Market Summary

Last week we were optimistic that the upward trend would continue and that was confirmed by the S&P 500 setting two consecutive new highs on Thursday and Friday. The possibility of completion of a head and shoulders top for the S&P which we saw three weeks ago is now defunct. The DJI also set new highs and the NASDAQ Composite is at its highest level since January 2001. For the week the DJI rose 2.17%, the NASDAQ Composite gained 1.52% and the S&P 500 added 1.44%. Volumes were above their weekly average and the NASDAQ has overtaken the DJI as the best performing index for the year to date after lagging for several months.

Why are the markets showing such resiliency in the face of fundamentals that should produce a downturn:

• rising food and energy costs cutting into consumer discretionary spending
• falling home equity withdrawals
• collapse of the housing market
• tightening credit?

The conventional answers that analysts gave this week were:

• improving retails sales at Wal-Mart
• Merger and Acquisition activity
• Warren Buffet buying into Hovnanian
• Company stock buy-backs
• Short covering

While these explain the short term 'noise' of day-to-day gyrations they do not account for a market that has defied all expectations of a strong correction since November last year. Our search for an answer has led to the following underlying factors:

• the falling dollar makes investments in US markets appear cheap
• the falling dollar swells the profits of US multinationals doing business overseas increasing the attractiveness of their shares
• expansion of the money supply by the Fed
• historically low interest rates

These factors combine to increase the liquidity in the markets and support the upward trend. AMG Data Services reports that net inflows including ETF activity, into equity funds were $3.867 billion in the week ended 7/11/07.

Our conclusion is that while liquidity continues to increase the party will go on.

There were fourteen confirmed breakouts this week that had gained an average 3.78% by week's end.

There were no new features added this week.

Efficient Market Hypothesis vs Technical Analysis

I've been reading a very important new book called 'Evidence Based Technical Analysis' by David Aronson. The book is important because it describes an approach to the development and testing of Technical Analysis techniques that are based on objective scientific methods. Along the way it debunks many of the traditional TA approaches because they are untestable. This book will contribute to our own backtesting approach in future tool development.

One of the topics discussed in the book is the Efficient Market Hypothesis (EMH). EMH proposes that in a perfect market all available information is incorporated into a stock's price and that any new information is immediately absorbed by market traders to adjust the price. If EMH is correct, then the current price of a stock incorporates all useful information about the stock and there can be no predictive value in the price. In contrast, technical analysis (TA) assumes that there is predictive value in the current price (and volume) in relation to historical prices and volumes. In other words, TA and EMH cannot exist side by side.

The book effectively destroys the EMH in a chapter entitled 'Theories of Non-Random Price Motion' and the chapter makes fascinating reading as a justification for TA.

Readers will be disappointed though if they are hoping for specific recipes for TA methods that work. Instead the book provides a guide for how developers of TA methods should approach their work. We will be guided by it in future.

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.

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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.

Note to advisors: If you would like to be listed here, please contact us. As a service to those who subscribe to us, there is no additional charge to be listed here.