Either the Nasdaq or the NYSE can lead the market - each one has a different meaning - and here it is.

What you see is a market that’s being led by the NYSE. This is not a condition we normally see at a sustainable advance or a meaningful break out. So unless this condition reverses, we’re looking for further downside.

Performance

So far, 2006 has not been a year to brag about, with both our Rydex Service up just under 7% and our QQQQ Service (on margin) up just over 7% (using closing price for Rydex and Open price for QQQQ). But to put it in perspective, at this point last year, we were sitting well in negative territory before advancing to finish the year up around 50%. And we had the same thing for 2004 - down 14% in March before finishing up 57%.

So I’m not too discouraged, since I understand that 1) investing/trading is something you do for the long term - and like any business, you’ll go through winning months or losing months and what matters is how you finish over a longer period and 2) this system is an intermediate term trend system, so we’ll eventually get the conditions that deliver +10% returns per trade.

For example, In 2005, we had 3 trades that delivered 12.7, 14.3, and 14.8%. So out of 23 trades, 3 resulted in the bulk of all our gains - the remainder of the trades pretty much balanced each other out.

Plus we had just gone through a stretch from October to March where we were up 45% - so we were over due for a draw down.

The point is, playing the mid term trend game, you don’t know when the next big trade will come - you just have to continue to position for it - and if you have patience, you’ll get them.

Of course, you can also play the short term game. The short term game is a way of playing shorter term, more predictable moves for smaller gains. This works great, until you get a 30 day trend - which normally knocks the short term system for a loop. And to me there’s nothing more frustrating than going against a large trade that can make you a lot of money.

Babe Ruth

I frequently liken my system to the way Babe Ruth played baseball. We all know that Babe Ruth was the home run leader. But most don’t know that he was also the strike out leader. So basically, every time he got to the plate, he was swinging away, expecting that perfect pitch, right down the middle and when he got it - he got it. And thus the home run leader. We do the same thing with the market. We look at each and every change in short term trend as a potential intermediate term move. Not every one will be - as we’ve seen. So we may strike out a lot - but when we hit it, we hit it out.

So if you understand that certain conditions repeat - but not all the time - and position for those conditions as if they’re going to be a strike right down the middle, it doesn’t take but 3 trades, as we saw last year, to put in a decent annual return. If you can deal with that - you can handle system trading.

Summary & Outlook

We remain in Sell Mode, expecting the market to move lower into 5/8 - but cognizant of the fact that we’re in a consolidation and that the market can break out of this consolidation either higher or lower.

The next key reversal date aligns closely with the Fed meeting. With everyone expecting their increasing rates to stop, I see us entering into a buy the rumor sell the news scenario. So whichever way we do break, higher or lower, I think we’re setting up for a good counter move. To be honest, my gut has me leaning towards the market breaking higher here - for one last run into a top - and if that happens, that top WILL mark the top for the rest of the year.

Later in the year bird flu will begin playing a role. So far the market has shrugged off everything that’s come its way, but I think bird flu has the potential to have significant impact not just our markets, but global markets.

As always, if you have any questions or comments, feel free to email me here at jay@stockbarometer.com.

Regards,
Jay DeVincentis

Trading involves high risk. Past results are not indicative of future returns. Stockbarometer.com and all individuals affiliated with Stockbarometer.com assume no responsibilities for your trading and investment results.

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