The market this week got a dose of reality as traders began to question the reasons for running this market up in an environment of slowing economic growth, higher interest rates, inflation concerns and a continuing housing slump.  The merger mania over the past several months has been able to avert attention away from these underlying problems, but that can only prop up the market for so long.  Long term rates surging last week put it on the radar and was the "headliner" of the week.  That probably means it’s not going to move higher over the next several weeks, but the long term  trend in rates off a 2003 low has certainly been up. How long can the almighty consumer continue their spending ways in this kind of environment?  Probably not much longer. 

It’s important to realize that while the market has priced in the majority of the housing slump, it has not at all priced in concerns over the consumer.  With the exception of a very weak retail number in April (which appeared to be an aberration at this point) retail numbers have not been consistently weak.  However, recent poor numbers from Walmart indicate that trouble may lie ahead.   If and when the market begins to price in consumer concerns, it could get ugly.  Wow, do you I sound bearish.. and I consider myself a bull at heart!  I want stocks to go up .. really I do.

If you’ve been reading my reports over the past few years you probably know I rarely discuss the economy.  Today, I just felt the need to ramble and rant a bit.  The reason I don’t concern myself too much with the latest economic numbers and predictions is fairly simple.  The market does a good job of pricing in these events well before they occur.  So, by reading the price and volume movements of the charts of the major indices we can gauge with some degree of certainty just how well the economy WILL be doing.  At the risk of sounding like a broken record, I have been mentioning for at least a few weeks that the market is getting fatigued and that all signs point to institutions selling into any rallies.  Price and volume movements (higher volume selling, lower volume buying and high volume churn) over the past few weeks predicted a looming sell off of some degree. 

It’s important to remember that bull runs like we had don’t just roll over and die.  After all, institutions need more time to unload all those large positions and get more defensive.  After we stabilize following the selling of last week, the market could very well retest those highs.  However, I do think those early June highs mark a top for at least several months.

Market Action This Week: Decidedly Bearish
Outlook for the Next Month: Leaning Bearish

::: Model Portfolio Update :::

With the long overdue selling setting in, the portfolio is beginning to  get in better synch with this market and beginning to close the gap of underperformance.  I mentioned last week that I began getting short way too early and that hurt my performance, however I expect my current positions/strategy to begin paying dividends.  During the week, I closed out two very small position in NVEC for a 2% loss and JOBS, a quick strike profit play for a 6% loss.  These were replaced with 2 stronger, very small long positions in high quality names.  Both held up remarkably well during the week – in fact one of the positions actually finished with a gain with volume on Thursday.  Sometimes you get lucky.  I did add another short position to the portfolio as well, bringing the total short allocation to about 35%.  About 50% remains on the long side (15% of that is in Google) with a 15% cash position.  The portfolio was off just .2% last week, but still significantly lags the S&P with a
 3.5% YTD return.  I’ve certainly got my work cut out for me if I’m going to whoop the S&P again this year.

::: Best/Worst Performers :::

– Top 10 Performing Industries For the Week –

1. Personal Computers: 3.30%
2. Music & Video Stores: 1.90%
3. Medical Practitioners: 1.60%
4. Data Storage Devices: 1.20%
5. Diversified Electronics: .55%
6. Discount – Variety Stores: .55%
7. Catalogue & Mail Order Houses:  .35%
8. Education & Training Services: .35%
9. Consumer Services: .30%
10. Computers Wholesale: .25%

– Top 10 Worst Performing Industries For the Week –

1. Health Care Plans: -8.80%
2. Major Airlines: -6.45%
3. Diversified Utilities: -5.80%
4. Shipping: -5.75%
5. Pollution & Treatment Controls: -5.45%
6. Electric Utilities: -5.30%
7. Dairy Products: -4.90%
8. REIT – Healthcare Facilities: -4.90%
9. Manufactured Housing: -4.85%
10. Specialty Eateries: -4.80%

– Top 5 Best Performing ETFs For the Week –
 
1. Herzfeld Caribbean Basin (CUBA)  4.25%
2. Chile Fund (CH) 3.05%
3. China Fund (CHN) 1.55%
4. Ishares South Korea (EWY) 1.10%
5. Ishares China (FXI) 1.05%

– Worst 5 Performing ETF’s –

1. SPDR Select Utilities (XLU)  -5.60%
2. Ishares Germany (EWG) -5.45%
3. PowerSharers Dynamic Utilities (PUI) -5.40%
4. HLDRS Utilities (UTH) -5.25%
5. Ishares Utilities (IDU) -5.10%

:::  IPO’s Worth Watching for This Week :::

No solar IPO’s this week, but a new ethanol IPO should get some undeserved attention.

1. GeoVera Insurance Holdings (GEOV): The company focuses on providing specialty homeowners and residential earthquake insurance. GeoVera sells its products in states prone to these natural disasters in the northwestern and southeastern US. First established in 1993 as a division of United States Fidelity and Guaranty Company, GeoVera distributes its products through a network of more than 1,600 brokers and agents.  The company has seen rapid growth over the past couple years.  Trading set to begin on Wednesday.

2. Biofuel Energy (BIOF):  The ethanol upstart is set to begin construction on the company’s first two (out of six total) plants, in Nebraska and Minnesota, is under way and should be completed in early 2008. Its remaining facilities (Iowa, Illinois, Kansas) are scheduled to begin construction in 2007; the sixth will serve as an alternate plant. Annually, BioFuel’s plants are expected to produce 575 million gallons of ethanol and 1.8 million tons of distillers grain (ethanol manufacturing process byproduct used in animal feed). The company is partnering with agribusiness giant Cargill, which gives it reliable corn supplies, an established logistics/transportation network, and marketing expertise.  Trading set to begin on Tuesday.

::: Upcoming Economic Reports (6/11/07 – 6/15/07) :::

Monday:        None
Tuesday:       Treasury Budget
Wednesday:  Fed Beige Book, Export/Import Prices, Retail Sales, Crude Inventories
                      Business Inventories
Thursday:      PPI, Initial Claims
Friday:           CPI, Capacity Utilization

::: Notable Upcoming Earnings Reports I’ll Be Watching This Week :::

Monday: Jos Bank (JOSB)
Thursday: Goldman Sachs (GS), Bear Stearns (BSC)

::: In Case You Missed It – SelfInvestors Blog Entries of the Past Week :::

1. Unintended Consequences of the Ethanol Boom
https://selfinvestors.com/tradingstocks/news/unintended-consequences-of-the-ethanol-boom/

2. Selling Intensifies But Critical Support Near
https://selfinvestors.com/tradingstocks/weeklyafter-stock-market-review-archives/selling-intensifies-but-critical-support-near/

3. Precarious Economy; Stock of Day – Intercontinental Exchange (ICE)
https://selfinvestors.com/tradingstocks/weeklyafter-stock-market-review-archives/precarious-economy-stock-of-day-intercontinental-exchange-ice/

4. More Distribution, But Relatively Healthy Selling
https://selfinvestors.com/tradingstocks/weeklyafter-stock-market-review-archives/more-distribution-but-relatively-healthy-selling/

5. IPO Lockup Dates (June 5 – 8)
https://selfinvestors.com/tradingstocks/ipos/ipo-lockup-dates/ipo-lockup-dates-june-5-8/

6. Stock Spam in Major Financial Publications!
https://selfinvestors.com/tradingstocks/news/stock-spam-promotion-in-major-financial-publications-guangzhou-global-gzgt/