Beat The Dart -"Picking Stocks the Old-fashioned Way"

Now is the time to step back and not be too aggressive in adding long positions. At 1,427.09 for the S&P 500 index with Friday's range of 1425.48 - 1431.63 the upside appears limited to that range while the likelihood for declines are greater. If you focus strictly on economic data, the signs are bearish. The fact that the market held up so well is noteworthy, but scary. A review of last week indicates a battle of what opinion should prevail into '07. The S&P plunged 19 points on Monday for largely overbought reasons, and came back smartly with a 5 point gain on Tuesday and 13 point jump on Wednesday. Thursday the S&P was up 1 point before a 4 point drop on Friday. Assessing the action suggests the "rally" is running out of steam as the general stock market surging 14% in just four months. Yet economic news became bearish, the market has all the excuses to decline and did not. A pullback in January to retrace 7% of the upside is possible. On Friday we presented four signals to watch - (1) S&P support line of 1410, (2) price of oil, (3) 10-year Treasury note rate and (4) status of the U.S. dollar against other currencies. The relationship of the U.S. dollar to interest rates and price of oil are so intertwined to inflation that any subtle change has major implication for the stock market. Therefore, the technical support of 1410 for the S&P 500 may broadcast whether dollar can stabilize, and the index maybe further harmed on the expectations of rate cut. Continual selling pressure of the dollar versus overseas rivals over the past two months has been addressed with a Washington spin. To ease pressure on the dollar Fed Chairman Bernanke told the big lie. He gave a speech last Tuesday in which he emphasized the inflation risks, implying that underlying economic trends were solid. His speech clearly suggested that the next move in Fed policy is to raise rates rather than lower them to contain inflation. In fact the market did not embrace the big lie as fed funds futures were pricing in a Fed rate cut at the March 07 policy meeting. The 10-year note yield dropped to 4.43% at the end of the last week on the belief that economic weakness is spreading, while the international market believes a rate hike is likely in March to rally the weak dollar from a whooping 10% decline against the euro so far this year. Our prediction: The Fed will keep interest rates at 5.25% and lower it to 5.0% in June/August timeframe to easy pressure on the mortgage markets. In the interim the dollar will firm, establishing an underpinning to inflation and keep crude price below $70 per barrel. While this balancing act continues, the stock market will be left to determine what really is taking place. In this convoluted atmosphere, technical indicators will be the best signs to follow. For now, 1,410 in the S&P must hold to remain committed to the long side of equities.

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