Hedging Your Bets With Matt Davio: Breakdown, Shakedown, and Takedown.
I have learned that the market is a living, breathing, forward-looking beast that always hurts the most people it possibly can. That is just the way the game works, and the equity markets are just that -- a game. 

This last week in the US equity markets we saw how the game plays out.  It is a game typically played with a few big winners and many losers.  Here’s why the downside will likely be back in charge for some time.

SPX–Bull Trap was set the first week in March with the new highs set.  However now the bears are in control and we hit my initial target of 1140 in sight.  I see 1100 as a very near support withal upside moves to 1190 needing to be sold. If 1100 can’t hold, I project 1000 on this major index at some point in the near future.

COMPX-Completely broken down with upside reward of 2050 and downside projection of 1600, yes 1600, not a typo and we did close the week @ 1908. 

INDU-I see possible upside of 10600, and initial support near 9800 on our close today of 10080.  A more likely scenario in my book is 8500 after a bounce off of 9800 on the dow and then retreating back to 8500. Any move beyond 10600 would have to come from something I just can’t predict on the upside. 

BKX-The banking index is very ugly also, closing @ 94.54, upside to me looks limited to around 98, and downside will see 80-85 we project over the next  year or so. 

HGX-The housing index broke down this week severely and closed @ 453, @ 475 which was prior support now becomes the ceiling on this sector. It isn’t pretty and we project near term support near the 400 level. 

RMS-REIT index broke down a few weeks ago and closed @ 721 this week.  We project limited upside of  755 on this sector with downside in the next few months heading towards initial support of 655 or another %10 down, with potential severity and support near 520. 

SOX-The semis broke down in Jan of 2004 and never enjoyed the bull trap the other indexes set coming into and right out of the 2004 November elections.  This chart has been ugly for almost a year and a half and still looks to have another %10 downside to 350 from a close this week of 382. The upside looks limited to 440. 

BTK-The Biotech Index is hanging in but closing @ 513, premium now needs to be sold to 550 and risk to the downside appears closer to 450. Not a good risk/reward set up on the long side.

RLX-The Retail Index closing @ 404, has limited upside in the near future @ 440 and downside risk approaching 350 in our book. 

TRAN-The transportation index really took it on the chin the last month or so, but appears headed from current 3380 range down to 3100 area very quickly.  This is not a pretty chart, limited upside potentials here to 3600. 

OIH-Broke down Friday, and could easily pull back another 10% to 80, with upside potential near term of 5% near 95.

Gold-Remains locked in an uptrend, really one of the only indexes that I can say this about.  As long as gold holds 420 an ounce,  this remains true. 

US Dollar-Broke down in 1st quarter 2002 and since then, has been locked in a death spiral.  Not suprising with the outrageous debt burden the US government has created since then. 
 
We are now in a “sell the rallies” mode.  Until the game changes, the winning team will remain in the downside camp. 

Final thought: If you bought any of the major indexes after 1998-99 and held your investments thru today you are losing money. That is why “buy and hold” in my book doesn’t work. 

Cycles come and go and the winners stay and the losers take their ball and go home. Buy and hold is the story Wall Street pitches but active management and continuous pruning is what makes money and keeps you in the game in the long run.  Without profits the game is over for the player.   Are you positioned for risk in the game?

Aloyan’s Technical Take: “It’s Falling, and It Can’t Get Up!”
The markets continue their deterioration, with a nice down-thrust last week into options expiration.  The Dow closed down 374 points (3.57%) at 10088, the S&P 500 was down 39 points (3.27%) at 1143, and the Nasdaq was down 91 points (4.56%) at 1908.  Resistance is around: 10241, 10387, and 10471 for the “Dow,” 1166, 1200 area, 1210, and 1219, for the S&P 500, and 1926, 1947, 2000 level, and 2020 for the Nasdaq Composite.  Support is at: 10050, 10000 area, 9921, and 9750 for the “Dow,” 1142, 1131, 1106, and 1095 for the S&P 500, 1900 area, 1865, and 1783 for the Nasdaq Composite.  

My sector breadth indicators turned extremely negative, with 92% of the sectors in the red.  The Drug sector led the strength, while Commodity based sectors, Transports, and overall Technology sectors led the weakness.  The dollar was, again, relatively flat on the week, failing to hold over the 85 area on the Dollar Index. Bonds rallied as stocks declined, with yields on the 10Yr Treasury Yield closing down at 4.27%. 

My trend indicators remain down for the S&P, “Dow”, and the Nasdaq.  My breadth, momentum, and volume indicators remain “bearish.”  My sentiment and economic/fundamental indicators continue to support a defensive position.

Bottom Line:  Again, this market decline for 2005 should come of no surprise to you if you have been following my analysis and forecast for 2005.  The market is falling, as it should, and you should be feeling no pain.  Cash remains king as we go into next week. 

Navarro’s Broad Market Outlook
In the course of a week, I talk with lots of folks.  In these kind of bearish times, the saddest stories I hear are from people who are long this market with their retirement nest egg across a wide range of mutual funds.  Large cap, small cap, growth, income, real estate, you name.  The sad thing is that they think they are diversified because they are in a LOT of different investment vehicles.

Truth be told, there’s a lot of overlap across mutual funds.  Worst still, a broad market decline brings EVERYTHING down.  You are not safe with a long only mutual fund strategy!

The macro fundamentals are clear: Oil price shocks and Fed rate hikes always slow economies down.  A weak Japan and German to sell exports to and a China unwilling to revalue its currency dooms our trade balance.   The Bush deficits are structural and not cyclical, meaning they are won’t go away even at full employment growth.  Consumer confidence, personal income, retail sales, and auto sales are all in, or going into, the toilet.  The housing sector is rolling over, and the refi boom is long over.

And if any of you loyal readers out there get sucked into the nice one or two-day (or week) bear market rallies and load up again, you need to join TA (Traders Anonymous) and go through the 12-step program.

Nuff said – except – If you want to get your portfolios analyzed let us know.  Friends don’t let friends go long this market.  Learn how to hedge your retirement!

Peter’s Portfolio: Short ZQK and LEN
I got short Quiksilver and have been short Lennar.  Quiksilver has been a great company that has now vastly over-reached with an over-aggressive expansion strategy at an inopportune time in the business cycle. 

My Lennar short has been painful for several months but I endured the pain because I felt it was only a matter of time.  Now, the housing sector has officially rolled over.

Three of my longs – ARDI, ALTI, ZILA – are underwater, but I like the prospects of all of them and “double down” once they find a bottom.

One of my readers turned me on to a very high risk penny stock OCCM.OB that has doubled from 12 cents to 26 cents.  It’s a broadband/VOIP.  Every once in a while I like to go to Vegas – but prefer the pennies to roulette, cause at least I got a chance.

David’s Pick: Cash.

Peter Navarro is a business professor at the University of California-Irvine (www.peternavarro.com).  David W. Aloyan is a managing member of Platinum Capital Management, and can be contacted for investment services at platinum@peternavarro.com.   Matt Davio is a managing partner at the hedge fund, Infinium Partners, and be contacted for hedge fund services at infinium@peternavarro.com.

DISCLAIMER: This newsletter is written for educational purposes only.  By no means do any of its contents recommend, advocate or urge the buying, selling, or holding of any financial instrument whatsoever.  Trading and investing involves high levels of risk.  The authors express personal opinions and will not assume any responsibility whatsoever for the actions of the reader.  The authors may or may not have positions in the financial instruments discussed in this newsletter.  Future results can be dramatically different from the opinions expressed herein.  Past performance does not guarantee future performance.