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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

U.S. equities traded in a fairly tight range last week, with the major indices ending the week less than 1% from where they opened. However, given how overbought this market is, coupled with the nasty-sounding warnings from the Fed after their meeting, I think the market has actually held up quite well.

When it comes to our recommended ETF trades, I closed our Japan WEBs trade (EWJ, $6.76) for a +6.9% profit on Thursday, May 8th. I made the decision to take profits because there was some timing that suggested U.S. equities could have made a turn lower last week, plus the fact that the jump in the Nikkei, coupled with the losses in the USD, left large risk of profit taking. However, I suspect that we will be able to buy EWJ back very soon for an equally rewarding trade!

THE WEEK IN REVIEW
Last week was a quiet one in equity land. The only item of note, which I will cover below in my economic analysis section, was the FOMC (Federal Open Market Committee) statement on Tuesday. With prices largely stuck in neutral, on moderate volume, equities may have worked off some of their short-term overbought stance. My turn date from last Thursday, May 8th, which I warned you about via a special News Flash on Wednesday evening, has come and gone with little consequence. If prices are going to sink, then that would need to start on Monday, May 12th. Otherwise, even though a correction is due, for the moment (as in the next 3-6 weeks) the medium-term trend remains up.

It is worth noting that the U.S. dollar (USD) has been absolutely eviscerated recently. The USD is extremely oversold, helping to push oil and gold higher. I expect a snapback in the dollar soon, which could provide a good shorting opportunity in the energy-related ETFs. Also, the Canada WEBs would become interesting as well from the short side. In fact, this may become a very interesting trade once stocks start to fall, as you will get the double bonus of a strong U.S. dollar and a falling Canadian stock market.

ECONOMIC ANALYSIS
Last week was supposed to be very quiet in the economic analysis world, as no important data items were due out. However, the Fed quickly changed all of that, as the FOMC minutes showed how concerned the Fed truly is about deflation. The news sent the dollar spiraling lower and fixed-income markets flying higher. Oddly enough though, by the end of the week, the market had priced in the probability of another rate cut at just 50% -- its lowest level since April 29th. I have always argued that there was substantial risk for deflation, but have never felt it was likely to occur. I still believe that to be the case. Still, the Fed is correct in wanting to keep a close watch on this.

Next week sees a large chunk of data. Normally, the trade balance is none too important, but with the USD oversold, Tuesday morning's release may garner closer scrutiny. The forecast is for a deficit of $40.3 billion dollars. Retail sales are due for release on Thursday. Forecasts vary between +0.1% and +0.4% ex-autos. I would not be surprised to see a negative ex-autos number. Industrial production and capacity utilization are expected to slide this month as well.

Thursday begets the Producer Price Index (PPI). A sharp drop due to lower energy prices is in the cards, but the Core PPI, which excludes volatile food and energy prices, should be little changed. Consumer prices (Friday) should also not vary substantially from zero. Meanwhile, University of Michigan consumer sentiment ought to improve some in Friday's mid-morning release.

WHERE DO WE GO FROM HERE?
There is little question in my mind that the stock market is somewhat overbought. It is also ridiculously overpriced. Anybody who thinks the U.S. economy (or the global economy, for that matter) is in anything but precarious or worse health is wearing rose-colored glasses. However, as we all remember from the Internet bubble in 1999-2000, reality and the stock market only meet periodically. I continue to expect a substantial correction and more likely a drop to new lows. But, until we get a signal that it is time to sell, there is absolutely no way that I can recommend shorting this market. There is no need to be a hero by trying to perfectly time a market top. There will be plenty of money to be made on the downside when the selloff finally comes.

The News Flash I mailed out last week (on Wednesday, May 7th) contained some important market timing information. Last Thursday was one opportunity for the market to turn lower. So far, we have not exceeded Tuesday's peak, but we are close. If we do not turn lower by today (Monday, May 12th), then I would assume that the timing cycle I was working on most likely did not pan out. Gains much beyond 940 in the S&P 500 Index (SPX, 933.41) would also be a sign that a test to the August 2002 high at 965.00 was underway.

If prices do not turn lower now, then trading is going to be tough. We could get a blow-off top to this bull run and even take out the stops likely set near 965.00 on the S&P. For that reason, I have no desire to get short now. However, I have a hard time fathoming that prices will be able to rise continuously until the next set of turn dates in late June. Therefore, if we do steam higher, then I will be on the lookout for a turn for at least a deep correction.

I would like to be able to recommend longs here, but given the potential for a steep selloff, that would not make sense. There just is not enough room left on the upside. Meanwhile, with volatility so low, selling options is a bit scary. But as you will see below, that is the most profitable route to take right now.

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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.)

After spending weeks at or near the top of our rankings, the two biotech ETFs we track have fallen precipitously. The Biotech HOLDR (BBH, $101.52) tumbled -2.85% last week, sinking six places in our relative strength index. Meanwhile, the Nasdaq Biotech iShares (IBB, $58.40) fell -1.77% last, tumbling from our top-ranked fund to the middle of the pack. Only two other ETFs lost ground last week, as it was generally an excellent week for both the stock market and the bond market. If equities do turn lower, then the recent underperformance by the Biotech HOLDR may give us a good opportunity for a relative strength trade there, as that sector has acted well as a defensive play recently.

The Oil Service HOLDR (OIH, $59.58) posted the biggest gains last week, rising +6.62%. It is now ranked 19th out of a possible 23 in our index. However, this has been a volatile sector and is only up +6.00% over the most recent 4-week period and +7.93% over 13-weeks. This may make for a good long defensive play as well.

When stocks do turn down, the first place to look for shorts will be the Semiconductor HOLDR (SMH, $27.93). SMH tacked on another +2.50% last week, putting it ahead +19.10% in the past four weeks and an astounding +35.32% over the most recent 13-week period. Can you say "bubble?"

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

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4.  THIS WEEK'S TRADES

RELATIVE STRENGTH ETF TRADING IDEA:
I have decided to make life simpler going forward here. Relative strength trades typically involve buying one fund and shorting another. However, the key elements in such a trade need close tracking, and the actual job is quite complex. Therefore, going forward I will make these trade recommendations via special News Flashes unless they are ready to roll on Monday mornings. However, I will continue to offer some general ideas as to where I am looking for trades in the Relative Strength Monitor Section above.

SHORT-TERM ETF TRADING IDEA:

SELL TEN MAY S&P-100 (OEX, 472.25) 445 PUTS (OXBQI, $0.30)
Normally I look to put an options strangle trade on with little time to expiration. A strangle would mean selling out-of-the-money calls and out-of-the-money puts. Unfortunately, the calls are way too cheap to make it worthwhile. Although I do see risk for the OEX to fall soon, right now the greater risk is for a blow-off high first. That is why I do not want to sell an options strangle at current prices (a call at 500 is only worth about $0.05-$0.10).

These options expire this Friday and the Bollinger Bands shown on the chart are a 10-standard deviation measure over the past five sessions.

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RECOMMENDATION:

SELL 10 OEX MAY 445 PUTS (OXBQI) AT $0.30 OR HIGHER

TARGET:  Expire worthless.
STOP:  $1.00, narrow to $0.80 at then open on Tuesday and $0.60 on Wednesday, keeping it there until expiration.

Your profit will be $300 if the options expire worthless. If we are stopped on Monday, the loss would be $700, on Tuesday, $500 and on Wednesday or later, $300.

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LONG-TERM ETF TRADING IDEA:

SELL SHORT ISHARES RUSSELL-2000 GROWTH FUND (IWO, $43.77) ABOVE THE MARKET
This trade is a set-up. I doubt we will be able to enter it this week, but if the stock market succeeds in a blow-off high in the coming weeks, then this trade should prove to be very profitable.

As you can see in the chart below, IWO has been rising in a fairly steady manner for some time now. The fund is ahead more than +16% over the past 13 weeks and ranks third behind only the Technology SPDR (XLK, $16.32) and the Semiconductor HOLDR (SMH, $27.93) in our relative strength index. What makes this trade attractive is that we have a channel line, Fibonacci retracement and Fibonacci extension target all near each other. It is highly unlikely that a move much beyond that range will be possible absent a major correction, or even worse.

I like this trade because:

• Two trend channels and a retracement level all come in very close to one another.
• There is a well-defined stop area at a trendline and another Fibonacci retracement.
• Although volume improved recently, it is not as high as it was during the late-2002 peak. Plus, prior volume spikes have occurred 1-2 weeks before major tops.

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RECOMMENDATION:

SELL SHORT 200 SHARES iSHARES RUSSELL-2000 GROWTH FUND (IWO, $43.77) AT $46.75

TARGET:  $40.50
STOP:  $50.60 (Should IWO hit our entry price, then we will lower this stop gradually with the trendline, ultimately to 62% retracement at $49.78. We will keep you informed of this via either a News Flash or in this weekly newsletter.)

Assuming you sell at $46.75, your profit will be $1,250 on exit at $40.50, while risking $770 if stopped at $50.60.

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5. CONTINUED GUIDANCE ON PREVIOUS TRADES

BUY JAPAN WEBS (EWJ, $6.76) AT OPEN ON APRIL 29th
BOUGHT 1,000 SHARES EWJ AT $6.26
DATE RECOMMENDED:  04/28/2003
DATE ENTERED:  04/29/2003
DATE CLOSED:  05/08/2003
CLOSED AT:  $6.69
GAIN/LOSS:  $430 on 1,000 shares, or +6.9%

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LONG FOUR SEPTEMBER 2003 QQQ PUTS (SYMBOL QAVUZ, $1.10)
I recommended this trade in last week's newsletter and I continue to like it. The idea is that the market is overbought enough so that any drop, even if it proves to be just a correction, will lead to substantial losses, coupled with an increase in implied volatilities, which will also help the value of the put. We had a spinning top on the weekly chart, which is also a possible turn signal. Still, I would like to see some follow-through here now, especially since we are so close to our stops.

I have to admit that I am uncomfortable with how close we have placed this stop. However, there were several price targets very near the high just attained, and prices ought not trade above there. I have an iron clad rule that I will never raise my stops, so I am not going to break that rule here. For those of you who feel strongly that further losses are likely, you may want to consider the 50% retracement back to the 2002 high in the QQQ at $31.50 as a place to move your stop in case you're nervous about getting stopped out too soon.

BOUGHT 4 QAVUZ AT $1.20
DATE RECOMMENDED:  05/05/2003
DATE ENTERED:  05/08/2003
TARGET:  Sell half of your puts when they double. Hold the remainder until QQQ reaches $23.00
STOP:  Close position if QQQ reaches $28.91

If the stops are hit very quickly, then your losses will probably be in the neighborhood of $60 total for the four contracts. Using the $23.00 target, if reached by September, your profit would probably be greater than $1,000.

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BUY DOW DIAMONDS (DIA, $86.17) AND AT THE SAME TIME SELL NASDAQ-100 TRUST (QQQ, $28.41)
I have decided to cancel this trade recommendation. While I expect that it will ultimately be profitable, I also believe it is my job to alert you as to when to put this kind of trade on, rather than you having to track it yourself. If I see the opportunity, then I will send out a flash.

DATE RECOMMENDED:  05/05/2003
TRADE CANCELLED

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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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