Market Summary

The preference for large-cap stocks was evident again this week as the DJI gained 0.46%%, the S&P 500 squeaked by with just an 0.02% rise but the NASDAQ Composite slipped 0.39%. This was the sixth straight week of gains for the DJI and S&P 500. The week started cautiously ahead of the Federal Reserve's Open Markets Committee meeting. Investors expected that the Fed would keep interest rates unchanged and were reassured that although the inflation rate remains a priority, the FOMC statement did not imply a rate increase would be necessary to contain it. They were further reassured on Friday when core wholesale prices were unchanged and stocks recovered from a sell-off on Thursday following weak-same stores sales figures. Hopes for an interest rate cut seem to trump concerns over consumer spending at the moment because stocks rose on Friday despite further evidence of reduced consumer spending when the Commerce Department reported that retail sales declined 0.2% in April compared to March. Consumer spending accounts for 2/3 of GDP spending so falling consumption has the power to derail the hoped for 'soft landing'.

The economy is weakening and consumers are spending less. GDP 1st quarter growth is expected to be revised downward to possibly as low as 0.5% (Bloomberg News) and some economists believe 2nd quarter growth will be zero or negative. So why are the markets doing so well? One explanation for the continued upward trend is that money is still flowing into equity Mutual Funds and ETF's at a healthy rate. Net inflows directed at domestic equities were $3.4 billion in the seven days ended May 9 (AMF Data Services). This increases demand for equities and so prices rise in response to the demand. At the same time, money managers and savvy investors are aware of the possibility of a recession and so place these funds in liquid (large cap) investments as a defense against a sudden downturn. This explains why the DJI and S&P 500 are outperforming the NASDAQ. If we accept this explanation, then the underlying question is where is the cash coming from and when will it end? One possible explanation is that full employment increases flows into pension and 401k funds and these flows are directed towards equities because these offer a better return currently than fixed interest investments and real estate. The collapse of the housing market, while hurting the consumer, also causes a redirection of available investment funds away from housing speculation and into equities. If this analysis is correct, then we conclude that as long as a recession and job-losses are avoided, then large-cap stocks are likely to continue to gain.

The 5-year S&P 500 chart shows that redirection of investments from real estate into equities may well have occurred. From the start of the current bull-market in late 2002, the S&P 500 traded within a channel until last September when it broke through the upper channel and has traded largely above that long term upper channel since then. The chart also shows that there was an increase in volume around that time which would be consistent with more money entering the markets. That time period coincides closely with the decline in the housing market.

The number of breakouts fell back this week but their performance by the end of the week substantially beat the market averages with a gain of 3.8%.

There were no new features added this week.

The Importance of Volume

Stocks rise and fall based on supply and demand but the strength of the move is measured by paying attention to volume. This is well known and we don't claim any special insight for pointing it out. But we do emphasis the importance of volume in most of our reporting and provide you with the tools to evaluate the strength of move based on volume.

• Each day, our daily 'Today's Breakout and Top Ten Report' includes a commentary on how the day's volume compares to the previous day's and to the 50 day moving average.
• Our 'Equivolume Charts' provide a concise and visual representation of volume, accumulation and distribution and a comparison to the moving average for the three major indices.
• Our standard charts include not just volume bars but the Up/Down Volume Ratio displayed in green, yellow and red bands.
• Our enhanced T/A charts include several additional volume metrics such as On Balance Volume and the price/Volume Oscillator.

Our innovation is in developing volume indicators that apply specifically to breakouts and improve your chances of picking winning breakouts as they happen.

Our first volume indicator is the 'PVI' or Price/Volume Indicator that relates to the likelihood that a stock on our CwH list will breakout the following day. PVI classifies the price/volume action on the day the watchlist is published by looking at three conditions :

• did the stock close higher than the day before?
• if so, was the volume greater than the day before?
• if so, was the volume greater than the day before and above average?

This results in five possible outcomes, each of which is assigned a score.

It is important to understand that the values assigned to the PVI are to allow us to classify the possibilities and are not intended to imply relativity between the classifications. That is, a PVI of 0.6 is not 3 times better than a PVI of 2, for example.

We introduced the PVI on October 29, 2005 and described it on our newsletter of that date together with performance results.

Our second volume indicator 'VADVR' (Volume to Average Daily Volume Indicator) helps you determine which breakout alerts are likely to be most successful. Although a breakout volume of 1.5 times the 50 day average is considered the minimum for a confirmed breakout, our analysis showed that a VADVR of 2.5 was the optimum.

Investment Advisors Using our Service

TradeRight Securities, located in a suburb of Chicago, is a full services investment management company and broker/dealer. They have been a subscriber, and user, of BreakoutWatch.com for some time now. They practice CANTATA and use Breakoutwatch.com as a “research analyst”. You can learn more about TradeRight Securities at: www.traderightsecurities.com. If you’re interested in speaking to a representative, simply call them toll-free at 1-800-308-3938 or e-mail gdragel@traderightsecurities.com.

PivotPoint Advisors, LLC takes a technical approach to investment planning and management. A breakoutwatch.com subscriber since May, 2004, they use breakouts, market signals, and now TradeWatch to enhance returns for their clients. Learn more at http://pivotpointadvisors.net or contact John Norquay at 608-826-0840 or by email at john.norquay@pivotpointadvisors.net.

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