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JULY COMMENTARY

July 31, 2002

"Nothing tells in the long run like a good judgment, and no sound judgment can remain with the man whose mind is disturbed by the mercurial changes of the stock exchange. It places him under an influence akin to intoxication. What is not, he sees, and what he sees, is not."

Andrew Carnegie

July was a trying month for any trading system. Our QQQ PLUS program posted a negative return of (5.81%). The Nasdaq Index, or QQQ's lost (8.62%), while the top-ranked tech mutual fund lost (14.45%).

I say the month was trying because the volatility indicators were so extreme that no matter your trading style, you were bound to get caught on the wrong side of the market at some point. This usually happens when market trends are over-extended and reach a climax, whether temporary or not. Andrew Carnegie's above referenced quote strongly argues the case for an unemotional and systematic approach to trading.

For the last two weeks of the month, we have been in a "cash" position. The market action ending Friday, August 2nd, has crushed whatever hopes the bulls had for a near term recovery. Investors were teased by a powerful but short-lived market rally. We have been talking about follow through and it just didn't happen. Volatility remains very high and new trading positions are still too risky. Now we enter what usually is the quiet time of August. Volume has shrunk during the past few trading sessions. However, there is so much going on in the world with currency fluctuations, scandal, terror and war, and other economic issues, it's hard to imagine a quiet period. But, as usual, things change and we remain unemotional and systematic.

New Service Announcements Forthcoming

As you know, I believe in American technology. Further, if you've studied my "Sacred Cows", you'll know that technology stocks need to be traded due to the fact that dynamic change is what technology is all about. The QQQ's represent an Exchange Traded Fund (ETF) that best represents this area. When good trends are present, the QQQ's are great to trade.

My role as publisher of this letter is to give you moneymaking opportunities. As a consequence, I've been investigating other ETF's. Before I begin trading any security two important criteria new to be satisfied:

• Adequate liquidity
• Good historical trends

Many have asked me why I don't trade the Diamonds (DJ Industrial Average, ETF's) or SPDR's, (S&P 500, ETF's). They both satisfy the first criteria, but not the second. Only recently have effective trend criteria been satisfied. That's not enough for me.

However, the Russell 2000 ETF, (IWM), and the S&P Small Cap 600 ETF, (IJR) offer adequate liquidity and excellent historical trends that lend well to our trading system. The TechTrend Advisor will be offering commentary and signals on these two ETF's in the near future.

I've also been investigating foreign ETF's. Currently, only Japan offers enough liquidity with adequate trends. One of the reasons I'm in Hong Kong is to meet with professionals at the Hong Kong Stock Exchange and Morgan Stanley regarding trading opportunities available in other Asian markets. Foreign ETF's, trading in the US, are now starting to see increasing, but still inadequate, volume and liquidity. If the growing liquidity trend persists, it will give us even more opportunities to make money.

Why would I want to trade these markets? One of the things I find interesting is that investors are tending to become more globally aware. I traded Asian stocks in the late 1980's and early 1990's. The US bull market of the late 1990's forestalled any serious trading interest as the US bull market was the place to be. Now that the US is in the third year of a bear market, one must recognize that substantial capital has been repatriated abroad. At least on satellite, global 24-hour market TV coverage is taking hold and exposing these markets to wider audience. It makes sense that after scandals in the US and the inevitable shifting of assets abroad, more interest in other markets is developing. This doesn't mean the US will be a second rate market, it just means more investment opportunities will exist in other markets. Right now most foreign ETF's only offer good trending requirements, but have inadequate, but increasing liquidity. If liquidity continues to build, we want to be involved. This will likely be a gradual process.

Market Reflections at 35,000 Feet

I'm writing a portion of this monthly commentary while on a 14-hour flight to Hong Kong via Seoul. It's giving me an opportunity to reflect on some issues that are affecting the markets and have been on my mind. Most of this has little to do with technical trading, or our system, but are just personal observations about what is transpiring in the markets. So, if you wish to indulge me by reading this, fine. (I'd understand if you stopped right here, but hey, I've got a lot of time to kill and an extra battery!)

I've been guilty of underestimating the level of concern investors, the media, and politicians have about corporate accounting issues and related matters. As I've stated previously, the current scandals have been, and still may be, viewed historically as "falling action" from the excesses of the bull market of the late 90's. I keep forgetting that we always need to fix blame on someone for bad circumstances, especially in a political year. This is true in the markets as for other modern problems like who's to blame for 9/11. Finding "fall guys" to take the rap for whatever bad things happen has become a pastime during this bear market. Perhaps I've been too harsh on pinning the blame on investors' own greed, or ascribing too much to Mr. Greenspan's "irrational exuberance" comment. I have my own favorite whipping boys to blame for much of the mess investors have experienced.

Let's talk about JP Morgan, Citigroup, and the demise of Glass-Steagall. The Glass-Steagall Act prohibited banks from engaging in normal investment banking activities. They weren't permitted to do underwriting nor could they engage in general securities brokerage. The banks, nervous and jealous about the flow of money to mutual funds during the bull market, wanted the law repealed. They got their wish, and as a consequence, large banks bought brokerage firms and visa versa. Such was the case with JPM and C-each bought brokerage firms or were acquired by same. The bull market helped things go smoothly with trust officers, tellers, and frankly, any employee at the bank who could read and write, now possessing securities licenses. The banks were creating mutual fund product and pumping it out to bank clients. It was a bull market after all and they wanted to keep ALL the money within the bank.

Now underwriting fees in a bull market can be even more lucrative and this wasn't lost on the banks either. To get good underwriting clients, many firms courted them through supposedly neutral securities analysts who covered, or rated, the client's stocks. Every firm wanting to do an underwriting wanted good things said about them by analysts, and those that did say good things, not so coincidentally, got the business. This conflict of interest is why we see a parade of analysts being excoriated in the congress and media. (And, I'm just reading in the Asian Wall Street Journal about a Merrill Lynch analyst who believes he was fired due to his neutral ranking of Enron that he alleged was costing Merrill a loss of Enron's investment banking business).

The bull market also needed a lot of product to feed it. Everyone who could assemble and start a mutual fund did. But they also needed an army of peddlers and they were plentiful too. I had a hard time imagining that mutual funds could be sold door to door, but it happened. Such was the fever.

That brings me to the public investor. So caught up was the public in the stock market that organizations such as investment clubs, stock chat rooms, and day trading systems flourished, and did so with great notoriety. People gave up their day jobs to trade/invest full time. They would routinely be featured on CNBC boasting of their great results, their own research, and top stock picks. On a personal level, I noticed this type of behavior socially. Often when I would be at a cocktail party or dinner, the conversation would inevitably turn to the stock market. Everyone would have stories to tell about their stock conquests and their own market forecasts to trumpet. Curiously no one would ask my opinion about anything despite my background, what I thought about the market, its direction, his or her stock picks, etc. They had it all figured out and experienced hands were either in the way or irrelevant.

Which leads me to the "more money than brains" phenomena. How many individual mutual funds does Fidelity have in their fund family? Just what is the ratio of new mutual funds to Wharton school graduates available to manage them? Are there enough experienced managers available to manage the funds created? No way!

Now, Charles Schwab and Fidelity are advertising that investors should go seek their advice. This is remarkable given that their "raison d' etre" has been that individuals didn't need advice, not to mention the fact that their employees aren't experienced to dispense it. Even the major wire house firms are rethinking their strategies. In the last 10-years their brokers have had it pounded into them that their job was to bring in money for in-house management. They weren't to use their own judgment about the markets; just bring in the money. If they did choose to actually recommend a security, it would have to be one covered and rated by one of their in-house "conflicted" analysts. Their pay structure was changed to reflect trailing compensation for funds at the firm and not commissions based on turnover.

This led to the long-term "buy and hold" mantra that was so embraced by mainstream investment media. Why would mutual funds and brokerage houses want you to trade any more? They wanted a steady stream of fee income. (The broker's called it "evergreen income" for them-perpetual and reliable). Abetted by the bull market, they scoffed at "market timing", saying that it just didn't work.

The aforementioned is why I'm so happy writing a newsletter that's independent, effective, and unconflicted.

On a different note, August 14th looms as a date certain (it'll get almost as much media attention as Y2K) when corporate CEO's need to sign off on their corporate financial documents. This is a good thing for the markets as it eliminates some uncertainty surrounding any more new scandals.

What will be the next big thing in technology investing? As far as I'm concerned it will be when I can take a laptop computer and cell phone anywhere in the world and use it at a reasonable cost. What companies will offer equipment and software to make this happen? When is nationwide cellular service really nationwide? I have a "nationwide" cell phone in Hawaii that is now turned off because it doesn't work in Wisconsin. My "nationwide" cell phone in Wisconsin will be turned off in the fall because it won't work in Hawaii. The same absurdity is true for global cellular voice and data communications technology. There's too much regulatory turf protection that prevents people from using their phones "anywhere" in an "affordable" manner. Satellite technology that can leapfrog hardwired highly regulated systems is still a good solution. Another more likely scenario is industry consolidation.

It tickles me to talk to others in Hong Kong about communications technology. This is the world cell phone capitol as far as I'm concerned. Everyone here is wired. Most people walk the streets either talking on phones or appearing to be talking to themselves due to headsets. When I mention my own desire to have just one cell phone that will work anywhere at a reasonable cost, their eye's light up in agreement. They can't call in or out of China without enduring a bewildering array of phone numbers or expensive cell phone chips.

MARKET STATUS & COMMENT

The market is struggling to carve a bottom. As I boarded the plane on the 29th in Chicago for Hong Kong, the market was engaged in a fierce rally higher. This is the kind of follow through action we have been looking for. The next two days were indecisive but still impressive given weak Consumer Confidence statistics and then today's worse than expected GDP numbers. Investors are more focused on big cap stocks right now, which of course, were the most oversold throughout this past month. The current buzz on the street is all about August 14th, the date most corporate CEO's must certify their financial numbers.

All of this is interesting, but not enough to move us out of our cash position.

MARKET STATUS & COMMENT

Follow through. There hasn't been any that's convincing yet. The Nasdaq is approximately 30 points lower after last weeks big rally and the Dow is some 75 points higher. Volume is starting to normalize. The big question is, will the market return to its primary downtrend or break free to upside? It's a "show me" deal right now.

I'm leaving on a business trip to Asia tomorrow and will return in about a week. I take my laptop with me and am able to do my charts and communicate (hopefully without too much delay) from anywhere.

We remain in cash.

Market Status & Comment

As you are aware I don't like to comment about the markets with great frequency, letting my actions speak more clearly. But, these are unusual market times.

I said on the July 21st that the Fed might try to jawbone the markets higher. Today rumors of a "special" Fed meeting swept through the trading pits in the morning. This was the spark the market needed to rally higher from its oversold condition. This Fed is not going to sit idly by while the stock market collapses causing an implosion in consumer confidence. The specter of this Fed action, plus high volatility, and severely oversold indicators is why I said yesterday that I "wasn't going to short this market here". If I traded the Dow (DIA), which I don't and won't, I'd be stopped out of my short position tomorrow morning at the opening. As for the Nasdaq, it was pulled higher (kicking and screaming most of the day) by the Dow's rally.

Now, will the markets follow through and rally from here? Or, will this be another one day phenomena similar to that which we've experienced these past two months? Tonight AOL reported that the SEC has instigated an accounting investigation. The stock is being pummeled now in the evening session. Are the markets hardened to this? Can the markets separate this company from its peers? If the rally is for real, it will. Pushed to the back burner for now are the "war on terror" and a potential invasion of Iraq.

These questions can't be answered now and, as usual, I'm glad to trade systematically. We remain in cash.

Market Status & Comment

Citicorp and J P Morgan. These twins could put the market under severe sell pressure and increase volatility. I don't wish to repeat myself too much here, but these stories are still falling action from the bull market of the 90's. I've had negative personal experiences with both these firms. I'll have more to say about them and this market in my month end comment soon.

For subscribers to this newsletter, you want information about what to do. I can tell you this--we're not going short here. We never enter a trade when the markets are at these kinds of extremes whether long or short. Obviously we would have preferred to remain in our last trade, but the volatility stopped us out. Almost all US stock indices are in an oversold condition by my indicators. Based on our system, the volatility risk is even greater now. So we remain on the sidelines.

MARKET STATUS & COMMENTARY

The market collapse of this past week looks on the charts like another terrorist attack occurred. This time, however, the terrorists are dressed in pinstriped suits and armed with Wharton diplomas. The corporate scandals dominating the news are leading to panic, foreign investor flight, and mutual fund redemptions. As I mentioned previously, the tone is similar to 1987.

These issues are affecting the Dow and the Russell Indices more than the Nasdaq. It's curious to note that the Nasdaq is still at the level where we last unsuccessfully went short. I don't have any signals to relate currently as markets, particularly the Dow and Russell, are at extreme oversold levels. These oversold conditions can persist longer than one might expect, but the likelihood of counter-trend rallies and continued high volatility make trading risky now. Therefore, "cash" is best given our system.

This is a political year. Given the partisanship and finger pointing likely to continue and intensify through the fall, it will be difficult for the markets to find any bullish catalysts from government policy. Greenspan's testimony this past week was disappointing as he had the opportunity, but not the will, to jawbone the market higher. Perhaps he'll recognize that shortcoming and act. The Fed has intervened in the currency markets in the past and don't be surprised to see some action like this from them in both equities and foreign exchange markets. There must be tremendous pressure within the government to arrest this market fall.

Right now it appears that a gap opening down on Monday is likely. But then, things change.

Market Status & Commentary

The TechTrend Advisor was filled in its short covering trade at $25.20. We are now in a cash position. Although it's small comfort to my subscriber's, the only thing I can think to say about this last transaction is that "it's about time". After almost a year of winning trades, we now finally have a loser. I said when I put the trade on that the volatility might get us and it did. But, it's history, and as is our rule, we accept our small loss and move ahead.

There's a sense of panic and doom in the markets right now. This is more about mutual fund redemptions and foreign capital flight tied to accounting scandals than anything else. It's reflected in the sell-off of mainstream American stocks, (Dow Stocks), while Nasdaq stocks aren't experiencing the same kind of decline.

The accounting scandal that's now taking place has become excessive and taken on a life of its own. It's become a witch hunt as reporters and other commentators speculate about who's next to drop an accounting bombshell. Does anybody honestly believe that we're in a bear market because of Enron or Worldcom? Were these companies dominant when the Nasdaq was over 5,000? We're in this pickle right now because of duplicitous Wall Street advice and investor greed. The companies with accounting scandals are not why the Nasdaq fell from 5,000 in 2000 to 1300 in 2002. They'll be the scapegoats and poster boys that politicians and others will assign the blame to.

It's usually assumed by many that I like volatility. I don't. I like trending markets where I'm able to get in early and stay long enough to make a fair profit. The volatility that we're experiencing now is similar to that of 1987. The economy is quite different now but investor psychology and the "feel" of the market is playing out in a similar fashion. Eventually the financial markets calmed and normal investment activity (including trading) resumed. The accounting scandals of today seem more important right now, but looming ahead is the potential invasion of Iraq, war, and terror. These latter issues seem more important to me right now and how this plays out will dictate the markets direction, and more importantly, how we trade, for a long time to come.

ACTION ALERT

At the opening of the market tomorrow, July 16, 2002, The TechTrend Advisor will cover its short position in the QQQ as a market order.

MARKET STATUS & COMMENT

The TechTrend Advisor was filled on its short transaction this morning at $23.80.

For us to re-enter a trade in the same direction so shortly after just closing the same trade is often a sign of great market volatility. This volatility is extraordinary and may lead to an early trade exit. Remember, our best trades last 4-8 weeks while our worst are of short duration.

As I write this, the QQQ's and tech stocks in general, are moving higher in after-market trading. The amount of negative sentiment surrounding stocks in general has become so intense that perhaps it's already priced in. But, as you know, we're not in the predicting business.

ACTION ALERT

At the opening of the market on Thursday, July 11, 2002, the TechTrend Advisor will be selling the QQQ short at the market.

SHORT COVERING COMMENTARY

The TechTrend Advisor's order to cover its short QQQ position was executed at $26.17.

I'm somewhat suspect of this recent rally. The big move up on Friday, July 5th could very well have been specialists and other market makers pumping the market higher in order to distribute stock they had taken in the previous week. The last time we got a point move like this was May 8th. That upward thrust was followed by two serious down days, and then a rally higher to May 17th. As you can see by the chart that rally failed resulting in the most recent shorting opportunity.

The important thing is we booked another nice profit.

We are now in a cash position and await further market developments. Remember, approximately 25% of the time we are in "cash". I think I might go fishing.

ACTION ALERT

At the market opening Monday, July 8, 2002, the TechTrend Advisor will "buy to cover" its short QQQ position as a "market order". Upon completion, we will be in a "cash" position.

Heads Up Alert

My indicators are telling me the market is getting very oversold and a short covering notification will be forthcoming fairly soon. Many times this oversold condition can persist for a longer period than can be anticipated. Therefore, it is best to maintain this short position until indicators instruct a change.