MARKET STATUS & COMMENT

Last Sunday I advised that investors may need "to pause and reassess the conflict's impact on markets. Some uncertainty has been reintroduced to the equation." The markets struggled all week in accepting more realistic war outcome expectations.

Volume is light on down days, and high on up days. Bulls would characterize this drifting downward as profit-taking from the prior week's emotional run-up. A retracement back to $26 on the QQQ's is good. However, before we can enter the market long, strength needs to be demonstrated again. Bears would look at the charts and declare that the markets failed to make new highs making the recent rally just an impressive bear market rally. Before we would short the market, significant weakness will need to occur. Frankly, the bottom line is that we're back in the middle of the $23.80-28.00 trading range that I outlined for you last week.

YHOO and EBAY have both crossed the overbought marks that I implied was near. NTES and SINA failure to surpass their prior highs indicates a failed double top. My position is that I never own or encourage subscribers to own stocks when my primary market index position is short or in cash.

The commodity, currency, and bond markets highlighted last week all showed some recovery from the severe selling that had occurred over the prior two weeks. These markets should be avoided.

We remain on the sidelines in cash.

MARKET STATUS & COMMENT

It was supposed to be quite a week, and it was. It's difficult for our system to catch sharp initial up or down market moves such as we just experienced this past week. The best we can hope for generally is to be in cash when these kinds of movements take place.

When we were close to shorting the market two weeks ago, I refrained because volume was incredibly light and other markets; (gold, crude oil, CRB, currencies, and bonds) were very overbought and linked to prevailing stock price movements. For the past month, I've been discussing that as the equity market drifted lower, these other key markets were moving sharply in an opposite direction. As this was taking place, a rubber band snapback was inevitable. This was enough to caution subscribers involved in those markets to exit from them and stand aside. First gold turned over in early February, followed by currencies, bonds, and crude oil on March 8th. While we don't currently provide signals for these markets, their linkage and importance to our market analysis can't be overstated. Every strongly trending market is interesting, especially given their relationship to stock price movements.

The sharp emotional rally in the Nasdaq has left it, and the QQQ's, in the extreme upper portion of the 6 month trading range meat-grinder that has frustrated the success of most trading positions. Market volume has increased dramatically and shorts have been squeezed. We will enter the market "long" should the QQQ's break and close above this trading range. A pullback may also occur this coming week, allowing for an alternative entry.

The Nasdaq presents an interesting picture with the 200-day moving average starting to flatten for the first time since this average turned lower in October, 2000. Also, this is the third time in the last six months that the index has moved above this much followed average, with prior attempts leading to failure.

In the Nasdaq, strength can be found in internet based stocks, as internet usage has significantly increased during this period of international tension. Last month I noted that SINA and NTES had topped-out and should be avoided. Further, subscribers interested in buying these Chinese internet portal stocks, were advised to wait until a retracement to $5.50 and $10.50 respectively occurred. SINA did so on March 11th, and NTES, on March 10th. EBAY and YAHOO are leading the way in US internet stocks. EBAY is rapidly becoming established an internet juggernaut with a remarkable platform upon which to develop and grow its business. However, EBAY currently is approaching an overbought status.

It would appear that the Iraqi conflict is going reasonably well. However, toward the end of last week, many expected the Iraqi regime to collapse immediately, allowing troops to stroll into Baghdad unopposed. Over the weekend, events have made that outcome appear more difficult to achieve. Sporadic acts of violence, terrorist actions from within and without, potential conflicts with Turkey involving Kurds, killed and captured Americans, and highly negative and jingoistic Middle East media combine to make the result murkier. This may lead investors to pause and reassess the conflict's impact on markets. Some uncertainty has been reintroduced to the equation.

MARKET STATUS & COMMENT

Barring something unexpected, the long awaited conflict with Iraq will commence this week. Bulls may have already priced-in a quick US coalition victory. Bears were pounded last week, but may be only hibernating.

Last week we came within an eyelash of shorting the market. This week we are close to going long. Such is the indecisiveness of this trendless market environment. This back and forth action is what makes trading difficult and cash the prudent alternative. It reminds me of a recent Warren Buffet comment that "occasionally, successful investing requires periods of inactivity."

This coming week will be eventful for both geopolitical events and the markets. If trading signals are generated, you will be notified.

MARKET STATUS & COMMENT

The rubber band effect I've been discussing as a potential event occurred today. Equities, by my measurement, were not that oversold; however, bonds, currencies, and some important commodities were much overbought. I've been expecting this sort of day for some time now. The bulls drew a line in the sand not allowing the QQQ's to fall beneath $23.80. Over the past two months, whenever they approached that level, the bulls stepped in to defend their turf. They knew if the market fell through this line, then a cliff dive to $19 was sure to follow.

The only question is, will this rally continue? Or, was this just a short-covering rally in a bear market? If the latter, then the next down leg could be more severe as there are now few investors short the market.

I have no signal yet and remain in cash. Stay tuned.

MARKET COMMENT & STATUS

At the edge of the cliff, or poised to rally? The QQQ's are in danger of making a new low for this move and thus retest the October $19 low. The Dow and the S&P have already fallen off the cliff and are moving inexorably to their October lows.

Volume is shrinking to levels not seen in many years. The Nasdaq only traded 1B shares yesterday, and today, only a more typically light 1.2B shares. This reflects tension and uncertainty among professional traders. Unfortunately, it also reflects retail investor fear and loathing of the stock market. It was announced today that 401K contributions have reached their lowest level in 11 years. Investor redemptions in equity mutual funds continue at consistent levels. These two factors deny markets fuel to rally beyond short-covering episodes.

Markets are rising briefly on slightly higher volume and falling persistently on light volume. This is typical of a "death by a thousand cuts" bear market. When the market rises, it does so only when professionals choose to square short positions temporarily. They "short" again soon thereafter, frustrating hopeful bulls. If the QQQ's break the $19 low, a more serious sell-off would result.

What do the bulls have going besides contrary opinion? As I've been pointing out, bonds, currencies, and commodities like gold and crude oil are seriously overbought. Energy and gold have started to sell-off as I indicated would happen two weeks ago. Bonds and currencies remain overbought and can remain so while continuing to rally higher while stocks sell-off. However, the further bonds and currencies rally from here, the greater the rubber band gets stretched and the more significant the snapback rally in stocks will be. How or when that occurs is anyone's guess, but it's just a question of time. We've already witnessed sharp rallies from reallocation of bonds to equities in early mid-October. So, it's logical to expect another such event.

How long could such a rally last? If significant bond money comes back to equities, the rally could be powerful. However, if it doesn't pull retail investors back in, then it will just be a short-covering rally. Powerful and dramatic, but still just a bear market rally. My fear is that this bear market with its attendant losses and scandal has caused us to lose a whole generation of investors.

Since late October, the Nasdaq has done little but caused systematic traders like me to lose money. Tomorrow, March 12th, may be significant technically as the Nasdaq hovers once again at a significant level. I will continue to make indicated trades. Stay tuned.

MARKET STATUS & COMMENT

Just when I thought we might get a short signal, the market rallied enough to keep us out.

I caution subscribers that any action alert we might send out now will contain HIGHER RISKS than one would normally expect. The reasons are tryingly apparent. Low volume persists owing to uncertainty surrounding terrorism and Iraq. Bulls are convinced of a quick US victory that will lead to a massive short-covering rally as money is pulled off the sidelines and into the market. Bears think this news is already priced-in and point to continued mutual fund redemptions as a drain on buying power.

If we were to short the market, and war ensues culminating in the quick US victory that the bulls perceive, a major counter-trend move could be the consequence. Investors short would have to cover quickly with potentially large losses. Then again, if the smart money believes victory is already priced-in, investors long the market will also be losers. I can envision a day where we experience a significant rally that is met by an even greater sell-off and major move down.

The Nasdaq/QQQ's are hanging to critical support levels, while the DOW and S&P seem much weaker. Surprisingly, Thursday evenings negative news from INTC did not translate to a collapsing Nasdaq/QQQ's on Friday. Perhaps traders were just squaring-up positions before an uncertain weekend.
If an alert is generated, we will notify you despite prevailing conditions, but please fasten your seat belts!

FEBRUARY COMMENTARY

Perfomance Summary & Comparison
	IWM ULTRA	IWM Buy And Hold	Morningstar Small Cap Fund Average
February 2003	0%	-3.00%	-2.72%
Year to Date	0%	-5.01%	-5.46%

February 2003

"How horrible, fantastic, incredible it is that we should be digging trenches
and trying on gas masks here because of a quarrel in a far away country between people of whom we know nothing."

Neville Chamberlain, 1938
(Upon Hitler's taking of the Sudetenland)

America experienced a February much like Britain 65 years ago. Terror alerts and war versus peace controversies dominated our attention all month long. The markets, and our own trading systems, continue to tread water as we all await some certainty and resolution to the Iraqi situation.

Economic indicators have been mixed with good manufacturing and GNP news, but very weak consumer sentiment. A friend of mine owns and operates a stamping plant in Chicago that supplies the auto industry. His business, owing to brisk auto sales, had been very good up until last month. Now, he says, all his orders are frozen pending an outcome with Iraq.

The daily and weekly Nasdaq charts (reflect a range bound market. As you can see by the charts, the trading range itself is getting tighter as time goes by. At the same time, volume is becoming lighter exacerbating price swings within a narrow range. As we have witnessed over the past few months, sustainable trends and trades in this environment are difficult to maintain. Like business conditions for my friend in Chicago, the charts reflect a market held captive to uncertainty and event risk.

There are many unanswered questions for investors. Is the conviction that the US will quickly win a war in Iraq already factored in to stock prices? Does this mean equity prices will fall on that news? Or, will the markets have the relief rally so many anticipate upon a quick US victory? If the latter, how far could a rally extend? Worse yet, what if the war goes poorly for US forces? And, perhaps more importantly, what other battlegrounds will we face globally and at home in the years ahead? It gives everyone pause, as no one knows the answers. We can only keep trading, as the next signal could be the one to produce significant returns.

Are there signs of inflation ahead? If you think the charts hold evidence of inflation building beyond current events, you may be right based on other issues. The growing federal budget deficit needs to be financed causing lower bond prices and higher yields. The impending end of the inflation-hawkish Greenspan era may signal more uncertainty and inflation anxiety. Basic materials prices that constitute the CRB (Commodity Research Bureau Price Index), beyond crude oil and gold, indicate rising demand and future price pressure. A declining US Dollar, if it persists, is also inflationary. Finally, should the economy expand sharply from its current doldrums visible signs of inflation would be quickly apparent.

Let's look at some relevant "weekly" charts that reflect some of these inflationary trends:

• CRB (Commodity Research Price Index). The CRB reflects a broad range of basic materials from grains, textiles, metals, and energy. This basic index has been trending strongly higher as most commodity markets have been strong.
• Platinum. This metal better reflects both industrial demand as well as inflationary pressure. It is performing comparatively better than gold.
• Gold. Prices have fallen substantially from their highs of two weeks ago.
• Euro Currency. The strong Euro does not reflect a strong European economy, but rather simple repatriation from US markets. If anything, the overall Euro economy seems weaker.
• US 10-Year Treasury Bond. Bonds have a lot of air under current prices in my opinion, but they are felt to be safe-parking for now.

Two weeks ago, I said that these markets were all over-bought. Since then these markets, with the exception of bonds, have all either gone sideways or gone down. Perhaps they are just pausing and catching their breath. They too are held prisoner to current events. I would not have any positions in these markets.

Here is a link to an article forwarded to me that is very critical of the current real estate driven mortgage boom. It is interesting and intended to alarm. Not included in the essay are two important factors. If mortgage debt is too high, will the government accept more inflation as a method to keep asset values high? Further, the essay does not take into consideration dual household income due to both spouses working. If not properly included, then conclusions that real estate related debt is too high would be wrong.

One thing we all know though is that most individual investors continue to shun equity markets for the perceived safety of real estate investments. We also all know of circumstances where individuals are in a bidding frenzy for select properties. In Hawaii, where we are located for the season, I know of many couples that have said, "Dave, we're putting our savings in real estate because we don't want to leave it in the losing stock market." This common mentality feeds on itself among retail investors and will serve to limit upside to the stock market. Higher interest rates will cool housing prices ultimately. In the long run, retail investors are usually wrong.

Both NTES and SINA have fallen sharply since we highlighted them as sell candidates two weeks ago. SINA traded down to the a retracement price of $5.50. NTES declined to $11.50 versus $10.50 I indicated as correction target. I still would not have a position in these.

SUMMARY

Cash is king. But, things can change quickly.