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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  

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

1. MARKET SUMMARY

After struggling against minor resistance U.S. equities continued their positive slope last week, finally breaking through on Friday. I remain convinced that we are nearing a major correction and very possibly a reversal. However, so far nothing negative has happened. Only one of the equity-linked ETFs that I track lost ground last week -- the Oil Service HOLDR (OIH, $55.88).

We had a very good week last week. We aggressively trailed stops higher in our short Semiconductor HOLDR (SMH, $27.25) and long S&P 500 SPDR (SPY, $93.21) combination trade, ultimately closing the trade out for a decent one-week profit. We also are strongly ahead on our Japan WEBs (EWJ, $6.57) long trade. In fact, I was quoted on my bullish prognostication regarding Japan in Barron's Online on Monday at about the time you received your News Flash.

THE WEEK IN REVIEW
The stock market put in an amazing performance last week, especially in light of the universally atrocious economic data. Investors did correctly interpret Alan Greenspan's speech as neutral to positive, despite the early negative spin put on it by the Street and the financial media. However, the numbers themselves were poor at best. As I have noted many times previously, we are currently in a post-war honeymoon period. Greenspan managed to lengthen that by saying the data just are not in as yet to make a decision. Unfortunately, the bulls will wind up waiting for Godot. The economy is in rotten shape, and things are not getting any better. Q2 earnings will be atrocious, and by the time those numbers are out, Q3 won't look any better.

ECONOMIC ANALYSIS
Last week was unequivocally a bad one on the economic front. The only good news was that the consumer only spent what he or she made, as consumer spending and income both rose 0.4%. Consumer confidence surged as well, but that is not likely to last much longer.

The Chicago PMI and national ISM surveys were somewhat weaker than forecast. This is not a good thing, as much of the data are from the post-war period. Productivity was weaker than expected as well, while employment costs surprisingly jumped. These numbers were not in line with my expectations.

I did nail the unemployment rate of 6.0%. The stock market did not fall on the news, however, as non-farm payrolls fell -48,000, which was better than consensus forecasts of -60,000 and market talk of worse than -100,000. Still, a closer look at the underlying numbers painted a different picture, as it turns out that government jobs boosted the payrolls number, prior months were revised lower and hours worked tumbled. Although the report is supposed to be lagging, if there was any hint of improvement, then hours worked ought not to have fallen!

Next week has no important data items due to be released. There are two events worth being aware of though. First of all, the Fed meets. Nobody expects a rate cut, and I don't either. The Fed funds futures give less than a 20% chance of such an occurrence, and I think that is even way too high. The FOMC (Federal Open Market Committee -- the Fed's policy-setting body) minutes from March will be released on Thursday. It will be interesting to see if there are any hidden inflation hawks evident there. They will likely be more vocal this time around after the ECI (Employment Cost Index) data.

WHERE DO WE GO FROM HERE?
Stocks are making a run for triangle resistance that goes back to last summer. We might briefly trade above there (938 or so in the S&P 500), but the markets are not likely to hold that level. The question now is whether we turn to new lows right away or just correct. Either way, if you are long you might want to think about taking profits and starting to look for shorting set-ups.

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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

(Note:  If you're a first-time reader or you are otherwise unfamiliar with our proprietary ETF Relative Strength Monitor, then please click here for a brief description.)

If you include dividend payments in the return calculation, then not a single one of the ETFs I track for this newsletter has declined over the most recent four-week period. Excluding dividends, only the 1-3 Year Lehman U.S. Govt. Bond iShares (SHY, $82.29) are down, and that by only 0.01%!

Regardless of whether I am correct that stocks will make new lows or not, we need to be on the lookout for a substantial correction. Three ETFs are ahead by more than 10% in the past month and five by greater than 15% during the past 13 weeks. Included in that is the Nasdaq-100 Trust (QQQ, $28.28), which is up 15.71% over the past 13 weeks. This is a mighty broad index, and for it to be up that sharply in that amount of time is a rare occurrence. Incredibly, seven of the 16 equity-linked ETFs that I track rose more than 5% last week, with another managing a 4.01% gain. The Biotech HOLDR (BBH, $104.50) rose 3.06%, and was the second worst performing equity ETF we follow.

When choosing this week's relative strength ETF trading idea, my preference was to look for an opportunity among the more liquid ETFs I track. The best place to look, therefore, was among the major index-related funds. The Dow has easily been the worst performer in recent history, and its gains last week were only 3.19%. This compares rather unfavorably with 4.94% for the QQQ. The disparity is even greater when you look back 13 weeks: DIA is up 6.61% while QQQ is ahead 15.71%. (You can view my DIA/QQQ trade in the following section entitled "This Week's Trades.")

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

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4.  THIS WEEK'S TRADES

RELATIVE STRENGTH ETF TRADING IDEA:

BUY DOW DIAMONDS (DIA, $85.81) AND AT THE SAME TIME SELL NASDAQ-100 TRUST (QQQ, $28.28) THE DAY AFTER THE PRICE RATIO OF DIA/QQQ REACHES ABOVE 3.06 AFTER FIRST TOUCHING 2.96 OR LOWER ON A CLOSING BASIS
As I noted in our Relative Strength Monitor section above, the Dow Diamonds are overdue to start outperforming the Nasdaq-100 Trust. DIA is in the bottom third of our rankings with a seven (remember -- 23 is reserved for the best-performing ETF, while a ranking of 1 signifies the worst-performing ETF) while the QQQ comes in at 17. QQQ has posted returns more than double those of DIA in the most recent four- and 13-week periods. Yet that trend now appears to be running out of steam and is approaching some targets and key levels. Furthermore, there have been increasingly apparent momentum divergences at each new low. That said, I am not a big fan of trying to catch falling knives. Therefore, I only want to enter on some kind of reversal. Using closing levels (as noted in the trade summary above) will permit you to check prices once each day instead of forcing you to monitor the position on an intraday basis prior to entering the trade.

I like this trade because:

• I expect a move lower for stocks, and QQQ is far more extended than DIA.
• There are momentum divergences in the ratio.
• We are near a combination of retracements, Fibonacci extension targets and a support line. This should give us a good base from which to harness a reversal.

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RECOMMENDATION:

BUY 100 SHARES of DIA
...and at the same time...
SELL SHORT 306 SHARES OF QQQ

AT THE OPEN THE DAY AFTER THE RATIO OF DIA/QQQ MOVES TO OR ABOVE 3.06, AS LONG AS THIS RATIO HAS FIRST CLOSED AT LEAST ONE DAY AT OR BELOW 2.96

TARGET:  RATIO OF 3.40 (INTRADAY)
STOP:  RATIO 0.02 BELOW THE LOW CLOSE BEFORE ENTRY (INTRADAY)

Since I do not know the exact price levels at which we will actually enter into the trade, I cannot give exact profit and loss potential here. However, the approximate profit would likely be in the $750-$825 range, while losses at the stop would be in the $350-$400 area.

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SHORT-TERM ETF TRADING IDEA:

BUY FOUR SEPTEMBER 2003 $26 PUTS ON QQQ (SYMBOL QAVUZ) ONCE QQQ GIVES A SELL SIGNAL AS DEFINED BELOW
I do not really need to go into great detail here as to why I expect the stock market to fall. The broad market, as measured by the S&P 500 and the Dow Jones Industrials, has been tracing out a large triangle pattern since last summer. Triangles are often followed by a continuation of the previous trend, and in this case the prior trend was down (in case you hadn't noticed).

Even if my forecast for a new low is incorrect, the stock market in general, and QQQ in particular, is now somewhat overbought. A correction is due. Since QQQ has outperformed in recent history, there is substantial risk for a turn lower.

There's even more! Volatility in Nasdaq options (VXN, 32.36%) is at a record low (the history is not that long, but it is still very low). Part of the reason behind this is because the Nasdaq-100 now has a lower weighting in technology issues than it did in 2000, but that alone does not explain the depths to which it has recently plummeted. Furthermore, VXN has closed below its open for 34 consecutive days. RSI on VXN is near 21 and has a small divergence. Volatility levels are likely to rocket when this market finally turns, which will help your options even more.

That said, I do not want to just throw money away. For that reason, I do not want to buy the puts until I get a valid sell signal. As you can see, QQQ has not been able to make a new three-day low since February -- its last major downdraft. Therefore, buy the puts as soon as QQQ makes a new three-day low. That means if QQQ trades below the lowest price traded in the prior three trading sessions (excluding the current one), then buy your puts at that time.

To give you time to get it right, I recommend purchasing September 2003 puts with a strike price of $26 (symbol QAVUZ, or QAVUZ.X on Yahoo). This option last traded at $1.10 on Friday.

This trade makes sense because:

• QQQ is very overbought and is due for a substantial correction.
• We will not put the trade on until a change in trend is signaled.
• Volatilities are very low and will expand as prices fall.
• The recent gains in QQQ have been met with minor momentum divergences.
• We are now entering a horrible seasonal period for common stocks. Over the past 50 years, equities have had a small negative return from May 1st until October 31st while averaging more than +15% per year from November 1st through April 30th.

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RECOMMENDATION:

BUY FOUR SEPTEMBER 2003 QQQ PUTS (SYMBOL QAVUZ) AS SOON AS QQQ MAKES A NEW 3-DAY LOW

TARGET:  Sell half of your puts when they double. Hold the remainder until QQQ reaches $23.00
STOP:  Close position if QQQ trades above the highest price QQQ has traded since May 1st, 2003. (We'll issue a News Flash to let you know what this exact price ends up being once we enter the trade.)

Your maximum risk will be what you pay for the puts (this will depend on our entry point as soon as QQQ makes a new 3-day low). Using the $23.00 target, if reached by August, your profit would probably be greater than $1,000.

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LONG-TERM ETF TRADING IDEA:

I am going to hold off on issuing a long-term trading idea this week. I expect the market to turn sharply lower, but would like to get a better feel for how it is going to fall before doing so. The relative strength trade above will probably take awhile to develop, and the active EWJ trade is also working on a substantial profit level. If the market breaks, then I will make a long-term recommendation at that time.

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5. CONTINUED GUIDANCE ON PREVIOUS TRADES

SOLD SHORT ENERGY SPDRs (XLE, $22.59)
DATE RECOMMENDED:  3/24/2003
DATE ENTERED:  03/24/2003
DATE CLOSED:  4/28/2003
ENTRY PRICE:  $22.41
EXIT PRICE:  $22.39
GAIN/LOSS:  +0.1%

XLE hit our revised stop level on April 28th. Compared to other ETFs, this one is moderately oversold. When equities turn lower, there will be much better places to be short than in this somewhat defensive sector.

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BUY S&P 500 SPDRs (SPY, $93.21) WHILE SELLING SEMICONDUCTOR HOLDRs (SMH, $27.25)
DATE RECOMMENDED:  4/21/2003
DATE ENTERED:  4/22/2003
DATE CLOSED:  4/28/2003
ENTRY PRICE:  BOUGHT 60 SHARES SPY AT $91.49, SOLD 200 SHARES SMH AT $27.50
TARGET:  SPY/SMH PRICE RATIO OF 3.55
CURRENT PRICE RATIO:  3.49
STOPPED:  This trade hit our trailed stop on April 28th at a ratio of 3.46.
GAIN/LOSS:  $208 gain -- the average percentage profit on the two positions was +1.9% (SMH short gained +3.6% while the SPY long gained +0.1%)

I was correct to trail the stops here, as I knew there was risk of another leg of outperformance for SMH vis-à-vis the broad market. Had I kept the position on for the remainder of the week, then it would have moved into the red!

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BUY iSHARES LEHMAN 20+ YEAR TREASURY BOND FUND (TLT, $88.32) ON A DIP
DATE RECOMMENDED:  4/28/2003
DATE ENTERED:  CANCELLED ON 4/28/2003
DATE CLOSED:  CANCELLED ON 4/28/2003

I cancelled this trade via a special News Flash after the market closed on 4/28/2003.

**************

SELL TWO DOW DIAMOND (DIA, $85.81) MAY 2003 $87 CALLS AND USE THE PROCEEDS TO PURCHASE MAY 2003 $84 PUTS
DATE RECOMMENDED:  4/28/2003
DATE ENTERED:  CANCELLED ON 5/05/2003
DATE CLOSED:  CANCELLED ON 5/05/2003

I do not expect to see the Diamonds reach high enough to execute this trade. If they do at this point, then the trade might not turn out as I initially had hoped. Therefore, I have decided to cancel this recommendation.

**************

BUY JAPAN WEBS (EWJ, $6.57) AT OPEN ON APRIL 29, 2003
BOUGHT 1,000 SHARES EWJ AT $6.26
DATE RECOMMENDED:  04/28/2003
DATE ENTERED:  04/29/2003
TARGET:  $6.75 (may be revised higher)
STOP:  $5.98
GAIN/LOSS:  $310 on 1,000 shares, or +5.0%

If targets are achieved at $6.75, then our gain will be $490, or +7.8%.

This trade really took off in our favor, soaring +5.0% from our entry point at the open on Tuesday (the open price was actually $6.22, but there was a wide range in the early going, so in the interest of being conservative, I used a higher level for our profit calculation). Prices broke above the down channel active from February and MACD gave a buy signal on the daily chart from a divergence. Another week higher and weekly MACD will probably give a buy signal as well. We also have an island bottom, although gaps are less important here because they represent trading in a market that is essentially closed during the time the stock trades in the U.S. Finally, as I was quoted in the Barron's Online article last Monday, the Nikkei-225 Index bounced from oversold from just above a very long-term channel line as well as a major Fibonacci-based price target.

I would not be surprised to see EWJ dip a bit on Monday. The shares rallied in conjunction with the U.S. on Friday, but the Japanese market was only up slightly in that time, while the USD actually made gains. However, as long as we hold above $6.32, I'd remain bullish here.

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

Steven Poser
Editor
The ETF Authority
New York, NY

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