:01 am Sun Healthcare: CIBC Wrld Mkts reiterates Sector Outperform. Target $10 to $11. Firm also raises their EPS est saying the co appears to have good growth opportunities available through internal strategies.

10:00 am ANSYS: Deutsche Securities reiterates Hold. Target $42 to $52. Firm is saying that the key focus isses are as follows: Large orders, which continue to be strong and mgt has been optimistic about business conditions in recent quarters. Co has seen consistent strength across all regions and pockets of strength in Europe. Firm believes that recent moves have resulted in more efficient and aggressive direct sales force and are monitoring impact on indirect channel.

[ReturntoSender]

The Calm Before The Storm
Investors Insight Publishing

Click on link below to see charts and tables.

http://www.investorsinsight.com/otb_va_print.aspx?EditionID=316

Introduction

"The current state of volatility is an indicator of a potentially sharp stock market decline based upon (i) the currently low level of volatility, (ii) the tendency for upward spikes to follow extreme low volatility, (iii) the relationship of market direction to volatility trends, and (iv) the propensity for downside volatility during secular bear markets. Volatility could decline further and could remain low for some time longer; however, based upon history, it has not stayed low without subsequently spiking and, as it goes lower, the likelihood of a spike increases significantly.

When volatility does start to rise and the stock market likely declines, the bulls will call it a "pullback" or a "correction" in advance of the next major upward move in the market. Because we are currently in a secular bear market (at the least, a bear-in-hibernation), the market can be expected to act as it has during the past secular bear markets. Keep in mind: over the course of secular cycles, the market is driven by recognized principles of economics and finance. The current market conditions are not positioned to provide another secular bull market at this time--it is not a sleeping bull. The current conditions reflect a secular bear or a bear-in-hibernation because the price/earnings ratio ("P/E") is above its historical average. Without a rising P/E, future returns will be below average and investors are likely to experience an extended, choppy, and often volatile period.

There are strategies to employ to capitalize on volatility and to protect downside risk. Recognition is empowering. It is incumbent upon investors to understand the environment and to seek profit-oriented investments rather than hope that the market will again provide the passive rewards that occurred during the secular bull market of the 1980s and 1990s."

This week we will turn our attention to a topic of intrigue, volatility, one of which I think is becoming increasingly important. Ed Easterling, a good friend and fellow hedge fund colleague of mine, has performed an in-depth study on volatility trends and their effects on the capital markets. I have been harping on a similar theme in my e-letter, Thoughts from the Frontline, which I recommend you read in conjunction with this if you have not already.

Ed Easterling is the author of Unexpected Returns: Understanding Secular Stock Market Cycles, President of an investment management and research firm, and a member of the adjunct faculty at SMU's Cox School of Business where he teaches the course on alternative investments and hedge funds for MBA students. Mr. Easterling publishes provocative research on the financial markets at www.CrestmontResearch.com.

"The Calm Before the Storm" uncovers the current and historical levels of volatility in the marketplace and explores their impact on both secular bull and bear market cycles. Moreover, Ed goes on to discuss what those trends mean for investors' expectations and returns in the not too distant future. I trust that you will indeed benefit from Mr. Easterling's fundamental research and his "outside of the box" insights.

John Mauldin, editor

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The Calm Before The Storm

By Ed Easterling
April 21, 2006
All Rights Reserved

It seems that never before have the bulls and the bears had such strong arguments--the tectonic plates of the markets are intensely balanced in an edgy state of latent eruption. Most investors are actively searching for clues about what might next occur in the stock market: new highs or a correction.

Regardless of the direction of the market's next leg, the move is likely to happen with increased volatility. The historical cycle of stock market volatility has been erratic, yet consistent, "...the tectonic plates of the markets are intensely balanced in an edgy state..."for more than five decades. And although the trend in volatility may not be a completely reliable indicator, it does offer key insights about the likely direction of the market. Most if all, portfolios that are best positioned for declining volatility often do not perform well in rising volatility. Therefore all investors can directly benefit from insights about the upcoming conditions.

The charts and discussion that follow will present several ways to measure volatility--all of them reflecting volatility at relatively low levels historically--as well as insights about the implications of volatility rising back to average or greater levels.

Ringing The Bell

It happened this week...lately, it's not been happening very often: A 1% move in the market. For the Dow Jones Industrial Average (the one that we hear about on the six o'clock news), that's more than 100 points. It made all of us sit up and take note--as though something big had occurred. On average since 1950, 1% moves have come weekly based upon a rate of about four times per month. Lately, we're down to twice a month. That places us in the lowest quarter of all periods--a level of relative calm.

Figure 1 presents the average number of days when the market has moved more than 1%, up or down, since 1950. There have been a number of periods, including the mid-1970s, late-1980s, and particularly just a few years ago, when 1% days occurred over 10 times per month! Since the markets only trade about 21 days per month, those periods are especially volatile with a super-swing every other day.

Figure 1: 1% Days Per Month (1950 to March 2006)



Although 1% moves represent the kind of volatility that affects most investors' throats and stomachs, we can also measure market volatility using a statistic called standard deviation. This is the measure that most market researchers and academics use. The standard deviation for returns is expressed as a percentage and measures the magnitude of market changes compared to the average market change--in other words, it reflects whether the market is really choppy or fairly calm. Over time, the average standard deviation on an annualized basis for the stock market has been just under 15%. That does not mean that the average annual change is 15%, rather it means that about two-thirds of the years fall in a range of 15% around the average.

Enough with the details, let's apply it to the market. Our interest is to assess the daily volatility of the stock market over the past twelve months compared to all rolling twelve-month periods since 1950. As of last month, standard deviation volatility was running 6.9%--compared to an average since 1950 of 13.4%. Just as we saw with 1% daily changes, we're now at about half of the historical average. Yet, as reflected in Figure 2, the standard deviation has recently slipped into the lowest seven percent of all periods since 1950.

Figure 2 reflects a distribution of volatility by ranges. More than half of the time, stock market volatility is between 10% and 16%. Over the past couple of years, we have fallen below 10%...into the lowest quarter of all periods. As of March, we slid further to less than 7% and, if April is fairly flat, the twelve-month average could further dive to 6.2%!

Figure 2: Distribution of Stock Market Volatility



Other than seeing that the markets are extremely calm right now, what else can we understand about volatility and its cycles? Since 1950, the cycle of volatility has been quite erratic, yet fairly pronounced. Although it has taken a jagged path, volatility clearly has vacillated from lows below 10% to highs of more than 20%. The cycle reflects spikes and falls--often one extreme following the other--with interim periods chopping toward the middle of the range.

As reflected in Figure 3, there does not appear to be a longer-term trend toward lower volatility (some would say the result of increased efficiency in the markets), nor is it trending generally higher (others saying the impact of globalization or day trading). Rather the cycle has been bouncing around for decades, while rarely overstaying its welcome in the lowest or highest ranges.

Figure 3: S&P 500 Volatility (Standard Deviation)



The graph reflects relatively short periods outside of the range from 10% to 20%. On the lower side, market volatility has only fallen below 10% nine times over the past 55 years. Once it passed through that threshold, the time below the line averaged 16 months (with the longest being 33 months and the shortest at 7 months). Thus far as of March, we have been below 10% for 26 months. If we make it past October of this year, the market will be setting a new record--and the current 26 months is already the second longest run.

A decline below 7% has occurred even more rarely, with only five occurrences since 1950. As the chart reflects, such extremely low levels rarely persist. The average time below 7% has been 9 months, with none lasting more than 13 months.

Once volatility starts to rise from such a low level, a year later the volatility has averaged almost 12% and then on average in about three years it generally peaks at more than 20%. One extreme follows another until the market rebalances again toward the middle.

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All In A Day

Still another measure of volatility is the range from low to high during each trading day. In Figure 4, Average Daily Range: S&P 500 Index (since 1962, when range data was readily available) we can also see the cycles, highs and lows, and a current condition near the bottom of the range. This volatility measure is similar to the measures previously presented and reflects the general level of volatility in the stock market.

Figure 4: Average Daily Range: S&P 500 Index



Why does volatility matter? As reflected in Figure 5, Volatility & Market Returns, there is a strong relationship between the level of volatility and the performance of the market. As volatility rises, there is a greater propensity for the stock market to experience losses. Volatility tends to decline as the stock market rises and it tends to increase as the stock market falls. For example, in the top half of Figure 5, the average daily range for each month is grouped into four sets, known as quartiles, which are ranked from least volatile to most volatile.

You will notice that the least volatile periods have the lowest frequency of down months. As the volatility increases across the quartiles, the frequency of down months consistently increases. Further, as the volatility increases, the magnitude of the loss during down months consistently increases. Higher volatility brings not only a greater chance of loss, but greater losses as they occur.

Figure 5: Volatility & Market Returns



The column on the right provides a summary measure of the expected return during each period. The expected return is determined by multiplying the chance of a gain times the average gain and subtracting the product of the chance of a loss times the average loss. As you can see in the table, the expected return consistently declines and becomes an expected loss in the most volatile markets. A similar analysis using annual data is provided on the bottom half of the table reflecting the same conclusions.

Secular Cycle Implications

Volatility has different implications during secular bull markets and secular bear markets. For this analysis, principles from Unexpected Returns: Understanding Secular Stock Market Cycles will be employed. This article will include all of the charts and information needed to assess the market's current vulnerability. For more information about the book and secular market cycles, please visit www.UnexpectedReturns.com.

Secular stock market cycles refer to extended periods of above-average returns and below-average returns that result from trends in the price/earnings ratio ("P/E"). The P/E is a measure of valuation applied to stocks that compares their price to their current earnings. In effect, the P/E represents how many years of today's earnings that investors are willing to pay for a stock or basket of stocks. Over the past hundred years, P/Es for the stock market have tended to cycle from near 10 to somewhat more than 20.

Over longer periods of time, the earnings of companies in the market have in the aggregate increased in a close relationship to growth in the economy. During periods when P/Es are generally rising, investors realize above-average returns from the multiplier effect that rising P/Es have on increasing earnings. During periods when P/Es are generally declining, however, investors realize below-average or negative returns from the offsetting effect of declining P/Es and increasing earnings. There have been eight complete secular bull and secular bear cycles since 1900.

When the concepts of volatility are assessed in secular bull and secular bear markets, the volatility characteristics that we saw in Figure 3 (reflecting the rolling volatility of the S&P 500 since 1950) are further revealed. In secular bull markets, rising volatility can still allow profitable periods. In secular bear markets, however, there is a higher percentage of downside volatility than upside volatility. As a result, the negative effects of volatility surges in secular bull markets can be overcome by strong market performance and the stock market can experience gains amidst the volatility. In secular bear markets, the downside volatility and negative effects of volatility create adverse market conditions.

Figure 6, Volatility in Secular Bull and Bear Cycles, reflects the performance of the stock market during the volatility cycles presented earlier in Figure 3. Green shading has been added to reflect periods of secular bull markets and yellow shading reflects periods of secular bear markets. This will help to show that volatility surges have different effects on the market during secular bull periods and secular bear periods.

Figure 6: Volatility in Secular Bull and Bear Cycles



As measured by the rolling standard deviation, there have been five surges in volatility from extreme low levels since 1951. Each of these volatility surges is noted on Figure 6 with black circles, lines, and arrows. In addition, a percentage value is presented next to each black line representing the annualized rate of change in the S&P 500 Index from the bottom to the top of the move in volatility. The average change in the stock market during volatility spikes is positive during secular bull periods and negative during secular bear periods, yet the gains and losses can be much more extreme at times within the period. Time, totals, and averages have the tendency to blur the magnitude of intra-cycle swings.

Another Indication

An additional measure of volatility during secular market cycles is the frequency of years when the market is within or outside of certain percentage ranges. For this analysis, we use the same ranges and format that were presented and discussed in Unexpected Returns. The profile for the current secular cycle reflects an environment of low volatility and downside vulnerability. Figure 7, Annual Dispersion of Market Changes, presents the frequency that annual changes in the market occur either within or outside of two key ranges. Note the general consistency between secular periods for the frequency inside both ranges. Historically, almost 30% of the years have annual changes between -10% and +10%. Further, almost 50% of the years have annual changes between -16% and +16%. Most notably, these frequencies occur fairly consistently during both secular bull and secular bear periods at the same rate as they occur in the aggregate. Yes, the "inside-range" occurrences are remarkably consistent. The differences occur outside the range--secular bull markets have a strong bias to upside occurrences and secular bear markets have a notable bias to downside occurrences.

Figure 7: Annual Dispersion of Market Changes



So far in this secular bear market cycle, the past six years have been atypically concentrated toward the center. More concerning, however, the frequency of large declines (more than -16%) is unusually low. Based upon the typical secular bear market profile, we appear susceptible to double digit moves, especially large declines.

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CONCLUSION

The current state of volatility is an indicator of a potentially sharp stock market decline based upon (i) the currently low level of volatility, (ii) the tendency for upward spikes to follow extreme low volatility, (iii) the relationship of market direction to volatility trends, and (iv) the propensity for downside volatility during secular bear markets. Volatility could decline further and could remain low for some time longer; however, based upon history, it has not stayed low without subsequently spiking and, as it goes lower, the likelihood of a spike increases significantly.

When volatility does start to rise and the stock market likely declines, the bulls will call it a "pullback" or a "correction" in advance of the next major upward move in the market. Because we are currently in a secular bear market (at the least, a bear-in-hibernation), the market can be expected to act as it has during the past secular bear markets. Keep in mind: over the course of secular cycles, the market is driven by recognized principles of economics and finance. The current market conditions are not positioned to provide another secular bull market at this time--it is not a sleeping bull. The current conditions reflect a secular bear or a bear-in-hibernation because the price/earnings ratio ("P/E") is above its historical average. Without a rising P/E, future returns will be below average and investors are likely to experience an extended, choppy, and often volatile period.

There are strategies to employ to capitalize on volatility and to protect downside risk. Recognition is empowering. It is incumbent upon investors to understand the environment and to seek profit-oriented investments rather than hope that the market will again provide the passive rewards that occurred during the secular bull market of the 1980s and 1990s.



Conclusion

Your sell in May and go away analyst,


John F. Mauldin
[e-mail]



Disclaimer

John Mauldin is president of Millennium Wave Advisors, LLC, a registered investment advisor. All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors before making any investment decisions.

Opinions expressed in these reports may change without prior notice. John Mauldin and/or the staffs at Millennium Wave Advisors, LLC and InvestorsInsight Publishing, Inc. ("InvestorsInsight") may or may not have investments in any funds cited above.

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Backdating Probe
Widens as 2 Quit
Silicon Valley Firm

Power Integrations Officials
Leave Amid Options Scandal;
10 Companies Involved So Far
By CHARLES FORELLE and JAMES BANDLER
May 6, 2006; Page A1

http://online.wsj.com/article/SB114684512600744974.html?mod=wsjcrmain

The stock-options backdating scandal continued to intensify, with the announcement by a Silicon Valley chip maker that its chairman and its chief financial officer had abruptly resigned. That brought to eight the number of officials at various companies to leave their posts amid scrutiny of how companies grant stock options.

Power Integrations Inc., of San Jose, Calif., said Chairman Howard Earhart, who is a former chief executive, and finance chief John Cobb had resigned. It also said it probably will need to restate nearly seven years of financial results because of options-granting problems.

So far, at least 10 companies have been caught up in the stock-options-dating matter, with several already in effect acknowledging that some improper dating occurred. A number of companies are conducting their own investigations or are the subjects of Securities and Exchange Commission probes. In one case, company practices have attracted the attention of federal prosecutors examining possible fraud violations.

The matter also is drawing concern from investors, who have bid down the stock prices of some of the companies caught up in the various probes. Chip maker Vitesse Semiconductor Corp. has seen shares fall about 40% since suspending three executives, while shares in giant health insurer UnitedHealth Group Inc. have fallen 18% since questions about its options-granting practices surfaced in mid-March, shaving more than $13 billion off its market capitalization. The shares of Power Integrations rose slightly yesterday, amid a powerful market rally.

UnitedHealth, Comverse Technology Inc. and Vitesse were among six companies whose options practices were examined in a March article in The Wall Street Journal. The article found that the CEOs of the companies routinely received grants dated ahead of sharp rises in share price, and that the likelihood of those beneficial grant dates having occurred randomly was minute. All six companies have since said they've begun probes by outside directors and lawyers into their granting practices. (The Journal contacted Power Integrations for the March article but didn't cite it.)

Nina Beattie, a criminal defense lawyer with Brune & Richard LLP in New York, said the matter is shaping up to be a big issue at a time of rising shareholder attention to high executive compensation. "There will be pressure on the government to take a hard look at it and conduct investigations, criminal and regulatory," she said.

MORE


• Read more about stock-options grants made to UnitedHealth, Comverse and other companies' executives in The Perfect Payday (March 18) and see charts of the option grants.

• UnitedHealth Shareholders Show Discontent
05/03/06

• Comverse CEO Quits Amid Probe
05/02/06

Stock options give the recipient a right to buy shares at a set price, known as the exercise price or strike price. If the stock later rises, the recipient can cash in the option for a profit, as long as he or she has held them long enough for them to "vest." The lower the exercise price, the greater the gains. Stock options grew especially popular in the 1990s as a way to compensate executives and eventually other employees.

Typically, stock options are granted by boards of directors. They are generally supposed to carry exercise prices equal to the fair market value of the company's stock at the time of the grant. But at a number of companies, grants to top executives show an unusual pattern: They're frequently dated just before sharp rise in the share price, and at or near the bottom of a steep dip. The patterns, statistically unlikely, raise questions about whether there has been backdating or other gaming of the system.

Three companies in recent weeks appear to have reached at least preliminary conclusions that they have significant options-related trouble. Both Power Integrations and Comverse, a New York maker of telecommunications software, have said their reviews indicate that some options grants carried dates that "differed" from the grants' actual dates.

Both companies, whose reviews continue, said they expect to restate financial results to record "additional noncash charges." Under accounting rules, companies need to report an expense for grants of "in the money" options -- those that carry an exercise price below the market price at the time of the grant. Any options backdated to a day when the stock was lower would be in-the-money.

Another company, Vitesse, has suspended three executives, including CEO Louis R. Tomasetta, because of issues relating to "integrity of documents" in the options-granting process.

Securities lawyers said backdating could result in various thorny legal problems for companies and executives. Besides the need to restate financial results, companies could face bills for past income taxes. That's because any options found to have been backdated wouldn't qualify for compensation-related tax deductions that may have already been taken.

It's possible any executives who participated in backdating could be open to civil or criminal fraud charges of enriching themselves through false or misleading records or filings. Lawyers cautioned that any such criminal charges would require that an executive who took part in backdating did so intentionally. In past corporate-fraud cases, executives have often said they relied on advice of lawyers or other experts.

Corporate general counsels, who often oversee the mechanics of options programs or sign other executives' disclosure forms, have resigned at Comverse and at Mercury Interactive Corp. Mercury was targeted by an SEC probe of options dating last year.

A key question is what role, if any, directors played in any backdating scheme. Joseph Grundfest, a professor of law and business at Stanford University, said he doubted any board would approve a mechanism that allowed backdating. "Unless the board was informed that executives could backdate options and pick the lowest exercise price," he said, responsibility might well lie with the executives.

Comverse, for one, acted swiftly. Within days of beginning a probe led by outside directors, it said it would probably have to restate results. Within weeks, the investigation led to the resignation of Kobi Alexander, who founded Comverse more than two decades ago and built it into a major supplier of voice-messaging software and other products. Two other executives also resigned.

On Thursday, Comverse said it had received a subpoena from the U.S. Attorney's office for the Eastern District of New York, where federal prosecutors have begun a corporate-fraud probe. Prosecutors are examining the role of the departed executives, a person familiar with the matter said. Mr. Alexander's attorney hasn't returned phone messages.

At many companies, it's common practice to grant options to several top executives, or even all eligible employees, with the same date. That suggests that companies with timing problems mi ght find that those problems run deep.

At UnitedHealth, at least 11 executives, including CEO William McGuire and the company's general counsel, received at least one option grant dated on the lowest price of a quarter in 2000. Many executives also shared propitious option dates with Dr. McGuire through the years. The company has called its granting practices "appropriate," but its board is conducting a probe. UnitedHealth also has stopped giving option grants to some senior executives, including Dr. McGuire. He held $1.6 billion in unrealized options gains at the end of last year.

Timothy Main, chief executive of Jabil Circuit Inc., one of the companies cited in the Journal article, has strongly defended its options-granting practices and said that no backdating occurred.

At Affiliated Computer Services Inc., a Dallas tech outsourcer also examined in the article, CEO Mark King has said a preliminary review leads the company to believe there was no "intentional" granting of "look-back" options. The SEC is looking at both Jabil and ACS. The sixth company, Brooks Automation Inc., has begun a review and will delay securities filings because of options-granting problems.

The SEC began examining options backdating more than a year ago. Its attention apparently was piqued by academic research that found unusual patterns of stock activity around the time of options grants, suggestive of possible backdating. The research indicates that a dating problem could go beyond the cluster of companies already under scrutiny.

But David Aboody, another academic who has studied stock-options timing, said backdating would be such a "brazen" attempt to line one's pockets that he'd be surprised if it was widespread. "It's like stealing money. How many CEOs steal money from their company?" said Mr. Aboody, an associate professor at the Anderson School of Management of University of California, Los Angeles.

Joe Shiffler, a spokesman for Power Integrations, said it was "fair to say" that the shakeup was related to the stock-options grant timing matter. Mr. Earhart, the ex-chairman and former CEO, received four options grants between 1998 and 2002, a year when securities-law changes sharply curtailed the possibility for backdating. Three grants were dated before substantial run-ups in the company's share price over the next 20 trading days. For instance, shares leapt more than 75% in the 20 trading days after a grant dated in April 1999, on what was the lowest closing price of the month. Neither Mr. Earhart nor Mr. Cobb could be reached.

Balu Balakrishnan, the company's current chief executive, received five grants with the same dates as one or both of the two officials who resigned. Mr. Shiffler said Mr. Balakrishnan's status at the helm of the company is "not expected to change."

-- Mark Maremont contributed to this article.

Write to Charles Forelle at [e-mail] and James Bandler at [e-mail]

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InvestmentHouse Weekend Update:

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

- Further selling in commodity and industrial stocks takes SP500, SP600 below their 50 day EMA as well.
- Nigerian pipeline explosion can’t compete when oil demand fades.
- Michigan sentiment monthly drop the worst in 12 years.
- Everyone suddenly scared of inflation.
- Market sentiment moving in two directions.
- Correction versus the end of the post-crash run.
- The leaders left standing trying to set up for a rebound as market getting oversold, but the selling has yet to show signs of letting up.

Everything getting sold off. Fast sell off, fast turn?

Stocks got off on the wrong foot Friday on news of a Nigerian pipeline explosion killing almost 200. Futures were lower, following through on the Thursday plunge lower. Aside from the human tragedy, the initial concern was the rebels were stepping up their intensity. As it turns out, that was not the case. Indeed, there was some good news in that the workers that were captured the day before were released. Back at home, the US trade deficit was smaller than expected, helping appease those claiming the trade gap will ultimately bring higher interest rates and Egyptian-like plagues upon our economy.

No blood red waters, no fire raining from the sky. No, no biblical plagues, but the action to end the week had the feel of it. Stocks started lower and went even lower in a hurry. Mid-morning stocks bounced, recovering lost ground for just over an hour. We expected some short covering ahead of the weekend and after that initial surge lower the market bounced into lunch. An early afternoon fade and then another short covering bounce. That did not hold either, and stocks faded once more, closing at session lows.

Internals massively weak again.

Volume jumped on NYSE as the recent leading commodities, materials, machinery, and industrial stocks sold. NASDAQ was lower, another indication the tech selling is getting a bit washed out. Breadth was again sharply negative on both NYSE and NASDAQ. SP500 and SP600 blew through their 50 day EMA while NASDAQ plowed lower again. NASDAQ tried to show some relative strength and SOX was even positive into early afternoon. Some of the big name techs that sold hard of late actually managed a positive close. That suggests the techs are getting a bit sold out, having avoided the Memorial Day rush and selling early. Overall, however, the techs folded up the tent as well, and by the close they were at session lows.

The increase in NYSE volume shows distribution, i.e. institutional selling, as the large caps and small caps dove through the 50 day EMA. The institutions were selling the positions they had pushed higher and higher, now running for the door for fear of a blow off top. Yes, the financial stations started talking about that Friday as well. The stocks associated with commodities and the like were knocked back hard and on volume, though many gold stocks rebounded intraday to hold near support. Nonetheless, there was some bloodletting in the stocks that had surged higher at breakneck pace.

Lots of fear ramping up.

Two days of selling in the stocks that had surged for weeks and there was talk of this pullback being ‘the big one.’ Watching too much History Channel about the 1906 San Francisco earthquake I guess. Sure the selling was sharp and ugly; we wrote about the potential blow off top in commodities the past week. They were primed to roll over after the insane run higher the past three weeks. Demand? Demand didn’t ramp up in the past three weeks. Indeed, economies are expected to cool a bit just down the road. It was way too much excitement and money chasing that performance.

Whatever the truth, fear jumped as fast as the selling. All the way up the action was choppy and grinding, almost whipsaw, yet if you listened to the financial stations it was just one easy ride higher. In reality there were more direction changes than a Vince Young scramble. Now with two days of selling, sentiment has pulled a 180 and surely the market has hit its cyclical peak. Certainly the low volume rise on NASDAQ was a problem, and DJ30 had run well to within 1% of its old high; a test was coming.

The problem is the rise in the commodities, materials, and related stocks was meteoric what with all the money chasing performance. When the Fed came out with its ‘yet’ statement that followed the Bernanke ‘pause’ speech, the growth stocks sold off further in disappointment, and then the industrial economy stocks sold off fearing the Fed was not tough enough on inflation. In short, no side of the economy found what it wanted from the Fed, and that was a bad combination for the market on top of the high energy prices.

THE ECONOMY

Oil demand drops, trumps news out of Nigeria.

The Nigerian news was potentially the kind of news that could really spike the market. Oil barely budged on the news. It had rebounded after dropping below $70 earlier in the week, coming back on stronger gasoline demand reported mid-week with the inventory numbers. It was fading Friday, however, even with the Nigerian news (closed at $72.04 -1.28/bbl).

It seems demand trumps all. Oil demand fell to 1.25M bbl/day last week from 1.47M bbl. Even with gasoline demand rebounding after prices fell back from $3/gallon and oil coming back from below $70, when oil approached $75 again demand has tailed off. That level remains a barrier for demand. On Friday, even a scare out of Nigeria could not budge oil past that level. Now that was not a gut-wrenching event, but oil was down even as the first news reports came in.

Michigan sentiment posts a strong drop.

It was the preliminary report, and that means all of 200 respondents, but it was surprisingly low. Early May sentiment reading was 79.0, down from 87.4 in April and well off the 86.0 expected. This was the weakest reading since October 2005 immediately after the Gulf storms when sentiment hit a 12 year low.

The commercial talks of the power of cheese. Well, the power of rising gasoline prices on consumers is at least as strong. $3 gasoline stalled demand in the fall of 2005 and it stalled demand again in April, at least gasoline demand. Survey respondents were comfortable with their jobs, but were concerned what affect higher gasoline prices would have on their discretionary spending and on jobs down the road. Indeed, expectations for the future fell to 68.0 from 73.4.

And suddenly . . . inflation?

Last week we discussed how the spike in commodities the past three weeks after a strong run was already in place got everyone talking about inflation. While strong gold, silver and platinum are indications of potential inflation (hedges of value as a currency devalues when there is inflation), we pointed out how other factors are at work as well, for one, the tremendous amount of liquidity chasing performance. That money is surging prices higher as it seeks a home.

Friday the financial stations were very much abuzz with talk of inflation and how commodities were signaling this. Even the hold outs were starting to say inflation was ready to get out of control. Bernanke was labeled a weak Fed chairman. Hell, he seems very level headed and has a real understanding, even yet, of the forces at work in the economy. Much more so than his predecessor who was rather one-dimensional in his discussions of the economy. That is probably what has the market on edge; Bernanke is definitely a different breed, at least from the early readings.

In any event, after the selling the pundits were looking for a scapegoat as to why the market sold, and inflation and a weak Bernanke were blamed. We even heard calls that the Fed, after 16 consecutive rate hikes and raising the Fed Funds rate fivefold, should finally get tough and throw in a 50 BP rate hike.

Wow. What a role reversal. As we discussed when this rate hiking campaign started, the Fed talks a good game, but typically ends up getting too wound up in its fight, losing sight of its goal and focusing only on stalling the economy. Usually it is the Fed calling for more and more hikes and everyone else cringing as it does so. Now we have a Fed taking a reasonable approach, saying after 22 months of hikes that it can pause if it sees conflicting undercurrents that need some time to show their intentions. The private sector, however, is starting to call for more aggressive action.

Who do you trust? Usually it is the private investor side that is more in touch with reality, and that would suggest inflation is indeed getting out of hand. Indeed, the TIPS and bond yield spreads are the widest they have ever been, meaning that the inflation protected securities are being bought (a hedge against inflation) while bonds are being sold (their value drops if there is inflation). That is the market of investors saying there is some inflation issues as opposed to gold shooting higher in a liquidity rush.

Outside of that, however, what we heard Friday was mostly a lot of fear about the sell off in stocks accompanied by the start of selling in the commodities and related stocks. Those banging the table in the past about the price rises in gold, etc. being demand driven (and thus not inflationary) were suddenly inflation hawks.

They are forgetting about the destructive force of high energy prices on the economy. Those pundits said the economy would survive even with oil at $80 or above. We have already seen how high gasoline prices squelch demand back in the fall and again on this last spike. High gasoline and cooling costs siphon off discretionary income from other areas; it goes into the gasoline tank. It is a double whammy: higher prices divert more money from other areas while the other products become more expensive, creating less demand for them as well.

They are also forgetting that the Fed has paused during rate hiking campaigns in the past when it wanted to see how the rate hikes and other forces were impacting economic growth. Of course, it still often got it wrong, but if the market is looking for more certainty in actions with Bernanke at the helm, this should give it some comfort in some perverse way. In reality, a pause heading into the summer driving season with gasoline near $3/gallon is not a bad plan of action. With the selling to end the week and the near panic that brought out, however, reason was not on the front burner.

THE MARKET

MARKET SENTIMENT

We discussed the conversion of many pundits after the Thursday and Friday selling, how even the strongest ‘demand growth’ advocates suddenly became inflation fearing after a two day drop in the industrial stocks. The put/call ratio spiked and the volatility indices finally got off their butts and jumped higher. On the other side of the ledger, the Wall Street Journal finally acknowledged the strength of the expansion after 3.5 years of growth. When the papers and magazines start covering a story that is typically very late in the game.

VIX: 14.19; +1.7. Highest level since January when SP500 endured a pretty nasty but short drop to the 50 day EMA. Volatility is used as another method to determine when fear reaches extreme levels. It is not near a level how that would indicate any major reversal, but volatility has declined on this entire move. As we have discussed before, volatility can remain low as a market rallies. It will eventually start to rise even as the market advances, as the move gets longer in the tooth. It was at current levels in 1995 just as the market resumed a strong bull run. VIX rose with the market, hitting a plateau from 25 to 30 with occasional spikes higher (and some huge spikes as in the 1998 bear market). Then in early 2000 volatility jumped further as the market topped. In sum, we would expect to see more volatility at the peak of this rally.
VXN: 17.1; +1.38
VXO: 13.52; +1.32

Put/Call Ratio (CBOE): 1.27; +0.31. First move above 1.0 for this indicator. The composite of all options exchanges moved to 1.12. That is a strong indication of downside speculation as puts are bought for the downside gain and puts that were sold for premium as stocks moved higher are now being feverishly bought as stocks tank. Either way it is a sign that many think the market is heading lower, a sign of that quick build in panic we are talking about. That is a contrary indicator, i.e. if it gets high enough the market gets sold out and can then rebound.

Bulls versus Bears:

Bulls: 44.3%. A rebound in bulls from 43.9% after a slide from 53.2% at the April peak. We can anticipate a decline next week given the dive lower in stocks Thursday and Friday. Overall still in a nice decline. After a month climbing from 42.3% back close to the 55% level considered bearish, the recent slide is a much needed decline. It rose from 42.3% on the low this cycle, a level below the prior lows in May and October 2005.

Bears: 26.8%. Bears declined as bulls 28.6%. The NASDAQ decline and overall market chop and volatility had its effect on bears as well, rising from 25.8%. Not as dramatic a move as the Bulls as they are still well off their high at 33% on the last cycle. Up from 24.5% on the low this time around. The 33% high hit last cycle topped the prior two highs (30% in May 2005, 29.2% in October 2005) that gave way to strong rallies. The 20% level and below is considered bearish. It started this move just above 20%, the threshold level.

NASDAQ

Stats: -28.92 points (-1.27%) to close at 2243.78
Volume: 2.342B (-7.38%). Well now. After spiking higher Thursday as NASDAQ dove lower, volume faded Friday as it continued toward the 200 day SMA. That may indicate it is getting sold out (technically not distribution Friday), but still strong, above average volume as NASDAQ sold. In short, it was not as severe but it was not sold out as of Friday.

Up Volume: 427M (+135M)
Down Volume: 1.898B (+1.898B)

A/D and Hi/Lo: Decliners led 3.1 to 1. Pretty ugly still though better than Thursday. That is similar to saying the bear only bit off one arm in the attack as opposed to both of them.
Previous Session: Decliners led 3.9 to 1

New Highs: 72 (-61)
New Lows: 129 (+32)

The Chart: (Click to view the chart)

Another gap lower, and three rebound attempts intraday failed. NASDAQ closed the session at the low. The selling has not let up yet as NASDAQ dives toward the 200 day SMA (2229). NASDAQ is close to making a full test of the breakout from its 2 year ascending triangle at 2218. The 200 day is above that level and NASDAQ looks ready to fully test that support.

SOX (-0.78%) was the relative strength leader Friday. It was even positive in the early afternoon but it gave up the goods into the close as well, managing a close right at the 200 day SMA (491.72). SOX acted a bit sold out Friday after 5 consecutive down sessions, but it has to prove it is ready to put in a bottom here at this key support.

SP500/NYSE

Stats: -14.68 points (-1.12%) to close at 1291.24
NYSE Volume: 1.849B (+2.13%). Volume was strong for the second straight session, increasing as SP500 and SP600 dove through the 50 day EMA. Breach of a key level in a hurry as institutions piled out the door to end the week.

A/D and Hi/Lo: Decliners led 3.9 to 1. Breadth got even worse as the dive continued. It is close to levels that indicate an extreme. That typically occurs near -5:1.
Previous Session: Decliners led 3.69 to 1

New Highs: 35 (-157)
New Lows: 199 (+58)

The Chart: (Click to view the chart)

SP500 dove lower once more, this time blowing out the 50 day EMA (1301) with authority, closing just off the session low. After this break it is heading toward next price support at roughly 1286 to 1280. Not much to say about it at this point other than it has to find support after crashing its major near term support. Indices tend to accelerate on breaks through key support and then rebound to test.

SP600 (-1.89%) broke lower as well, falling through its 50 day EMA (390.50) and its up trendline (391). First serious breach of this trendline in, well, ever. It has not crashed through this trendline with such authority during the 7.5 month uptrend. Significant move through key support, accelerating as it made the move. It is likely to rebound to test the breach of key support early this week.

DJ30

The blue chips came under pressure after leading the market higher in the latest run. Thursday and Friday it tanked on above average volume, though trade was not at the levels of early May. Fell through the 18 day EMA (11,426) and is looking to test the March high (11,317), possibly the 50 day EMA (11,272). Big run, sharp fall, panic running high.

Stats: -119.74 points (-1.04%) to close at 11380.99
Volume: 321M shares Friday versus 322M shares Thursday. Volume remained above average as DJ30 sold for a second day. Not major volume, indicating DJ30 is likely to find support at the above levels.

The Chart: (Click to view the chart)

THE WEEK AHEAD

Not just a pullback, but not the ‘big one.’

After Thursday and Friday the market is left in a defensive position, having to pick up the pieces in order to salvage the rally. DJ30 suffered a 376 point loss in a week in January, undercutting the 50 day EMA in the process and looking ready to really cave. It found footing and rebounded. SP500 and SP600 will have to show that kind of action this time around, as both crashed the 50 day EMA Friday. NASDAQ, well, has to find something at the 200 day SMA; its fade has been far more significant.

That is the difference this time: more breakdowns through support by the indices as many more stocks head lower as the breadth shows. Choppy is the best description of the action this year even though the indices have held their uptrends. When the Dow came within 80 points of its all-time high there were not enough followers. The new highs did not surge as SP600 and SP500 broke out, and NASDAQ could not attract buyers in any numbers. The Dow was leading, but as we often say, it is just 30 stocks. It made its run, came within spitting distance of a new high, and now is testing that move.

The other indices are engaged in something more. It has been a while since the indices corrected, and the bump and grind to get the last breakouts took its toll. There was distribution to go along with the leadership. The ratio of hew highs improved, but new highs overall did not surge. The move started to bifurcate when MSFT gave lousy guidance and technology lost its bid. That market divided was unable to hold the line.

So the market is correcting, and the initial ferocity led to those calls of the ‘big one,’ i.e. the end of the rally on the economic expansion. It could always be that; in the initial stages it is difficult to gauge. What would be the cause of an economic slump (that is what gives rise to the market selling off)? It would have to be energy prices, really devastating inflation, or a combination of the two. The Fed has not gone too far with rate hikes yet; if it continues much more it will given the high gasoline prices, but at this stage it is not browbeating the economy. No, the high energy prices are a main ingredient, the one (along with the Fed) concerning us the past year. After all, thus far demand has dropped the two times oil approached $75 and gasoline hit $3.

Many corrections in this ongoing advance.

But does that necessarily mean that the expansion has ended and that is what the market is signaling? Of course not. Several corrections dot this expansion. January through April 2005. August to October that same year. Significant corrections that led to further advances in this same expansion. All of the hype on the financial stations about new highs even as the market showed that nasty choppiness and distribution we discussed clouded the fact that the Q4 rally and the choppy extension of that rally in Q1 needed a consolidation. When DJ30 reached close to the old high no one was ready to follow. Indeed, the techs had already turned tail.

Thus the current correction, but we doubt it is the ‘big one’ that was hashed out on Friday and then rehashed Saturday morning is underway. Liquidity is still rampant across the globe. The central banks have not tried to drain the pool, and earnings growth projections are still double digit (outside of MSFT). Business investment, the key to the last recession, remains very strong as corporations are indeed flush with cash and are spending it. That works as an offset to the consumer beleaguered with $3/gallon gasoline. Oil and gasoline prices could still put an end to it, but thus far businesses are still spending.

From the market standpoint, the drop to end the week was sharp, but most corrections in ongoing uptrends are. One thing we note: despite the choppy trade in Q1, the VIX did not jump higher as is typically the case when a long market expansion is over. VIX has trended lower for years and is still in a historically low range. When the market has made its run, you typically see volatility as measured by the VIX jump to higher levels and hold those levels as the market distributes. You can argue that was occurring in Q1, but as we said at the time, it was not the same as a topping type of volatility.

So what about this correction?

That all leads us back to the Friday close and where this correction takes us. We have to acknowledge the possibility of a big meltdown that marks the end of the economic advance. As long term readers know, we always factor that in and discussed it above.

Given we are viewing this, for now, as a correction in an ongoing expansion, we were willing to let stocks test back some last week as long as they more or less maintained their support levels. We took gain on many positions as they moved higher, and we closed some positions as the market started to test back. Energy stocks are typically quite volatile so we give them a bit more room along with other more volatile areas.

Even with this pullback, however, we see many quality stocks holding near support or testing the 50 day EMA. That is what quality stocks do in a pullback: they hold up better. Not always, but more than the also-rans that ultimately get some money thrown their way if an expansion continues long enough.

What we are going to do is let this correction run its course and see what opportunities come into play as the strong survive and set up to move again. Typically a breach of key support leads to immediate stronger selling and then you get a rebound to test the move. Friday NASDAQ and SOX tried to hold up after lagging the upside move and starting to sell earlier than the NYSE. They showed some relative strength early, but of course that did not last. Still, they are indicating they are a bit sold out and ready to bounce.

That bounce is likely not the end of this correction unless it was just an FOMC induced blip lower that caused some sharp profit taking that gives way to a wave of new buying. That remains to be seen, but we note that the selling was preceded by choppy trade and some distribution (mainly in tech), and that tends to erode the market, requiring more rebuild time.

Though the bounce may not be the end of the correction, we are going to keep an eye on the stocks that have either completely ignored the selling or used it to consolidate their upside moves by easing back to support. Those that keep their big money support during the selling are the leaders on the rebound. Of course if the sell off is more nefarious than just a correction, everything will be sold off. Thus while we let positions test support while the market makes this correction, we won’t let them start closing below the 50 day EMA. As we play leaders, when they start closing below that key support en masse that is not a good sign for the market. For now many are holding up just fine so we exercise a bit of patience in letting it test.

Support and Resistance

NASDAQ: Closed at 2243.78
Resistance:
2273 is December 2005 closing high.
2278 is December 2005 intraday high.
2288 from December 2000 low.
2300 from the April intraday lows.
The 50 day EMA at 2313
The 18 day EMA at 2315
The late January highs at 2325
2328 from the May 2001 peak
The January high at 2333
The February closing high at 2361

Support:
2240 is closing low in February range.
The 200 day SMA at 2229
2218 is the August 2005 peak before the sell off through October 2005.
2205 is the December 2005 closing low.
2182 is the September 2005 peak and interim high from November 2005.

S&P 500: Closed at 1291.24
Resistance:
1297.57 is the recent February high.
The 50 day EMA at 1301.40
The January high at 1303
1311 is the March intraday resistance on this move.
The 18 day EMA at 1310
1315 is the May and May 2001 peaks
1317, the recent intraday highs from April.
1324 to 1329 from the October 2000 lows.

Support:
The late January peak at 1285
1280 from prior price points
1272 is the December 2005 closing high and March 2006 closing low
1250 to 1248 from the November and December 2005 lows.

Dow: Closed at 11,380.99
Resistance:
11,401 from the September 2000 peak and April 2001 highs
11,417 from the recent April highs.
11,425 from April 2000 peak
The 18 day EMA at 11,426
11,452 from December 1999 peak
The 10 day EMA at 11,480
11561 is the DJ30 closing high
11,638 from January 2000
11,723 is the January 2000 closing high
11,750 is the January 2000 intraday and all-time high.

Support:
11,350 from the May 2001 peak
The March 2005 highs at 11,329 to 11,335
The 50 day EMA at 11,272
11,250 is the October/January/February up trendline.
11,159 is the February high.

Economic Calendar

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

May 15
- NY Empire State Index, May (8:30): 15.0 expected, 15.8 prior
- Net foreign purchases, March (9:00): $86.91B

May 16
- PPI, April (8:30): 0.7% expected, 0.5% prior.
- Core PPI, April (8:30): 0.2% expected, 0.1% prior
- Housing starts, April (8:30): 1.95M expected, 1.96M prior
- Building permits, April (8:30): 2.045M expected, 2.094M prior
- Industrial production, April (9:15): 0.4% expected, 0.6% prior
- Capacity utilization, April (9:15): 81.5% expected, 81.3% prior

May 17
- CPI, April (8:30): 0.5% expected, 0.4% prior
- Core CPI, April (8:30): 0.2% expected, 0.3% prior
- Crude inventories: +272K prior; gasoline +2.1M prior

May 18
- Initial jobless claims (8:30): 324K prior
- Leading economic indicators, April (10:00): 0.2% expected, -0.1% prior
- Philly Fed, May (12:00): 12.0 expected, 13.2 prior

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From Briefing.com: 4:55PM Western Digital: John Coyne named Pres, COO (WDC) 19.65 -0.23 : Co appointed John Coyne president and C.O.O.. Arif Shakeel, previously president and C.E.O., remains CEO. The appointment is effective June 1, 2006. Mr. Coyne was previously Exec VP and C.O.O., having assumed the latter post in 2005. As president and C.O.O., Coyne will add responsibility for the company's business units to his existing leadership of business operations, hard drive and head manufacturing, materials, engineering, and IT.

4:20 pm : Stocks closed mixed as uncertainty regarding monetary policy acted as an overhang on the market throughout most of the session; that is, until a sense that stocks may be oversold on a short-term basis renewed enthusiasm for blue chips in the last hour of trading.

With the Fed saying last week that further rate hikes will depend on "incoming data," and key inflation reports (e.g. PPI and CPI) hitting the wires over the next two days, the realization that market valuations now have to be priced for at least another 1/4% increase in yields across the board prompted follow-through selling in the wake of last week's broad-based consolidation. However, as was the case last week, the Nasdaq bore the brunt of selling efforts again as higher interest rates continue to spark valuation concerns, especially in growth stocks. To wit, the Russell 2000 turned in an even worse performance since small cap stocks often are more adversely impacted by a rise in borrowing costs.

With regard to sector strength and weakness, this year's leaders were again today's biggest laggards. Energy paced the way lower as crude oil closing down 3.7% at $69.40 a barrel (-$2.64) shaved another 1.7% off its leading year-to-date gain. Oil prices continued to consolidate after Saudi Arabia's oil minister cited the risk of OPEC capacity expansions outstripping demand while Qatar's oil minister said that oil prices around $70 a barrel may slow global economic growth. Speaking of demand concerns, metals prices also plummeted Monday as traders let some air out of the speculative bubble that has recently lifted copper to historic highs and gold prices to their best levels in 26 years.

The absence of leadership from the year's best two performing sectors -- Energy and Materials -- which are also expected to contribute a significant portion of the profit growth on the S&P 500, initially weighed on sentiment throughout the session. At the end of the day, though, more relief on the commodity price front, as a rebound in the dollar weakened their appeal as alternative investments, helped alleviate some of the concerns about inflation and further Fed tightening. In its policy statement on May 10th, central bankers noted that "elevated prices of energy and other commodities have the potential to add to inflation pressures."

Since rates are starting to get to the level where even small increases start to leverage in valuation models, the negative tone that underpinned stocks most of the day fueled renewed buying interest in bonds as more attractive alternatives to equities. Treasuries bounced back after five consecutive days of consolidation, supported by a weaker-than-expected read on May NY Empire manufacturing activity. The yield on the 10-yr note fell to 5.14%. As a result, the rate-sensitive Financial sector provided some influential leadership that, in combination with the defensive-characteristics of Health Care and Consumer Staples renewing enthusiasm for two underperforming sectors, helped offset more consolidation across the board in Technology. Even Consumer Discretionary, which was under pressure after Target (TGT 50.04 -2.17) missed analysts' expectations by a penny as profit margins fell for the first time in two years, eked out a small gain. BTK +0.3% DJ30 +47.78 DJTA +0.1% DJUA +0.4% DOT -0.4% NASDAQ -5.26 NQ100 -0.1% R2K -0.7% SOX -1.0% SP400 -0.6% SP500 +3.26 XOI -2.3% NASDAQ Dec/Adv/Vol 1989/1090/2.04 bln NYSE Dec/Adv/Vol 1867/1364/1.87 bln

1:24PM Semiconductors Hldrs Trust slide to fresh session lows under 35.80 (SMH) 35.72 -0.22 : Next level of interest lies near the March reaction lows around 35.19/35.61.

1:20PM Cree hovering near session low of 28.89 and just above the April/two month low at 28.86 (CREE) 28.90 -0.58 : Its March low is at 28.65 with its 200 day ema at 29.39.

11:54AM Cohu sells Metal detection business (COHU) 16.85 -0.23 : Co announces it has sold substantially all the assets, excluding real property, of its metal detection equipment business, FRL, Incorporated to First Texas Holdings, for approx $3.2 mln in cash. The sale is expected to result in a pretax loss of approx $0.7 mln that will be recorded in Cohu's second fiscal quarter ending June 24, 2006.

12:07 pm BostonPrivate Fin: Ryan, Beck & Co upgrades Mkt Perform to Outperform. Target $35. Ryan Beck upgrades BPFH to Outperform from Market Perform and sets a $35 tgt saying they believe the recent pullback in the stock price represents an attractive opportunity to step into a high quality franchise.

10:06 am Saks: UBS reiterates Reduce . Target $16 to $12. UBS cuts their tgt on SKS to $12 from $16 saying with little confidence in the turnaround they think current fundamentals only support a value of $12 a share.

10:04 am Marshall & Ilsley: AG Edwards reiterates Buy. Target $48 to $50. AG Edwards raises their tgt on MI, before the open, to $50 from $48 as they look for core fundamental trends at MI to remain strong, as the banking operation should continue to generate top-tier loan growth trends, a relatively stable margin, and continued momentum at Metavante.

10:04 am Gold Fields: CIBC Wrld Mkts upgrades Sector Underperform to Sector Perform. Target $26 to $35. CIBC upgrades GFI to Sector Perform from Underperform and raises their tgt to $36 from $26 saying they expect gold prices to pause and possibly pull back by 10% before moving ahead to exceed the all-time high of $875/oz set in January 1980.

10:02 am Novatel Wireless: Morgan Joseph upgrades Hold to Buy. Target $17. Morgan Joseph upgrades NVTL to Buy from Hold and sets a $17 tgt saying by the end of 2006, they believe Novatel will diversify its revenues and will be generating sales in four product categories; PC cards, embedded modules, PC express mini cards, and Ovation wireless routers. During 2H06, the firm expects new product launches to drive accelerating revenue growth, and significant margin improvement.

10:01 am Bookham Tech: Merriman Curhan Ford upgrades Neutral to Buy. Merriman upgraded BKHM to Buy from Neutral saying with BKHM now down nearly 60% from recent highs and trading at 0.6x EV/revenues, they believe the negatives surrounding Bookham's recent gross margin results and outlook are more than priced into the shares. The firm says in some senses the co is in the same position it was nearly a year ago, with the main differences being a) a much stronger balance sheet and b) an optical networking market that is clearly in recovery.

10:00 am Warner Music Group: Am Tech/JSA Research upgrades Hold to Buy. Target $28 to $37. Amtech upgrades WMG to Buy from Hold and raises their tgt to $37 from $28 based on their belief that Street numbers are underestimating the impact of higher digital rev in FY06/FY07. They believe that key drivers for WMG's digital rev include the news today of MTV's URGE music service, the possible release of AAPL's new iPod, and a possible launch of a digital music service from AMZN later this year. Furthermore, the firm says chatter continues around EMI possibly increasing its offer for WMG into a $31-$33 range, up from the previous offer of $28.50 per share.

09:59 am Covad: Cowen & Co initiates Outperform. Capital One initiates GDP with a Buy and a $34 tgt saying they expect GDP to continue to rapidly grow production, reserves, and earnings. The firm says GDP has focused over 85% of its 2006 capital budget on the low-risk, high-growth Cotton Valley sands of east Texas and northwest Louisiana. The firm says significant additional potential exists to accelerate drilling in the Cotton Valley.

09:57 am Goodrich Petroleum: CapitalOne southcoast initiates Buy. Target $34. Capital One initiates GDP with a Buy and a $34 tgt saying they expect GDP to continue to rapidly grow production, reserves, and earnings. The firm says GDP has focused over 85% of its 2006 capital budget on the low-risk, high-growth Cotton Valley sands of east Texas and northwest Louisiana. The firm says significant additional potential exists to accelerate drilling in the Cotton Valley.

3:37 pm Bausch & Lomb (BOL)

49.87 +5.43: Embattled eye care company Bausch & Lomb announced today that it will be permanently removing its MoistureLoc contact lens solution from worldwide markets effective immediately. The decision came after an extensive investigation that showed no evidence of product contamination, tampering, counterfeiting or sterility failure that many feared had contributed to a rare eye infection called Fusarium keratitis.

Notwithstanding the favorable finding, the company did note that "some aspect of the MoistureLoc formula may be increasing the relative risk of Fusarium infection in unusual circumstances" and that it is continuing to investigate that link. Bausch & Lomb, which has delayed its 2005 10K filing, had net sales of $2.23 billion in 2004. It was mentioned in the press release that the MoistureLoc product contributed $100 million in sales in 2005. Separately, the FDA indicated that its scientific conclusion is that the association of the fungal infection is in fact just with the MoistureLoc solution.

The market's favorable response to the news is rooted in the belief that Bausch & Lomb's findings and the FDA's scientific conclusion will put to rest concerns that the association with Bausch & Lomb's contact lens solution and the fungal eye infection may be more direct, serious, and widespread than first reported. Moreover, there is a sense that today's announcement will mark the nadir of a seemingly endless slide in the stock, which traded at $87.89 as recently as last July.

In all likelihood, there is some short covering that is exacerbating the move in the stock so we'd be wary of jumping on the turnaround bandwagon just yet. Although it is certainly good that there was no evidence of tampering or product contamination, Bausch & Lomb can still expect to be hit with its share of liability lawsuits. Furthermore, despite its recommendation that users switch to its ReNu MultiPlus or ReNu Multi-Purpose brands, Bausch & Lomb will still be fighting the public's perception that its product was linked to a fungal eye infection. Rightly or wrongly, that is sure to crimp sales of its other products and perhaps hit profit margins as the company wages a necessary damage control and imaging campaign.

The company's uncertain status was reflected in the statement that it has not provided revenue or earnings guidance for 2006 and that it has not estimated the financial impact of this action on its 2006 results.

--Patrick J. O'Hare, Briefing.com

11:58 am Target Corp. (TGT)

50.14 -2.07: Retailer Target Corp. reported its first quarter results before the start of trading and, well, they weren't exactly on target. As a result, Target's stock has been placed in the crosshairs of interested sellers.

The first point of contention for investors was that Target's profit of $0.63 per diluted share, which was up from $0.55 per share last year, was a penny shy of the consensus estimate. A few weeks ago that might not have made such a big difference for the market, which chose to look at just about everything in a positive light. Now, with the concern the Fed will go further with its tightening activity than previously expected, market sentiment has shifted to a point that the market seems to be taking a glass-is-half empty view of earnings prospects. Hence, it has mattered little today that Target said it believes the first quarter results put it on track to achieve a mid-teen percentage increase in EPS for the full year.

Additionally, the bottom-line miss overshadowed a solid sales performance that was accented by a 12.1% increase in total revenues to $12.86 billion and a 5.1% increase in comparable store sales. The bottom-line miss, though, was magnified by the recognition that Target saw some compression in its gross margin rate, which slipped to 32.18% from 32.36% last year, and incurred a higher expense rate than the year-ago period. Specifically, SG&A expenses were 23.0% of sales versus 22.3% last year. These trends have stirred concerns about the possibility of ongoing margin pressure tied to the sale of lower margin products like groceries, as well as the effects of increased competition.

At its current level, TGT is trading at 17.9x trailing twelve month earnings. That is a substantive discount to its 10-year historical average of 26.5x. While there is a value case to be made for Target, concerns about margin pressures and consumer spending in the face of more rate increases will impede multiple expansion for the time being. As such, we'd be inclined to take a wait-and-see approach with Target's stock for now.

--Patrick J. O'Hare, Briefing.com



10:52 am Illinois Tool Works (ITW)

102.26 -0.53: Illinois Tool Works, a $12.8 billion in revenues diversified manufacturer, reported a 7% increase in operating revenues for the three months ended April 30, 2006, and reaffirmed its guidance for fiscal second quarter and full year. As a result, shares of the company, which are up more than 17% since the beginning of the year amid improving fundamentals and strength in the Industrials sector, have edged higher in early market activity.

For the most recent quarter, the Glenview, Illinois-based company said operating revenues consisted of 5% growth from base revenues and a 5% increase from acquisitions. Currency translation and inter-company sales lowered revenues by 3% in the period. The increase in base revenue reflects continued strong demand from North American end markets, the company noted.

After one month of actual results, Illinois Tool Works backed its forecast for second quarter earnings of $1.52 to $1.58 per share, versus the Reuters Estimates consensus of $1.57 per share. Base revenues for the current period are expected to grow between 4.2% and 6.2%. For the full year, the company said it expects to earn $5.89 to $6.07 per share, with base revenues forecasted to grow in a range of 4.6% to 6.0%. Analysts on average are looking for earnings of $6.04 per share for the fiscal year.

Shares of Illinois Tool Works have traded in a range of $78.50 to $107.08 over the past 12 months, benefiting from strong business activity. At the current price level, the stock is trading at roughly 19.1x trailing twelve month earnings, compared with 18.8x for industry bellwether General Electric (GE).

--Richard Jahnke, Breifing.com



09:35 am Inco Ltd. (N)

66.55: Canadian nickel miner Inco Ltd. raised its offer to acquire Falconbridge Ltd. (FAL) by $1.7 billion to approximately $17.5 billion as a result of soaring metal prices - a trend that continues to support our Overweight rating on the Materials sector - as well as speculation that Switzerland-based Xstrata PLC, which already owns a 20% of Falconbridge, is considering a rival bid for the Canadian mining concern. Furthermore, Inco said that the two companies have increased the break-up fee for their deal to create the world's largest nickel producer to $450 million, up from $320 million, helping to curb the threat from rival bidders.

Inco had announced its original intentions to acquire Falconbridge last October, but the deal has largely been stalled by regulatory concerns in both the United States and in Europe.

"The enhanced terms reflect the change in metal market dynamics and the additional value created in Falconbridge because of higher metal prices," stated Inco's chief executive Scott Hand. "The recent gains in copper and nickel markets and their outstanding prospects going forward make our transaction look even better today than when it was first announced," he added.

According to the Wall Street Journal, the revised agreement follows a move last week by Canada's Teck Cominco Ltd. to launch a $15.35 billion takeover of Inco and break up its its pact with Falconbridge, as mining companies continue to mount takeover strategies amid soaring metal prices. Furthermore, the Journal reported that Xstrata is considering whether to bid for the rest of Falconbridge, but may wait for regulatory scrutiny to play out, people close to the company said. Xstrata in recent months has also sounded out some industry giants about their taking over Falconbridge, with Xstrata making a play for Inco, according to the report.

--Richard Jahnke, Briefing.com



09:05 am PetMed Express (PETS)

15.30: When it comes to pet services, PetMed Express, which does business as 1-800-PetMeds, isn't necessarily a household name. Nonetheless, the company, which bills itself as America's largest pet pharmacy, has shown with each passing earnings report that it is becoming more relevant for an increasing number of households. That message was plain to see again in the fiscal year-end results from PetMed Express, which were reported today.

For the year PetMed Express achieved a 51% increase in net income to $12.1 million, or $0.50 per diluted share, on a 27% increase in net sales to $137.6 million. The company acquired 624,000 new customers compared to 510,000 in the prior fiscal year; meanwhile, retail reorder sales increased 29% to $88.4 million, which is a reflection of the loyalty of its existing customers.

The quarterly results from PetMed Express also underpinned its status as a growth company. Specifically, its profit of $3.1 million, or $0.13 per diluted share, in the seasonally slow period was up 30% from last year while net sales increased 25% to $29.4 million. According to Reuters Estimates, analysts were expecting a profit of $0.13 per share on net sales of $28.6 million. For the quarter, the company acquired approximately 94,000 new customers versus 80,000 new customers last year.

Regular readers of Briefing.com will recall that PetMed Express was a suggested holding in our Active Portfolio until March 7 when we removed it, citing several factors that included valuation concerns, insider selling, and its overbought status. In doing so, though, we also communicated our belief that PetMed Express was putting up results that highlighted its appeal for growth-oriented investors, as well as potential acquirers looking to increase their presence in the higher margin pet services business.

The company's latest results haven't altered our position; however, with the market showing increasing skittishness about rising interest rates and their corresponding impact on earnings prospects, particularly for growth-oriented stocks like PETS, we'd refrain from committing new money at this time.

--Patrick J. O'Hare, Briefing.com

08:55 am Boeing (BA)

87.01: Boeing's history is steeped in scandal, but hopefully, under the new leadership of Jim McNerney, this chapter has come to an end. According to the Wall Street Journal, Boeing has agreed to pay $615 mln to end three year-long investigations by the Justice Department into high-profile scandals that have plagued the company. This would be an important milestone and a victory of sorts for McNerney who is attempting to restore Boeing's reputation.

People familiar with the details told The Journal that the deal will allow Boeing to avoid criminal charges or any admission of wrongdoing. Current and former federal investigators describe the tentative settlement as the largest financial penalty ever imposed on a military contractor for weapons-program improprieties, according to the article. Boeing was under investigation for procurement violations and alleged corruption, which prompted a major overall of the company's corporate structure.

If reached, the settlement will lift a cloud over Boeing and allow the company to focus on what it does best - build great airplanes. Boeing continues to fly high, propelled by the bull cycle in commercial aviation and the missteps of its major rival, Airbus. The Toulouse, France-based company is currently re-examining its A350 aircraft after major sales campaign losses and public criticism. The company is expected to announce earnings at the Berlin air show on May 16th. That same day Boeing holds its investor conference, during which time it is expected to provide long-term return goals. While growth in the defense business moderates and notwithstanding the run up in shares, we continue to recommend Boeing given its continued success in the commercial aviation business and the prospect of further margin expansion ahead.

--Kimberly DuBord, Briefing.com

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