MARKET ANALYSIS

I feel the current rally among 'old economy' stocks is not sustainable. The 'old economy' stocks have been in a bear market for an extended period. 450 of 500 stocks in the S&P index are in this group. Some market watchers refer to this rally as a bear market rally. It is a result of a rotation out of overbought Nasdaq tech stocks into oversold stocks which include the financial, drug, chemical, consumer, and retail sectors.

The current positives backing this current rally are the tax refund season just ahead and the first quarter earnings period, both of which are in April. The negatives are it is too soon in the Fed rate hike cycle for the bull market to return and Greenspan will continue to push for higher interest rates because of the 'wealth effect', if he wants to keep his credibility about being an inflation hawk intact. He has warned repeatedly he will target the stock market because consumers keep getting more money to spend from their lucrative stock investments.

The X-Factor is how much of this rally is because of government election year 'manipulation'.

In 1994, the Fed raised rates 7 times, and the market traded sideways with a few minor corrections. Provided there are not any unexpected catastrophic events, it should be no different this year. I predict there is a high probability the indexes will retest recent lows before closing higher for year 2000.

The markets may move up just enough to draw 'new money' in above the previous record high levels, then the 'momentum traders' (day traders, hedge funds, brokerage houses, and program traders) will push the markets down for one last shake out before the national elections.

See the excerpt of Martin Mayer's book I posted on my site to get some insight into the 'engineering' that goes on:

http://www.angelfire.com/biz/oci/livetrademayer.html

The brokerage houses and insiders know the markets need to be manipulated with extreme volatility to make money during this negative environment where the Fed is driving up the cost of money, restricting liquidity, and supposedly limiting the money supply. Also, margin debt rose over 80% this year, a historical high, which may resulting in margin calls and a rapid liquidation of assets if certain technical benchmarks are breached during a severe sell-off.

OCI