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Issue No. 36 - July 25, 2005 Prescott, Arizona Systems@WiserTrader.com

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1.0 Trading

Short term opportunities may be evolving in growth stocks due to currency changes

1.1 Currency Impact

      Now that China and Malaysia have untied their currencies to the US dollar, the question is will they discontinue holding US Treasuries. There is no longer a need for them to buy and hold treasuries in order to suppress US interest rates and keep the value of their currencies from rising too rapidly.  A surplus of Treasuries on the market can lower bond prices and raise interest rate yields for a period of time until yields become so attractive that bond buying would drive rates back down.  This might imply a short term sector rotation.

      A temporary rise in yields would adversely affect interest rate sensitive stocks, such as utilities, real estate, banks and other financials.  This could cause a sector rotation into growth stocks.  The first evidence of this is seen in the recent weakness in defensive areas such as healthcare.  However, we know from history that stocks do not like sustained high interest rates in a non-inflationary environment.  Technology stocks have also weakened recently.  Still the market continues to show health based on relative movement of the NASDAQ with respect to the S&P500. 

      Expectations of higher rates can lead to a dip in real estate.  Anticipation of a real estate pinch can lower expectations of consumer spending which can lead to a lowering of expectations in corporate earnings. 

      The magnitude of any shock to the economy depends on how rapidly treasuries are dumped on the market.

© 2005 Desert Mountain Systems, LLC. Members of wisertrader.com are neither licensed brokers nor licensed advisors.   Trades discussed represent recommendations made by the editor for the wisertrader.com portfolio.  The newsletter and web site are for information only and should not be considered as personal advice.   While it is believed that the posted information is factual, mistakes can be made in transcription.  Investors should trade stocks only after verifying all information and consulting with a licensed broker or adviser.  Desert Mountain Systems markets third party trading systems but has no other affiliation with trading system companies.

2.0 Market Analysis

      Investors, viewing the good reports from last week, had already priced in an expectation for good earnings reports before this week's reports came in.  As a result, there was little buying.

      Industry leaders in Table 2A rank from highest to lowest.   Relative strength is given in Table 2B and VTO market sentiment in Table 2C.

Table 2A - Market Summary

 Major Indices 
 For the Past Week:
 Dow Jones     +0.1%
 NASDAQ        +1.1%
 S&P500 Index  +0.5%
 Russell 2000  +1.9%
 
 30 Year Bond 4.442%
 10 Year Note 4.223%
 
 Industry Leaders
 For the Past Week:
 Coal 
 Steel 
 Business Training & Employment  
 Platinum & Precious Metals 
 Nonferrous Metals 
 Oil Equipment & Services 
 Industrial Metals 
 Mining 
 Oil Equipment, Services & Dis 
 Basic Resources   
 
 Industry Leaders
 For the Past Month:
 Business Training & Employment  
 Coal 
 Biotechnology 
 Nonferrous Metals 
 Steel 
 Home Construction 
 Home Improvement Retailers 
 Industrial Metals 
 General Mining 
 Investment Services  
 
 Crude Oil $58.65
 
 Gold for the past 30 days:
 USD    -3.72%
 CAD    -4.77%
 CHF    -2.56%
 GBP    +0.67%
 EUR    -4.02%
 JPY    -1.65

Table 2B

Relative Strength Index

	5 Day RSI
DOW	Neutral
S&P 500	Neutral
NASDAQ	Neutral

Table 2C

VTO Market Sentiment Indicators

Sentiment Indicator	Value	Last Week	2 Weeks Ago	Complacent	Cautious
VIX **	10.52	10.33	11.45	< 20	> 50
VXN ***	12.95	13.34	13.80	< 30	> 70
Put/Call Ratio	0.561	0.540	0.424	< 0.6	> 0.7
%Bulls - %Bears	29.5%	32.3%	32.1%	> 29%	< 20%
**   Below 20 day SMA = Buy signal. *** Below 20 day SMA = Buy signal.

      In Table 2D, the broader market was mixed for the week.

Table 2D

Index Tracking Stocks, Key Industry ETF’s and Sector SPDR’s

	1 month	1 wk ago	2 wks ago	3 wks ago	4 wks ago
SPY (S&P 500)	3.8%	0.6%	1.3%	1.5%	0.5%
DIA (DOW)	3.5%	0.2%	1.7%	1.4%	0.3%
QQQQ (NASDAQ 100)	6.6%	1.4%	3.0%	2.8%	-0.6%
IWM (Russell 2000)	8.2%	2.0%	0.0%	3.1%	2.8%
GLD, GOLD	-3.3%	1.0%	-0.5%	-1.0%	-2.7%
RKH, Banking	2.7%	-0.8%	3.1%	0.8%	-0.4%
IYT, Transportation	10.5%	3.4%	1.9%	2.2%	2.6%
SMH, Semiconductors	9.1%	0.6%	4.1%	5.1%	-0.9%
BBH, Biotechnology	13.4%	2.0%	4.8%	5.5%	0.6%
IYR, Real Estate	5.4%	1.4%	-0.7%	2.5%	2.1%
OIH, Oil	8.3%	8.8%	-1.7%	1.2%	0.0%
XLE, Energy	5.5%	4.5%	-1.9%	1.8%	1.1%
XLU, Utilities	2.2%	-0.7%	0.1%	0.4%	2.3%
XLB, Materials	5.2%	3.1%	0.8%	2.1%	-0.8%
XLI, Industrial	4.1%	1.6%	0.7%	1.2%	0.6%
XLK, Technology	4.9%	-0.3%	2.8%	2.4%	-0.1%
XLV, Healthcare	1.0%	-0.3%	0.8%	0.9%	-0.4%
XLF, Financials	2.9%	-0.7%	1.6%	1.3%	0.6%
XLP, Consumer Staples	2.4%	-0.3%	1.6%	0.7%	0.4%
XLY, Consumer Discretionary	5.3%	1.3%	1.9%	1.9%	0.1%

      Key industry ETF’s are Biotech and Semiconductors which confirm the NASDAQ.  Transportation confirms the Dow Jones Industrial Average according to Dow Theory.   Banking and Financials are confirming indicators for the S&P 500.  Gold and Real Estate are respective indicators for the inverse health of the currency and the economy in general. 

      Figure 2 compares index tracking stocks for the major averages with Sector SPDR’s.

      Figure 3 compares index tracking stocks with five leading ETF’s for the week. 

FIGURE 2

FIGURE 3

3.0 Procedure

      The following watch lists contain stock candidates for consideration.  They are not necessarily trades.  The “Reference” is the date that a stock passed the indicated filter and was added to or returned to the list.  The “% Change” is how the price has changed since a stock first passed the filter.  Stocks that are down 10% or more after being listed are removed.  The “% from Max” is the percentage the price has declined from the maximum price reached after a stock first passed the filter.  Stocks that are down 8% from their highs after being listed are flagged in yellow.  Stocks that are down 15% from their highs after being listed are removed.  More information on filters is available on the web site.  Send an email if you need more details.

Key

Passed Recent Filter

      Companies that have experienced net insider buying within the past 6 months of 5% or more of issued stock are listed in Table 3A.  These stocks should also appear in one of the master trader screens or meet additional screening criteria before being given serious consideration.  ZHNE was removed because it decline more than 15% from its highest price after being listed.

Table 3A

Net Insider Buying Check List

Stock	Reference	% Chg	Company	Sector	Industry	% from Max
ACAD	04/29/05	25.1%	ACADIA Pharmaceuticals Inc.	Health Care	Biotechnology & Drugs	-1.8%
AFT	05/20/05	-7.4%	Axesstel, Inc.	Technology	Communications Equipment	-11.1%
ASPV	05/27/05	14.2%	Aspreva Pharmaceuticals Corporation	Health Care	Biotechnology & Drugs	-2.3%
ATPL	07/01/05	1.3%	Atlantis Plastics, Inc.	Basic Materials	Fabricated Plastic & Rubber	-4.3%
AUXL	07/15/05	5.4%	Auxilium Pharmaceuticals, Inc.	Health Care	Biotechnology & Drugs	-3.9%
CRTX	07/01/05	0.0%	Critical Therapeutics, Inc.	Health Care	Biotechnology & Drugs	-3.4%
FTD	04/08/05	-1.3%	FTD Group, Inc.	Services	Retail (Catalog & Mail Order)	-1.4%
FVRL	04/22/05	62.7%	Favrille, Inc.	Health Care	Biotechnology & Drugs	-1.6%
IRN	05/20/05	0.6%	Rewards Network Inc.	Services	Business Services	-3.7%
ITMN	04/08/05	42.1%	InterMune, Inc.	Health Care	Biotechnology & Drugs	-2.9%
KIRK	05/27/05	-6.4%	Kirkland's, Inc.	Services	Retail (Specialty Non-Apparel)	-10.6%
MERCS	05/20/05	-4.4%	Mercer International Inc.	Basic Materials	Paper & Paper Products	-4.4%
PCTY	07/08/05	8.1%	Party City Corporation	Services	Retail (Specialty Non-Apparel)	0.0%
RGN	07/01/05	2.9%	RegeneRx Biopharmaceut.	Health Care	Biotechnology & Drugs	-0.8%
RNAI	07/15/05	-4.0%	Sirna Therapeutics, Inc.	Health Care	Biotechnology & Drugs	-7.7%
SCLN	07/01/05	36.4%	SciClone Pharmaceuticals	Health Care	Biotechnology & Drugs	-8.3%
STLW	07/08/05	-4.7%	Stratos International, Inc.	Technology	Semiconductors	-4.7%
THLD	07/08/05	26.8%	Threshold Pharmaceuticals, Inc.	Health Care	Biotechnology & Drugs	0.0%
ZHNE	07/15/05	17.0%	Zhone Technologies, Inc.	Technology	Communications Equipment	-1.2%

      Companies with net cash positions that comprise at least 40% of their share price are listed in Table 3B.   These stocks should also appear in one of the master trader screens or meet additional screening criteria before being given serious consideration.   CDCO was removed because of its Over the Counter status making it difficult to update the data.  Its price performance is still in line with requirements for being listed here.  EXM declined more than 15% from its highest price after being listed and was removed.

Table 3B - Capital Rich Companies Check List

Stock	Reference	% Chg	Company	Sector	Industry	% from Max
CDCO	07/15/05	0.0%	COMDISCO HLDG CO INC	Services	Rental & Leasing	0.0%
CLCT	05/20/05	-3.8%	Collectors Universe, Inc.	Services	Business Services	-9.8%
EXAR	07/22/05	0.0%	Exar Corporation	Technology