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IN THIS WEEK'S ISSUE:

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

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1. MARKET SUMMARY

Almost every ETF that we track lost ground last week. The only equity-linked funds to manage gains were the Canada WEBS (EWC, $10.24) and the Oil HOLDRS (OIH, $56.21). Interestingly, only one of the four debt-linked ETFs managed to finish the week in positive territory, with the 20+ Year Lehman U.S. Govt. Bond iShares (TLT, $87.26) managing a fractional gain.

THE WEEK IN REVIEW
Although losses were moderate last week (the Dow Jones Industrial Average slipped less than 1.0%), this masks the fact that stocks surged higher at the open last Monday, then fell for much of the rest of the week. The only upside we saw beyond Monday was a brief flurry from mid-morning on Thursday until mid-morning on Friday and as American troops pulled down the statue in the center of Baghdad on Wednesday.

The price action was disappointing given that the news out of Iraq was almost all good and that economic data, though mixed, was more positive than negative (see below). However, the realization that the war with Iraq may have caused more damage to the global economy than previously realized helped temper the bulls. Also, with prices in the upper third of their now nearly 10-month trading range, and with a good deal of risk still going forward, there is little reason to build longs at current levels.

ECONOMIC ANALYSIS
Last week's economic data provided several surprises. Despite stories suggesting that Americans were glued to their television sets watching the war, retail sales jumped. However, much of the gains were due to a jump in auto sales along with rebounds from weather-ravaged sectors in February. Neither should be particularly helpful in April.

The silly inflationists will have a field day with the PPI data. However, even though the core number popped by 0.7%, much of that was due to the vagaries of the auto portion of the calculation. With large new incentives put in place this month, that number could easily turn negative in April, especially since oil prices have fallen sharply.

The bottom line is that inflation is definitely not a problem. Deflation is still the risk. But as I've mentioned before, though the risk for deflation is larger than inflation, I do not expect deflation to take hold in the U.S.

Next week's economic data is not likely to build much on the positives set last week by retail sales and consumer confidence. Industrial production could rebound a bit after an essentially flat April figure (especially since it has been quite cold in the Northeast). CPI, boosted by oil prices, is seen rising 0.4%, with the core rate advancing 0.2%. Risk is on the downside for core, and higher for the total figure.

WHERE DO WE GO FROM HERE?
The pattern lower in the stock market last week was sloppy once again. This gives me little comfort from the perspective of expecting an acceleration lower in the very short-term. If prices are going to make a new low from current levels, they should be falling much more quickly. At a minimum, I'd expect a test back into the 880s in the S&P 500, with 913-940 the maximum upside. Bottom line: We are still well within the ranges set since the July/October 2002 bottom and subsequent rallies. The triangle is still active, and ultimately a new low is forecast, but I do not yet have any signal that it will happen straight off.

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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.  ETF RELATIVE STRENGTH MONITOR

There were several major moves in our Relative Strength rankings last week. The fixed-income indices, although they lost ground, moved up in the rankings, as their losses were far more moderate than those racked up by several over-extended equity sectors. Their lower volatility also helped them improve in the rankings. Unfortunately, I doubt that improvement will be sustainable.

The Oil Service HOLDR (OIH, $56.21) was the top-performing fund last week and is now second overall in our ranking system (behind only the Canada WEBS (EWC, $10.29)). Both managed gains of around 3% in a down market. However, with the Canadian dollar overbought, it may be difficult for EWC to keep the pace up.

Despite a 1.25% loss, the Energy SPDR (XLE, $22.11), which I am short, moved to the middle of the pack, improving to 10 from 4 (remember, 23 is best, 1 is worst). Last week's big losers were the two Biotech funds, the Semiconductor HOLDRs (SMH, $23.45), which lost 3.85% and has now fallen into last place in our index, along with the Russell 2000 Growth Fund (IWO, $39.10), which tumbled from a 16 to 4.

The Financial SPDRs (XLF, $21.93) and Retail HOLDRs (RTH, $73.45) continue to hang in at the strong end of the spectrum, while Japan WEBs (EWJ, $6.31) are mired near the bottom of our ranking.

Here is this week's ETF Relative Strength Monitor...

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4.  THIS WEEK'S TRADES

RELATIVE STRENGTH ETF TRADING IDEA:
I do not see any worthwhile relative strength trades this week. However, my recommendation to short RTH (see short-term trade below) is partially based on its recent extreme strength.

SHORT-TERM ETF TRADING IDEA:

SELL SHORT RETAIL HOLDRS (RTH, $73.45)
There were some chinks in the armor here last week. There is a pretty good chance that a five-wave rally completed last Friday. The MACD histogram also is showing a pretty substantial momentum divergence. Wave-5 was almost exactly a 1.618 extension of wave-1 (and wave-3 was very close to 2.618 times wave-1). While the larger direction might still be higher, a 50-62% retracement of the rally since February is likely.

My decision to sell RTH short is based on the following factors:

• Large momentum divergence at the high
• Likely five-wave completion.
• Excellent Fibonacci ratios.
• Inability to rally despite strong retail sales report and little sign of the economy picking up.

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RECOMMENDATION:

SELL 100 SHARES RTH (odd lots not allowed) on an open between $73.61 and $74.41 on Monday.
TARGET:  $69.65
STOP:  $75.26

Assuming you sell at $73.61 and exit the trade at our $69.65 target, you will pocket a $396 gain from this trade, or +5.4%.

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LONG-TERM ETF TRADING IDEA:

BUY JAPAN WEBS (EWJ, $6.31) AFTER FURTHER LOSSES
The Japanese stock market has once again tumbled to fresh 20+ year lows. The next major price target is near $6.05. Normally I would recommend being short for a move to that area, but last week's sharp drop would leave stops too wide. However, with the wave pattern fairly clear and nearly complete, coupled with clear price targets, a purchase below the market now looks compelling.

Buy EWJ below the market due to these factors:

• Double bottom in momentum and likely divergences ahead.
• Near very long-term complete five-wave pattern.
• Wave-5 equals wave-1 target nearby.

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RECOMMENDATION:

BUY 500 shares of EWJ at $6.10
TARGET:  $6.80
STOP:  $5.95

Assuming you buy at $6.10 and sell at $6.80, your profit will be $350, or +11.5%.

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5. CONTINUED GUIDANCE ON PREVIOUS TRADES

PREVIOUS SHORT-TERM IDEAS:

SELL SHORT iSHARES NASDAQ BIOTECHNOLOGY FUND (IBB, $50.25)
This trade was not executed. IBB gapped open too high on the huge jump on Monday morning. This was an unfortunate turn of events, since the Nasdaq Biotech iShares were the worst performing fund last week, losing -5.3% week-on-week and nearly -8% from their intraweek high.

PREVIOUS LONG-TERM IDEAS:

SOLD SHORT ENERGY SPDRs (XLE, $22.11)
DATE ENTERED:  03/24/2003
ENTRY PRICE:  $22.41
CURRENT PRICE:  $22.11
TARGET:  $21.00 (revised)
STOP:  $22.76 (revised)
GAIN/LOSS:  +1.3%

This trade is worth holding onto. XLE is holding below its continuation triangle and the inside week shows a further loss of upside momentum. However, the losses are not developing as quickly as I'd like them to, given the weakness in oil prices (at least XLE did not rally along with the Oil Service HOLDRs). I've raised the target to approximate the bottom of the triangle, and have brought the stops to just above the top of the triangle.

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SELL S&P 100 (OEX) OPTIONS STRANGLE
I sent out a News Flash regarding this trade on Friday morning, April 11th. The options expire will expire this coming weekend. Yet since we have already accrued more than 80% of the possible gain, I have moved my target to a total value of $0.20 (the options last trade implies that value, but the actual ability to buy your shorts back would probably result in a cost of $0.25, so we are still in the trade).

Sold two OEX 490 Calls (OXBDR, $0.05) for $0.90 each
Sold two OEX 400 Puts (OXBPT, $0.15) for $0.50 each
TARGET:  $0.20 for both options
STOP:  $0.30 combined value
Current position is ahead at least $190, and based on last trades, $200.

PREVIOUS RELATIVE STRENGTH IDEA:

SELL SHORT NASDAQ-100 TRUST (QQQ, $25.51) WHILE AT THE SAME TIME PURCHASING S&P 500 SPDR ($87.15) WHEN THE PRICE RATIO OF SPY DIVIDED BY QQQ EQUALS 3.26 (CURRENTLY 3.416)

This trade is cancelled.

Although I continue to expect QQQ to underperform SPY, the ratio did not dip as low as I had hoped for. The ratio still has a chance to slide to the 3.26 area, but we are too far away from that right now to make it worth waiting for. I will monitor the ratio and will send out a flash to take this trade if and when it reaches a level from which we can trade it again.

Thanks again for reading this week's issue, and good trading in the week ahead!

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

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