TOP OF THE NINTH
by Stephen Tetreault
August 2, 2005

I believe unlike those on bubble-vision that we are in now in the top of the ninth inning in this proverbial game with regard toward this huge swell of bullish tonality and as such we need to forge ahead in a very cautionary environment (especially if you take on new long positions) as we are now trending in my opinion within a proverbial mine field and one slip and boom/bang�down we go. Please remember that stocks drop 3-4x quicker than they rise, and any disappointment at these nose bleed valuation levels will be dealt with severely and quickly....so please remember that when in doubt, stay-out, if you enter the game, keep your share size manageable and utilize good money management techniques that I have emphasized many times until we can once again see an trend establish itself. The Big question has still yet to be resolved and that is whether the market is undergoing another major shift in sentiment after the patriotic rally or now that we have reached an all-time high in the Russell-2000 and 4-year highs in the SPX and Nasdog will it stall-out and then resume the downtrend that was in process, this is the 11^th day after that knee-jerk (liquidity infused rally, and as such we are ripe for a pull back�the Weekly/Daily and 180/120/60 minute charts are extremely overbought and we are start to see significant signs of distribution on a rotating sector basis into strength (see technical sectors below).

From my vantage point the giddy bulls induced by loco-weed better take heed, as according to the tape that I reviewed it appears that after a moot/mundane opening the indexes stalled ahead of the ISM report and then following the better than expected numbers released the markets/indexes barely budged on the bullish pro forma report. The talking butt-heads were touting this ISM report as a Goldilocks release, as had the ISM numbers been significantly stronger than there would have been a wave of fear that the Fed would be forced to continue to raise rates at a rapid pace. And conversely had it dropped back down within the downtrend then the market would have been worried about a significantly slowing economy. The bond market however unlike the equity markets were not as delighted with the bullish ISM release and we saw that they quickly dropped to new recent lows right after the release (higher yields) and indicates that the bond market is signaling that the Fed will become more aggressive with its interest rate pace.

We also got a glimpse at the June's (a lagging indicator) that construction spending showed slower spending than had been expected, falling 0.3% versus an expected rise of 0.7%. This was the fourth consecutive monthly decline but for the most part was ignored by those pundits on bubble vision and in my opinion these numbers should have raised a huge yellow-caution-flag. We also saw that May's number was also revised lower to a negative 1.7% from previously a previously reported negative 0.9%, and this downward trend in my opinion is very troublesome thus flashing a yellow-neon-caution signal, and another negative reading would start to flash a red-flag.

What was amazing today was that I heard that several economists have raised their 3rd and 4th quarter GDP forecasts based on last week's 2005Q2 GDP pro forma report, raising their 3rd quarter forecasts to between 4.5-5.0% based on the impact that depleting inventories had on last week's report. This is a ridiculous methodology in forecasting; however it did get press and headlines in bubble vision land. On Friday we saw the preliminary GDP release state: Real gross domestic product increased at an annual rate of 3.4% in the second quarter of 2005, according to advance estimates released by the Bureau of Economic Analysis. Conversely in the first quarter, real GDP increased 3.8%. The major contributors to the increase in real GDP in the second quarter were personal consumption expenditures, exports, equipment and software, residential fixed investment, and government spending.

What went un-reported with the GDP release on Friday for the most part was that the estimates released reflected annual revision to the national income and product accounts (NIPAs), beginning with the estimates for the first quarter of 2002.

I'm sure that Kudlow and the other host of talking butt-heads didn't dram any-attention to these revisions. To make a long story short�(you can review the numbers yourself if you like) but the synopsis of the major revisions for 2001-2004, stated that real GDP grew at an average annual rate of 2.8%....this was 0.3-0.7% less than in the previously published reports/estimates�.the largest quarterly revisions to the percent change in real GDP were for the first quarter of 2002 (where we saw a drop from 3.4% to 2.7%), for the fourth quarter of 2002 ( we saw a drop from 0.7% to 0.2%, for the fourth quarter of 2003 (from 4.2% to 3.6%), and for the fourth quarter of 2004 (from 3.8% to 3.2%). Thus we saw that the percent change from the preceding years in real GDP were revised down for all 3 years: From 1.9% to 1.6% for 2002, from 3.0% to 2.7% for 2003, and from 4.4% to 4.1% for 2004. So how the hell can these analysts in good faith come up with these ridiculous guess.

Also we once again saw the hedge funds pump up crude and associated energy prices as crude prices surged today as crude closed at $61.57 a barrel up $1 for the session with the rally on the back of the death of Saudi Arabia's King Fahd Bin Abdul Aziz. The contract traded as high as $62.30, the highest price ever for a benchmark contract before pulling back a tad. Other energy futures followed suit, with heating oil closing at $1.7169 a gallon, up a whopping 2.4%, and unleaded gas pushed up 1.2% to close at $1.7471 a gallon�.and not to be outdone natural gas closed up 3.4% at $8.154 per million British thermal units. And there appears to be little contagions to these price levels, and bullishness due to geopolitical concerns, terror concerns and the overall demand picture. However if we are to believe the talking butt-heads we have nothing to worry about as these prices are easily absorbed and will not be a determent to the economy or the ability of the consumers to continue their wild spending ways. What stupid statements that they make�as last year at this time it cost me approximately $22.00 to fill my gas-tank from near empty yesterday it cost me nearly $41.00, last year I filled my heating oil tank (400+/- gallons for $520-535, this year it will cost me almost $300 more�and these increases alone will soften the discretionary spending by consumers, despite what the data and talking-butt-heads allude to.

Today we saw several bullish releases that helped to put a floor under the market:

The ISM manufacturing index rose to its highest level of the year in July, according to the release today from the Institute for Supply Management. As the index rose to 56.6% in July from 53.8% posted in June; and the talking-butt-heads were so quick to point out that this was the 26^th straight month of expansion in the sector (a reading above 50). The street was expecting an increase to 54.5%, hence this number was a positive surprise. Bonds quickly extended their losses after the data was released. What the talking butt-heads do not say is that this index has fallen for six straight months into the month of May where it hit 51.4% then miraculously it rebounds; [lease remember that this is also just a survey]. So quickly the bulls were being lined of on the airwaves touting with the mantra that "It appears that the sector has bottomed in May.� No where did they convey that this is a seasonally trend prior to the anticipated holiday-season; we saw that the new orders index rose from 57.2% in June to 60.6% in July, the highest reading since December. The production index rose to 61.2% in July from 55.6%, the highest since September; and much to my amazement in an environment of corporate mass-lay-offs the employment index rose to 53.2% in July from 49.9% in June. Also confounding to me in this report was that the prices paid index fell below 50% for the first time in over 40 months, dropping to 48.5% from 50.5% in June. What was slightly disturbing was that backlogs of orders declined in July.

The talking butt-heads were delighted and giddy with the reception of this news blip from a self-serving agency, and they repeated the news throughout the day�The SIA stated today that Global semiconductor sales totaled $17.98 billion in June, and was just a slight drop of 0.5% from May's $18.07 billion, in sales reflecting in their opinion that inventory adjustments in the distribution channel and price attrition in DRAM chips were positive developments. The sales also rose by 0.8% from $17.84 billion reported in June 2004, last years mark; its very important to note that the SOX/SMH have also risen back to the same levels seen last June as well. The SIA release also noted that global sales for the first half of 2005 came in at $109 billion; 6.5% higher than in the comparable period of 2004, with expectations for stronger growth coming for the semiconductor sector during the second half of the year. Semiconductor manufacturing capacity utilization rose in the second quarter after two quarters of sequential decline, and most of the major end markets for semiconductors saw unit sales substantially above expectations in the June quarter.

• However when I reviewed the various earnings reports throughout chip-land we saw good results for the seasonally weak second quarter but I also saw relatively cautious guidance expectations for the 3^rd quarter�.and this overall guidance was given as investors have been building up positions up during the previous two months on the hope that guidance and overall fundamentals would improve significantly; this is not what we have seen from those reporting at all, just the bullish hypsters. It's important to note that the SOX index is up almost 24% since May and almost 15% since the start of July. For the year, the index is up 9%. We have seen reports that PC shipments rose in the 2^nd quarter, but I'm very concerned about this as I do not believe this pace is sustainable through the end of the year. Despite the fact that indicators for some chips are positive, strong demand for cell phones and MP3 players, these factors are in my opinion entirely baked into the cake in my opinion. Near-term folks I do not see much on the horizon that would/should spur investors into more bullish positions here, quite the contrary they may very soon start to book these huge realized profits. These stocks are very pricey here and I don't see a killer applications looming on the horizon. As I have said before the fact that tape points to investors and traders are on the proverbial edge ( GREED makes them stick with the slight trend) and that any kind of a selling (FEAR and they hit the sell-button very quickly) rings the ship-is-sinking bell and herd starts running for the exits; not a very bullish scenario in my opinion.

Despite the host of pro forma data being released I still see a multitude of contagions to our overall economic health, and I'm in a very shrinking minority view I know. Let's face it folks, we would have to have our heads buried in the sand like an ostrich, not to see the signs�.we have seen increasing energy and commodity costs, that will surely impact consumer discretionary spending far greater than currently expected�.we have seen that spot gasoline costs have risen 45-60% (and even more at the pump) during the past year, home heating oil has risen 60-75% as well, and light-sweet-crude powers upward (see chart) and as the summer comes to a close, these increases will surely impact discretionary incomes (strip extra spending income away from the average consumer) as we approach the winter months. Also the CRB index is still on a trend upward part despite this recent pull-back (thanks in part to steel and metals) and we could see a retest of the recent highs soon (see chart)�Oh and lets not forget the Federal Reserve , and a Fed who is on a continued path to raise interest rates and the ever-ballooning �Twin-Deficits� Also with just over 70% of the SPX firms reporting earnings, the earnings season is quickly coming to a close and the headlines of earnings strength (managed, massaged and pro forma) will no longer be an influencer.

Total national health expenditures increased by an estimated 10.2% in 2004 and in 2004, employer health insurance premiums increased by 11.2% - nearly four times the rate of inflation and employees also had to absorb an ever increasing share of these increases. The annual premium for an employer health plan covering a family of four averaged came in close to $10,000; and the average annual premium for single coverage came in at $3,695. It is estimated that between 2001 and 2004, increases for national spending for prescription medications averaged 15.7% and almost all of the leading experts agree that our health care system is riddled with inefficiencies, excessive administrative expenses, inflated prices, extremely poor management, inappropriate care, waste and fraud, and they even allude to corporate �book-cooking� so the proverbial insiders can continue to reap huge benefits. And all of these problems significantly increase the cost of medical care and health insurance for employers and workers alike which will also eat away at Americans real earnings and take-home pay and discretionary spending. (Read this interesting report from national coalition on heath care)

On a Bullish note�.Still despite this bullish run�the markets are acting in a very skittish manner (like a long tailed cat in a room full of rocking chairs); this bullish tonality that is being exhibited on a daily basis thanks mostly to the Fed's continued liquidity injections (strange if they are truly trying to fight inflation) and the various orchestrated short-squeezes due in part to selective upgrades. As I have said before the markets have thrown a proverbial curve ball as the old historic trend/proverb that promotes "Sell in May and go away and stay" has resulted the proverbial conundrum as those that have adhered to and utilized it, now are starting to feel some significant pain�and now since we saw a huge upward thrust after the patriotic rally those that have been sitting on the proverbial sidelines are now distinctly underperforming the overall market and various indexes that they are benchmarked against. And those currently on the sidelines are caught at the cross-roads, in sort of a catch-22 and they are slowly (due to the emotion called greed) being forced out from the shadows, and forced to buy at these overly inflated valuations. Especially in the small-cap/mid-cap arena as today I heard that the forward P/E of the Russell-2000 is approaching �35� and many have been giving lackluster guidance so far. The bulls have been in the driver�s seat for the 3rd Quarter as it’s off to a blazing start so far�but that may soon come to an end (read-bearish note below, and technical section). So far for the 3^rd quarter�month of July:

• Dow is up 3.6% since the end of the 2^nd Quarter (June 30^th)
• SPX is up 3.5% since the end of the 2^nd Quarter (June 30^th)
• Nasdog is up 6.2% since the end of the 2^nd Quarter (June 30^th)
• Russell-2000 is up 6.2% since the end of the 2^nd Quarter (June 30^th)
• And the SOX is up a whopping 13.2% since the end of the 2^nd Quarter (June 30^th)

And I'm betting that those fund managers that were on Vacation the first week of July, and that sat on the sidelines after the London bombings because of the potential of collateral damage, are now grimacing with thoughts of�.If I do not hold my nose and by some of this overly inflated crap here will I be left behind even further and have to chase it at even higher prices, and if I do not buy here then how will I attract more clients and in the end reap greater bonuses and add to my wealth by detaching them from their money� These fund managers are currently finding themselves town between their greed, and their rational reflections and ponderings that this market is extremely over-extended and over-valued despite what the talking butt-heads are suggesting, within an deteriorating economic environment�in an rising interest rate environment.

On a bearish-note: The big three indexes which have seen the greatest moves and largest gains of late may soon become subject to selling as we encroach into the capital-gain tax timing zone wherein they will no-longer become subjective to short-term tax rates from 28-39% but will be able to enjoy tax rates as low at 5-15%�and this is a huge advantage folks�to the bottom line of many portfolios. This though was presented to me by a long-time friend "Ken" and I being a short-term trader almost forgot the impact capital long-term vs. short-term gains....As you can see from the analysts below�.

• Nasdog bottomed at 1,752.49 on 8/12/2004, and since then has run up a whopping 443 points at Monday�s close of 2,195.38 this is a 25% move in a year, and we have a tremendous amount of profits built up here folks
• The Russell-2000 bottomed at 515.90 on 8/13/2004 and since then has run up a whopping 167 points at Monday�s close of 682.80 this is a 33% move in a year, and we have a tremendous amount of profits built up here folks, in underlying issues that for the most part are illiquid (small average trading volumes, and small-floats) and we have certain sectors within the group (homebuilders, retailers, energy, REIT�s, and various other beta-players) that have experienced huge runs, and are sporting huge P/E ratio�s and P/S ratios, and once the selling starts these issues will crumble very-quickly.
• SPX bottomed at 1,060.72 on 8/13/2004 and since then has run up a whopping 176 points at Monday�s close of 1,235.35 this is a 6.8+/- not a huge move but a good one nevertheless; now what is very disturbing is that so many of the underlying players within the index like homebuilders/energy-patch players are up are up 100-150% and the propensity to start booking profits may be overwhelming when the selling starts.

Technically Speaking

Well folks since the London Terrorist event (17-trading days ago)�the indexes had dipped initially, but very-quickly rebounded and have since been on a steady rise **{the Dow has gained almost 480-points, the Nasdog has gained almost 145-points, the SPX has gained almost 52-points, the Russell-2000 has 44+/- and the SOX has gained almost 49-points} due in large part to a surge in ETF/Futures and they so far have never significantly paused as we continued to see daily manipulated gaps. And when ever it appears that the indexes are starting to roll-over, a futures/ETF buyer(s) have tended to appear miraculously to put a floor under the markets and/or to help orchestrate a short squeeze, as they usually buy without any real care for prices received. In my opinion the lack of any pause during the patriotic induced rally, *really a huge-short-squeeze in disguise* which was likely the strongest short squeeze I have seen so far this year, may have taken its course and run out of steam; and if I'm correct in this analysis the old trend (down) will resume very soon....

• The DOW, (Dow Daily Chart) is suggesting that a near-term top may have been put in last Friday As the Dow closed today below the 10sma crossing at 10,639 confirming last Friday's downside reversal candle hinting, the low-range close today sets the tone for a neutral to lower opening on tomorrow; The Stochastics and the RSI indicators are overbought, diverging and are turning bearish signaling that a near-term top might have been triggered on Friday, or is very-near. If we see a close below last week's low of 10,579 and the previous weeks low of 10575 (very-close to each other) then we could conclude that a double top has been posted. Now if for some reason the Dow manages to find some bullish fuel and thusly extends July's rally, the 75% retracement level off of the March-April decline crossing at the zone of 10,740-10,745 would be the next likely zone to be assaulted before a run at the old yearly highs can be staged. The Dow weekly chart is very-overextended as well and looking very-toppy here as well (Dow Weekly Chart) as its very-unlikely from these levels that a strong up-thrust can be started. The monthly chart however is giving us a mixed picture (Dow Monthly Chart) as the Dow could rally up to the top part of the ascending wedge pattern at 10,750+/- before rolling over, though we are seeing negative divergences on the MACD.
• On the SPX, just like the Dow I am seeing distinctive signs that this liquidity-induced patriotic rally is fizzling, and the SPX bulls better pray that we see do not experience a hard selling into the end-of-the cycle of earnings reports. I believe that better than expected earnings that we have seen are already baked into the proverbial cake and then some. So far the index has been kept afloat by low bonds (which we have seen, have reversed course of late) , great-expectations for energy stock earnings due to soaring crude prices, and a renewed interest in mid-cap speculative stocks, which has helped to sustain the index. As I have mentioned before wrote before the SPX weekly chart depicts a rising wedge pattern and any break to the downside could get very nasty�we are quickly nearing the top of that trend line�the Index is showing distinct signs of hitting a or is very-close to near-term top�however we can not rule out an explosive exhaustion/volume climax event�.a long term rollover here which should take us down to 1165+/- as a minimum and I would not rule out a 100% retracement of the entire move as there was very little support built into the recent rally. A breech of this support zone would be disastrous for the bulls as we could see a drop down to 1090-1095� The (SPX Daily Chart) is also showing signs of exhaustion after this move/rally and that lasts weeks relative high could have been a near-term relative top�then we have the SPX-Monthly Chart which is also displaying signs of a near-term top�as well.
• The Nasdog seems to be hanging on to its euphoric tonality activity the next level of overhead resistance comes into play at 2,210-2,220 and it will take the bulls quite a bit of liquidity to push further here through that level, thereafter 2,267-2,274 will be a huge hurdle, the charts are flashing near-term bearish divergences, and money flow is weakening, and the near-term charts are getting pretty over extended; as you can see from the weekly chart the index is very over-extended, and is showing signs of a near-term top, and several negative divergences. And it sure is looking like a double top here, and not a situation where we would see a breakout Nasdog Daily Chart Nasdog Weekly Chart
• The Russell-2000 has been the most bullish of all the major indexes as it continues to surge ahead and continues its break-out to new-all-time-highs due to hedge funds and mutual funds fighting for their existence, and continuing their borrowing spree of cheap money, thanks in part to the liquidity infusions from uncle Greenspam (as they still pump carry-trade and running the small/mid cap stocks significantly higher, despite the looming energy and economic contagions, as this index and the underlying stocks have been on fire, however this index is extremely toppy here and the foundation is extremely unsound, as these stocks are for the most part very illiquid; and once profit taking starts the rats will be jumping all-over-each other as they race for the exits.�the charts are extremely over-extended here and a significant retracement could be just around the corner as earnings start to slow/diminish, and the economic conditions are softening (Russell Daily Chart) (Russell-Weekly Chart)
• The SOX as is the Nasdog/Russell-2000 quite extended here�and as you can see from the charts the landscape is littered with potential mine fields as it nears the 38.2% fib retracement from the longer-term recent move down� SOX daily Chart SOX Weekly Chart SOX Monthly Chart
• The Volatility Charts and indicators are suggesting every increasing levels of complacency, not indicative of a sustained significant move to the upside from here these charts are at record lows, and as a contrarian indicator for this excessive and continued bullish euphoric move, we could see a reversal come out of nowhere�.(VIX-Daily Chart) (VIX-Weekly Chart) (VXN-Daily Charts) (VXN-Weekly Chart) as I believe we are getting real close to a top. We also have several other Bull/Bear sentiment indicators flashing extreme bullish-sentiment (see charts) This excessive bullishness has also pushed the broader indexes, SPX, Wilshire and NYSE Composite to near to their multiyear highs. Now the question for us to digest and ponder this week and heading forward is will it euphoric condition last, and is there fuel/liquidity (see section below) enough to even sustain this recent push. The recent dollar's bullishness is also in question as well, (see chart) and a fall-back could also affect returns

A positional recap�.The recent gains that we have experienced in the Month of July have been very significant and for the most part they have mitigated most of this year's losses in the various indexes; and these gains have been realized in a very brief period of time, and the indexes have surged despite the economic pro forma data suggesting softening in the economy (I sincerely believe that the data if truly reported would show more weakness than most believe). However we continue to see a huge positive market influence being placed on survey data (key-word is survey, not real hard anecdotal data, just opinions and most often these opinions are self-serving from the various CEO/CFO�s surveyed) as the trends still point to various contagions that continue to cast storm shadows over the entire markets/indexes and I do not see them mitigating in the near-future, in fact I see them strengthening into a very powerful storm that could turn into a Class-5 hurricane. We have continued to seen a bevy of lackluster earnings guidance, and conflicting economic data points, and a continuing weakening jobs market (despite the pro forma reports), and we see additional releases of various reports this week that will either point to renewed weakness in the economy or some newly discovered strength in the data.

• The Dow started the year off at 10,783.01 ran up to a relative reactionary high of 10,984 on 3/7/2005 and then subsequently fell almost 1000 points to the reactionary lows of 10,000.46 on 4/20/2005 and its been on a slow and stair stepper rise for the past 3+ months and its within striking distance of where the index started the year. We ended the secession today at 10,623.15, and as such the Dow is still negative on the year by 159.86 points for the year so far, and it has been the weakest index of the big-three players�and even if the bulls are able to sustain and push the recent bullish even higher into this month of August�and manage to retest the yearly highs I believe it will be extremely hard for the index to push mush higher within this environment. I believe the next pullback/retracement will most likely be far deeper and worse than many expect as we are getting real close to starting another leg down in my opinion�we Hit a high this past Friday on window-dressing of 10,754.60 before reversing course into the close, and this may be the high posted for the this recent push
• The Nasdog started 2005 at 2,175.44 and it fell on hard times right from the start as it slid downward on a slippery path into the reactionary lows posted on 1889.83 posted on 4/29/2005 a drop of 285.61 points; and since hitting that bottom it has been on a proverbial rocket ride for the past 3+ months, as it has regained all of its yearly losses and is challenging and making new 4-year high; and the folks on bubble vision are extremely smitten with excessive bullishness at this development. We ended the secession today at 2,195.38 and now the Nasdog is green on the year by almost 10-points for the year so far. But please before you become caught up on the wall-street hype being perpetuated by the likes of Jim Cramer, Joe Batapaglia, Tobin Smith, and the Abbey J. Cohen and other well known bullish hypster, who only appear bullish to serve their own self-interests or those they are working for�the same folks who never see any negative issues with regard toward valuations and earnings growth�these are the same clowns who said to by the Nasdog stocks with reckless abandon when it was trading north of 4,900 as it was headed to 7,000 then 10,000 now once again want you to put on blinders and just buy/buy/buy�Its amazing to me how they, and now they want you to do the same; forgot the bursting of the technology bubble, in 2000-2001, and the pain it inflected on millions of investors. These same folks once again want you to done your blinders/sunglasses, put your iPod on and crank it up with the repeat button triggered on the song �Let's party like its 1999� all over again.
• Well I have not forgotten the bubble bursting folks and at the risk of sounding repetitive, I reiterate some thoughts for you to ponder, after the Nasdog reach it bubble peak the darn index plunged over 4000 fricking points to off the proverbial cliff from the March 2000 highs of 5133, to the October 2002 lows of 1,108�that was a plunge of approximately 80% wiping out trillions and trillions of investors wealth, now since we have seen a nice multi-year bull-rally within what in my opinion is still a secular bear-market, of 1100+/- points (thus just gaining back approximately 20% of the previous mountain of losses) and the very same hypsters that were shouting and touting that investors buy Nasdog 4800-5000 have once again crawled out of their proverbial holes and are once again professing that we should back up the truck and buy stocks especially technology with reckless abandon as we are headed to Nasdog 3,000 very soon, and some are forecasting a run thereafter to 4000 within 6-18-months�this in my opinion folks is as ridiculous a prediction as it can be�please do not get caught up in the hype and jive associated with these numb-nuts and their fortune-telling abilities as their crystal balls are full of smoke. And they are suffering from mad-cow disease.
• The SPX started the 2005 at 1,211.92 and we embarked so far on a nice rollercoaster ride throughout the year as we posted a new relative high in March 1,229.11 and a reactionary low of 1136.15 on 4/20/2005 and since then in a very challenging environment it has risen on a steep path to new-4-year highs�it closed the secession out at 1,235.35 and is challenging the recent 4-year highs again; the SPX has experienced a nice rally, thanks in part to the rapid rise in commodities especially crude which helped to juice the energy components of the index as their profits have soared, and we have seen a strong-wave of hedge fund activity (buying and pumping of small/mid-cap stocks especially in the homebuilding and high beta areas) and this Euphoric buying of small/mid-caps has also helped to propel the index higher.
• What disturbs me the most is that most of the movement in the SPX�s energy components has been led by the increased speculation in crude/energy costs, and the carry trade and increased trading (hopefully for their sake positive trading revenue) associated with financials and brokerage stocks which has also fueled excessive movements in commodities (crude, steel, grains, metals etc). My main concern is that hedge funds and those hybrid growth-funds, due to excessive GREED just keep buying and buying and pumping and pumping these illiquid small and mid-cap stocks with out any reservations for taking profits in the underlying equities�despite seeing the huge wave of storm clouds and the proverbial perfect storm brewing on the horizon. And it all deals with GREED, as many are not aware many fund managers get paid quarterly based on portfolio performance and their bonus programs are tied too their portfolios, and their solicitations and ability to entice new clients into the fold are tied to portfolio performance�hence its not real profits that drive their ambitions just overall paper performance, and as such it behooves them to just keep pumping new money into existing positions with out regard for valuations and future earnings etc.. So many hedge fund managers and for than matter fund managers are over-extended with leveraged due to cheap/easy move as a result of Greenspam�s printing presses working at full capacity, and they have reaped great gains with the so-called �Carry-Trade� that being said many of these funds have little to no cash reserves and would be ill-equipped to hold the line if they succumb to a wave of redemptions based on a retracement or significant selling event, they would have to liquidate their illiquid positions and as such the proverbial flood-gates could become unhinged and a contagionous whirlpool of selling would like ensue. 570.03 4/29
• The Russell-2000 started the 2005 at 651.57 and like the Nasdog fell victim to a prolonged gradual downtrend (selling spree) as the year progressed as it dropped to a reactionary low of 571.03 on 4/29/2005, and then the rebound began, thanks in large part to the vast amounts of liquidity that Federal Reserve has been flooding the financial system with, despite their battle cry to fight inflation, and that the economy is on a prosperous path of significant growth. We have seen repeated surges to relative all time highs and according to my charts we are getting very dangerously close to a potential climatic/exhaustion top�we ended secession today up 3.05 points to close at 682.80 a new all time high.
• The SOX Not-withstanding my bearish outlook�we started 2005 at 433.31 and we ended the secession today by a tad (0.07-points) at 474.37. The SOX have staged a very nice run, by far the best performer out of the gate for the 3^rd quarter so far and has been showing the most strength of late as bubble-mania chippers/semi diehard tech-bulls are so darn bubble-minded and sort of pig-headed; but I can’tlay all the blame on them, as for the past 1-2 weeks the talking butt heads have been beating the proverbial strong-buy drums, as they claim that the semi-group has hit the trough and that the new-up cycle is upon us and will run for 3-4 years. Please folks remember these are the same fools that can’tget their analysis right for 3-months out, but we are to believe that their insight/wisdom is foretelling on a huge up-cycle for semi/chip stocks. Well even if they are right, and all the stocks in this universe see a surge in demand will never be able to sport their old growth multiples, as in my opinion the sector is now just basically commoditized�Long gone are the days where INTC can charge $400-500 for their chips�.as whole computer systems that once cost $2500-$3000 can be purchased now purchased for $300-500, and cell phone that sported price tags of $500-600+/- now are given away with 1+ year service plans. Hence this industry is no longer in a hyper growth mode and it can no longer support P/E in the 30-55 range, it has moved into a commodity mode where margins will continue to be compressed, especially when the Chinese move into the picture in a larger extent. Usually the semi-bulls (generally tech-bulls) are the last to be sent to the slaughter yards in most secular bear-markets that experience bull-relief rallies, as they cling to hopes of those once stalwarts return to glory.

© 2005 Stephen Tetreault
Editorial Archive

Contact Information
Stephen Tetreault
T-Waves
Southern Maine, USA
Email | Website