 The ETF Authority for Monday, June 9th, 2003 Volume 2, Issue #23 Published weekly on Sunday evening, The ETF Authority is a short-term swing trading newsletter that can help you profit from some of the most heavily-traded securities on the market -- exchange-traded funds (ETFs). *Please
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subscribe to this newsletter today... We urge all readers to print out this
newsletter each week for maximum benefit... (1.) MARKET SUMMARY There is little doubt that we are in what I call a
cyclical bull market. However, the very long-term picture (as in years)
remains bearish and a new low is still my preferred forecast before the year
is out. Prices are overextended in the short term and are due for a drop.
As I noted above, even if stocks are still in buy mode for the next few weeks to even 2-3 months, the short term poses substantial downside risk. We have not had a correction of at least 5% since March. We have probably begun one now. ECONOMIC ANALYSIS Construction spending fell more than expected, and the ISM Index was weaker than consensus expectations as well. On the bright side, the ISM's services data substantially exceeded forecasts. That is what had given us the reversal from danger last Wednesday. The overall state of the economy remains poor, despite many who seem to believe that the stock market is correctly forecasting a stronger economy. I have to admit that many people do seem to be showing greater confidence as of late. However, continued poor retail spending and a hugely overextended consumer suggest that there is not a whole lot more upside potential in the immediate term unless the economic data start to support the market's rise. Remember that the old saw is that the market forecasts a turn six months early. Well, the S&P hit an annual low in October 2002, but we still are not seeing any economic strength. Even if we account for a delay due to the war, we still need to start seeing some good numbers now. Next week sees two important bits of info: The Fed's Beige book (Wednesday, June 11th at noon) and retail sales. The market has already priced in a 25 basis point rate cut for June 25th. I doubt that the Beige Book will give Wall Street any reason to alter that thinking. However, signs of improvement could halt any correction tendencies very quickly. Retail sales are forecast to rise 0.2-0.3%. This follows a sharp -0.9% drop in April. Not very exciting. The ex-autos number will be a bit better. With consumer confidence so strong, continued mundane retail sales data should be a concern. WHERE DO WE GO FROM HERE?
http://www.StreetAuthority.com/subscribe-etf.htm Below you'll find a table of weekly performance data for all ETFs that I track for this newsletter...
(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.) The four bond market funds took a stranglehold at the bottom of our rankings last week. Although the data shown do not include dividends, the bond funds we track for this newsletter have been the four worst performers over the past 13 weeks. Including dividends, the iShares GS$ Investop Corporate Bond Fund (LQD, $115.55) and the 20+ Year Lehman U.S. Govt. Bond iShares (TLT, $94.14) would have topped the Japan WEBS (EWJ, $7.07). However, EWJ soared 13 places in our ranking scheme last week, as its returns were only eclipsed by the Nasdaq Biotech iShares (IBB, $72.92), the Biotech HOLDR (BBH, $125.94) and the Pharmaceutical HOLDR (PPH, $79.82). The past four weeks have seen the two biotech funds jump more than 24%, and IBB is ahead 54% during the preceding 13-weeks. They are both extremely overextended and put in reversal formations on both daily and weekly charts. The technology sector is also somewhat overbought. Software HOLDRs (SWH, $32.74), Semiconductor HOLDRs (SMH, $30.50) and the Technology SPDR (XLK, $17.20) all put in horrific intraday turns on Friday. Here is this week's ETF Relative Strength Monitor...
S&P 500 Model Portfolio The purpose of our portfolio is to attempt to catch decent-sized swings in the market. The breakout early in the week saw us reverse the SMH trade to long, but I kept the stops too tight. We also got taken out of our very profitable long IBB trade, as we protected our substantial profits there. However, despite last week's relatively poor performance, we are well set-up for the correction that has likely already begun. Our long trade in the Dow Diamonds (DIA, $90.87) is fully hedged by the calls we sold and our stops in the Energy SPDR (XLE, $24.77) are close by as well. With IBB hugely overbought, I am recommending a short position in that fund this week for the portfolio. If the market starts building downside momentum, I will also shift funds into the bond market and add additional shorts to our positions. This week's instructions are:
MODEL ETF PORTFOLIO
SELL SHORT 100 SHARES iSHARES RUSSELL 2000 INDEX FUND
(IWM, $90.40) ON A BOUNCE
Other reasons to believe we are en route to a substantial correction include:
******************************************** SELL SHORT 100 SHARES IWM AT $91.70, BUT DO NOT SELL ABOVE $92.45 TARGET: $85.01 Assuming a short sale at
$91.70 and a cover at our $85.01 target, the potential profit from this
trade is $669, or +7.3%. (6.) CONTINUED GUIDANCE ON PREVIOUS TRADES BOUGHT 300 SHARES SOFTWARE
HOLDR (SWH, $32.74) AT $31.90 The technology sector is headed for some short-term trouble. Although prices might bounce early, I do not want to get fancy here. Close this trade at the open on Monday morning. If prices open at Friday's close, then your profit will be $252, or +2.6%. ------------------------ SELL SHORT 100 SHARES OIL
SERVICE HOLDR (OIH, $63.03) ON A CLOSE BELOW ITS CURRENT UP TRENDLINE I had the right idea here in shorting OIH, as it was the only equity-linked ETF to fall last week. Unfortunately, my requirements for entry were very restrictive and we never entered the trade. I have presented you with a number of better opportunities for shorts this week (see above), so I have decided to cancel this trade. Thanks again for reading this week's issue, and good trading in the week ahead!
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