Market Summary

The markets recovered somewhat from last week's sell-off and the major indexes closed modestly higher. The DJI gained 0.36%, the NASDAQ Composite added 0.55% while the S&P 500 closed barely higher by just 0.05%. Steadying influences that allowed this mild recovery were:

• predictions from the Federal Reserve's Open Market's Committee that modest economic growth would continue despite the housing sector meltdown;
• an improved outlook for technology stocks following analyst upgrades on Cisco and Intel and better than expected profits by ORACLE
• a drop in year-on-year inflation as measured by the core PCE deflator to below 2% - the Fed's target range.

The gains were constrained by ongoing concerns that the losses from sub-prime lending are still being hidden from scrutiny. On Friday, Bloomberg reported that the ratings agencies were slow to write down credit ratings on $200 billion dollars in loans, that this was just the beginning and that eventual losses "may rival the savings and loan crisis of the 1980s and 1990s". Nervousness was further aggravated by news that the SEC is investigating the two Bear Sterns hedge funds that are in difficulties.

While the economic picture is improving we continue to be cautious about the immediate prospects for the markets. We showed last week that the S&P 500 may be forming a head and shoulders pattern and more evidence of weakness appeared this week despite the index's narrow gain. The index rose above its 50 day moving average 3 times intraday but failed to close above the 50 dma each time and closed the week 6 points below it. Repeated breakdowns through the 50 dma is one of the criteria we use to select stocks for our '50 dma Breakdown' list of stocks for possible shorting.

The number of confirmed breakouts fell to 12 this week, but as usual they comfortable beat the indexes by gaining an average of 1.62% by Friday's close.

There were no new features added this week.

Stay in Cash during the Holiday Week.

As we said last week and was confirmed on Friday, markets are likely to be volatile until the extent of the subprime CDO (Collateralized Debt Obligations) debacle is known. Additionally, trading is likely to be light as the markets are closed on Wednesday for the July 4 holiday and many will take the whole week off.

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