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IN THIS WEEK'S ISSUE:

1. MARKET SUMMARY  
2. WEEKLY ETF PERFORMANCE  
3. THIS WEEK'S TRADES  
4. CONTINUED GUIDANCE ON PREVIOUS TRADES  

We urge all readers to print out this newsletter each week for maximum benefit...

1. MARKET SUMMARY

The stock market remains largely stuck in neutral, suffering slow, internal bleeding as investors await an outcome regarding Iraq and the Middle East. This has left the release of economic and corporate earnings data of secondary importance. As long as the decision and outcome of any action in Iraq remains in the balance, the economy itself remains on hold.

The continued slow drop in stocks makes sense on this basis. Projects and spending remain on hold, and the economy is suffering considerable damage from the uncertainty. Some of this damage may be irreparable. While I do not expect a rally as the war starts (unless of course it ends immediately and further uncertainty is cleared away), as long as there are no successful terror strikes, the market will likely bottom within days of the start of the war (again, this is all assuming that U.S. troops meet their goals).

On the other hand, if the U.S. and Iraq somehow reach a peaceful solution, then the stock market will gap higher and the bond market will tumble. Chasing that move will likely be dangerous, but buying stocks on a retracement will likely make sense, as would selling bond-related ETFs on a bounce back.

THE WEEK IN REVIEW
Given the sudden downshift in recent economic indicators, the stock market actually turned in a rather impressive performance last week. The bottom line is that investors are assuming that once we can get the Iraq situation behind us, stocks are now cheap enough to post a solid rally. While that may be a dangerous assumption, my technical work suggests that the lows set last October are most likely within 10% of whatever bottom we're likely to see this year. A substantial rally is then likely from there, but in the short term we should see new lows in the next week or two.

Note that several models that I track show turn dates for the equity markets fast approaching. One neural net had a turn for last Friday. The same person has developed a revised version of the Bradley Model (astrology-based system) that also forecast a turn for last Friday. The Spiral Calendar, developed by Chris Carolan, has a turn for today, and the original Bradley Model forecasts a low for Thursday. Put it all together, and we should be on the lookout for a rally in the very near future.

ECONOMIC ANALYSIS
Note: All new data releases are scheduled at 8:30 AM ET unless otherwise noted.

Last week's economic data were almost all worse than expected. The one bright spot was personal income, which actually rose more than spending did in January (+0.3% versus -0.1%). Strong income gains were also confirmed by the otherwise dreadful non-farm payrolls report (see below). I am honestly surprised by these data, simply due to expected seasonal adjustment. However, the weak consumer spending figure really is none too bullish either.

The two Institute for Supply Management (ISM, formerly known as the NAPM) surveys both came in below January's levels and forewarned of the weaker-than-expected payroll report. Still, both surveys did show the economy expanding, albeit at a slower pace (manufacturing was at 50.5 against 53.9 in January while services slipped to 53.9, better than expected, versus 54.5 in January).

The Beige Book, the Fed's synopsis of economic activity that it uses when shaping monetary policy, was rather moribund. Virtually every district reported rotten retail sales and poor business activity. The only bright spots seemed to be in duct tape sales and residential construction.

Factory orders surged last month, but that came as no surprise. The revision to productivity from -0.2% to +0.8% will further cement the ease with which the Fed should be able to react by cutting rates going forward.

The non-farm payrolls report was absolutely atrocious. The loss of 308,000 jobs was well beyond what anybody thought likely, and far below what I thought could be a slightly above-consensus result. The unemployment rate ticked up to 5.8% as well, and weakness was across the board. While some of this weakness may have been due to bad weather and reservists being called up, neither was likely a significant factor. The major snowstorms on the east coast mostly hit after the survey week.

Not only was the payroll number down, but hours worked sank as well. This indicates trouble for this month's industrial production data. The increase in earnings (+0.7%) is welcome, but means that productivity could get slammed in Q1 2003.

This week sees two very important releases retail sales on Thursday and capacity utilization / industrial production on Friday. PPI is also due on Friday with the trade balance scheduled for Wednesday.

The trade gap is forecast to marginally improve from December's record $44.2B deficit. With the economy appearing weaker than previously thought, I would not be surprised to see the gap narrow to about $41.0B. Remember, the U.S. tends to import more than it exports. The recently weaker U.S. dollar (USD) will help the deficit, and a slower economy means that on balance, the gap should improve. Unfortunately, while that might help the USD a little, the numbers will have little impact on the stock or bond markets.

Retail sales, which tumbled 0.9% in January but gained 1.1% ex-autos, are expected to be little changed, both on a total basis as well as after removing the auto numbers. It's important to understand that retail sales figures are based on actual receipts, and not on unit sales. They also are not adjusted for inflation. With these factors in mind, the huge recent jump in gasoline prices will partially mask an otherwise weak report. However, part of the negative results will be due to the impact of bad weather. While I expect the final result to be somewhat worse than the consensus -0.2% total, the market impact will probably be minimal, with the snowstorms that blanketed the east coast during President's Day week getting much of the blame. Additionally, the bad news is already well known from the already-released chain store sales data.

Producer prices (PPI), due on Friday, are likely to surge as energy prices went into overdrive last month. Most auto incentives were not put on until March, so there will not be much of a balancing from that arena. However, ex-energy, the report should be benign.

Economists are forecasting steady capacity utilization (75.7%) for February and a small increase of 0.2% in industrial production. The data, due for release on Friday at 9:15AM, may come in a bit beneath that figure. I am not sure that economists have fully figured a lost day of output from the blizzard in late February into these forecasts. Yet since that was fairly late in the month, we may not see a major impact from it. The bottom line is that the risk is to a slightly worse-than-expected result, but not enough to alter the overall picture, which is already poor at best.

WHERE DO WE GO FROM HERE?
As I noted above, there are several cycle turn dates due for this week. Although Friday's action was impressive, given the negative news from the U.S. payroll report, chart patterns still purport to a new low in the stock market. That said, until there is some resolution to the Iraq quagmire, I doubt that we can take out the October 2002 low.

Look for a weak open on Monday after investors have the opportunity to think about the state of the markets. From there, a substantial rally, possibly 5-10%, looks likely. We have not seen any sort of impulsive price action in either direction of late, but wave counts to the downside are incomplete. It is starting to look as if the current move down is part of a running correction, with the drop from January 13th to January 27th being the only five-wave price action seen of late. There are way too many discouraged and bearish types in the market right now, and we need to take out the more recent shorts with a good rally before the market will be able to reload for the final move down.

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2.  WEEKLY ETF PERFORMANCE

Below you'll find a table of weekly performance data for all ETFs that I track for this newsletter...

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3.  THIS WEEK'S TRADES

TRADE #1:  BUY ISHARES RUSSELL-1000 VALUE INDEX FUND (IWD, $42.87) ON A PULLBACK MONDAY MORNING

This trade should only be executed if IWD falls into the buy range on Monday morning. If that fails to happen, then do not take this trade.

I expect a fall to new lows in some parts of the market early in the week, but I doubt that IWD will fall that far. Though volume was disappointing, I cannot ignore the spinning top last Thursday, followed by the bullish engulfing candle. Add to that a need for a wave-c of wave-4 higher, which should target levels north of $44.00, and we have an excellent opportunity for a nice swing trade here. Note also the good momentum divergence at the lows.

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RECOMMENDATION:

BUY IWD on dip to $42.60 on Monday morning, but do not buy on an open below $42.40. Do not execute this trade after noon on Monday.

TARGET:  $44.03 (drop target $0.02 per day)
STOP:  $41.99

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TRADE #2:  BUY SEMICONDUCTOR HOLDRS (SMH, $22.41) ON A FURTHER PULLBACK
My first look at this chart provides a good lesson on why you should always look at more than one timeframe. The daily chart is fairly bullish looking. We had a strong day higher after a pretty close test of the 62% retracement of the rally that began on February 10th. Add to that the fact that the recent fall looks to be a pretty clean-looking a-b-c, and you have a good reason to want to buy.

Unfortunately, the intraday price action (not shown on chart) is much sloppier. A five-wave advance was not visible in the intraday price movements, so I still would prefer to see one more new short-term low. Although that is a long distance from here, I do not want to short the stock against such a bullish-looking daily pattern. As such, I would rather purchase on a pullback to the 62% retracement and place stops below the 76% retracement level.

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RECOMMENDATION:

BUY SMH on a pullback to $21.71 (Remember, you cannot trade HOLDRS in odd lot amounts.)

TARGET:  $23.89 (I may revise this higher in the coming days.)
STOP:  $21.18

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4. CONTINUED GUIDANCE ON PREVIOUS TRADES

TRADE #1:  SELL SHORT THE S&P MID-CAP SPDR (MDY, $73.22) AFTER A RALLY

Unfortunately, we missed our entry point on this trade by just a few cents on Monday.  Please cancel this trade.

RECOMMENDATION:
Sell short MDY at $75.73 -- CANCELLED
TARGET:  $71.73
STOP:  $76.97

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TRADE #2:  PLACE A COVERED PUT TRADE ON THE NASDAQ-100 TRUST (QQQ, $24.54) BY SHORTING QQQ AND SELLING A MARCH 25 PUT (QAVOY, $0.95)

The maximum possible gain on this position at expiry on March 21st is now $0.96. We are currently ahead by $0.58. As such, I'm going to keep a very close eye on this trade. If stocks look set to reverse, then I may consider closing it. The new target value for the trade -- when the sum of the two positions falls to $25.27. This sum currently sits at $25.49. As prices fall, the value of the option will start to rise more quickly as it gets deeper in the money, making the risk/reward of staying in the trade less favorable.

RECOMMENDATION:
Sold QQQ at $25.27 on March 3rd
Wrote a $25.00 March QQQ put (symbol QAVOY) at $0.80
TARGET:  Close at expiry on March 21, 2003 or when the sum of the value of the put and QQQ reaches $25.27 or lower.
STOP:  If sum of QQQ and QAVOY reaches $25.94

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TRADE #3:  SELL SHORT THE iSHARES 20-YEAR TREASURY FUND (TLT, $90.56) ON TRENDLINE BREAK

We were stopped out of this trade last Wednesday for a small 0.5% loss.

RECOMMENDATION:
Sold short TLT at $90.13 on March 4th
TARGET:   $86.70
STOPPED AT $90.54

Good trading in the week ahead!

Steven W. Poser
Steven Poser
Editor
The ETF Authority
New York, NY

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