09/29/06 Market Update

Stocks:

We have a strongly bifurcated market. The Dow Industrials and the S&P 500, both weighted indexes, are making headlines as they approach and set new highs. However, the unweighted averages have recovered scarcely 50 percent of the 2000 decline. Additionally, of the 30 stocks that make up Dow only 10 of them or 1/3 are pulling the Dow up. The other 20 are off their highs some as much as 65 percent.

Dow Industrials verses NASDAQ 100

What does this mean? Well, there are only two viable options. Either the NASDAQ surges to meet the Dow or the Dow declines precipitously to correspond with the broader market. In the past the broader market has prevailed in these sorts of divergences.

Market Environment Matrix

Date	Total	Sma
9/29/2006	9	7.43
9/28/2006	9	7.29
9/27/2006	8	7
9/26/2006	6	6.86
9/25/2006	6	7

Will it break tomorrow? It is hard to tell. Our own proprietary indicators are also sending mixes messages. The Market Environment index is currently at 9 which is one of the highest reading ever and indicate the environment for stocks is healthy and favors an advance.

McClellan Summation -- Weekly

However, the divergences mentioned coupled with the over-bought levels of the current market suggest a pull back over at least the next week most likely the next eight months. On the left, the McClellan Summation Index, which tracks overall market participation and health, has broken above its decline tops resistance line (bullish) However, its level remains significantly below previous tops for the market to be at all time highs, more divergence. (bearish)

Bonds:

The 10-Year Note yield is now again approaching its rising support line and an over-sold RSI and stochastic oscillator position. With this rising support and the trading rubber band oscillators stretched towards their limits, we should see the interest rates climb over then next weeks to month.

10-Year U.S. Treasury Yield – Weekly

The 10-Year rate should easily move to the 4.7 level before it encounters any resistance. The 4.7 level will be next Friday’s point on the declining tops line. This resistance line will continue to drop as the weeks progress.

10-Year Treasury Note Yield – Daily

Gold:

The XAU slid back below the daily Gann grid matrix. While this is usually a sign of weakness, this may be just a retest of the lower limit line. The oscillators remain over-sold or neutral. If interest rate start to push up as the above section suggest, then we could continue to see weakness in the gold stocks. Additionally, if stock retreat as suspected, gold stocks will most likely follow as they often travel with the broader pack, especially in a rapid decline.

XAU -- Daily

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