NEWSLETTER ONLINE - STOCK MARKET DIRECTION - © May 1, 2004
STOCK MARKET DIRECTION by Steve Zito Financial Newsletter
Technical Indicator Analysis of the Nasdaq Composite Index
Redistribution only with permission of the writer Steve Zito.
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STOCK MARKET DIRECTION by Steve Zito Newsletter for Saturday, May 1, 2004
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John F. Kerry and the stock market - George W. Bush and the stock market
In April 30's newsletter, I mentioned 5 reasons for stocks to turn higher,
this newsletter examines whether any of these affected stock markets Friday.

Information in this newsletter is based on prices from Friday, April 30, 2004
Dow Jones Industrial Average
---------------------------------------- 10,225.57 -46.70 (-0.45%)
Nasdaq Composite Index
----------------------------------------- 1,920.15 -38.63 (-1.97%)
Standard and Poors 500 Index
----------------------------------------- 1,107.30 - 6.59 (-0.59%)
10-Year Note yield
-------------------------------------------- 4.501% -0.039

DOW JONES INDUSTRIAL AVERAGE analysis:
The Dow Industrial Average closed 10,225.57 -46.70 at 1.1% under Friday's
short-term moving average, which has turned down in the last 2 trading days.
The Dow rally from the low at 9,970 in March to the peak at 10,600 in April
using the high and lows made during the day (intra-day) was 630 Dow points.
The current weakness in the past week from Dow 10,570 to 10,225 is 345 points,
or retracement (giving back gains) of 55% of the late March into April rally.

What does this mean? First, a 50% to 60% retracement of any stock's move for
no fundamental reason is perfectly ordinary and normal. That kind of reversal
of the previous direction (up in late March, early April) is what causes the
up-down roller-coaster pattern seen in stock charts. If no one took profits,
stocks would only go in one direction, to be seen as a straight line on charts.

Lately, geopolitical developments are changing day to day from Iraq to Korea,
and with a U.S. Presidential election 6 months away, investors are uncertain
as to whether Republicans or Democrats will run the show for the next 4 years.
Stocks do not like uncertainty. Uncertainty increases risk, and increased risk
increases volatility, which leads to wide swings in stock prices, as in April.
If stocks were to quiet down, become more stable, less volatile, the odds of
advancing would increase, since long-term investors want to hold stable assets.
The bond market is much larger than the U.S. stock market, and U.S. bonds are
expected to fall in May, seasonally worst month of the year for fixed income.

If bonds fall, that is from selling, just where will the money from bonds go?
Into cash, alternative investments like real estate and gold, and into stocks.
Conventional wisdom has it stocks fall when bonds fall, both from rising rates.
Not true. Stocks advance when bonds fall as rates are rising, since an increase
in demand for money drives up rates, and demand for money signals GDP growth.

On the contrary, if the rise in rates coming in May is from government borrowing
to pay for military expansion around the globe, then GDP growth may become slow.

Tech is often weak in summer as CIO's take vacations, and CIO's are needed to
sign off on hardware, software, and services contracts. Tech stocks anticipated
a summer slowdown and led all stock groups (except gold) lower in the past week.
Tech stocks have fallen despite great earnings reports in April, despite rabid
demand for products from a boom in China. As Bush falls in the opinion polls to
rival low popularity of Richard Nixon (1974) and King George of England (1775),
prospects for business with the Communists in China may be as fleeting as the
marriage of G.W. Bush's brother Neil, whose divorce trial revealed Neil is paid
millions of dollars by the Chinese Communists to lobby for chip sales into U.S.

China joined the World Trade Org. (WTO) and is not subject to tariffs since.
Since China has labor costs about 5% of what U.S. workers are paid, China can
sell everything like semiconductor chips, toys, textiles in the U.S. for cheap.
That's great for consumers of chips like Dell Computer or Americans buying gear.
But American companies employing millions of workers are finding China as like
a Walmart opening in their backyard and putting most local shops in bankruptcy.

Ask a Walmart sales guy next time how much of their Dell PC is made in China.
If John Kerry gets elected, business coziness with China may cool, as Kerry
demands human rights for labor in Shanghai to Beijing for fair not free trade.
Companies like Accenture ACN (see Tiger Woods in ACN TV ads) pay little U.S.
tax by headquartering in Bermuda, earn billions outsourcing jobs into China.

Yesterday, I gave 5 good reasons for stocks to turn up, and here is analysis.
First, Dow stochastics were oversold Thursday at 14%/38%. Oversold markets are
likely to RISE, not continue falling. It's not a guarantee. It's a tendency.
Friday's Dow collapsed in last hour trading, stochastics went lower to 3%/18%.
The Dow was higher all day Friday, until 3:00 PM when a large investment house
sold tens of millions of dollars of Standard and Poors 500 stock Index futures.
Brokers were miffed that Morgan Stanley got the Google IPO, and caused a panic.
Heavy selling causes falling prices, lower prices increase demand for stocks.
The demand has to wait until Monday, when mutual funds get monthly contribs.

Secondly, CBS News opinion polls released late Wednesday show Kerry and Bush
tied at 50% for who will get Presidential votes. Unless Nader is counted too,
and with Ralph Nader, Bush beats Kerry by 4% with Nader getting 5% of America.
See http://news.yahoo.com/news?tmpl=story&u=/nm/20040429/ts_nm/bush_poll_dc_2
The market does not care who wins. The stock market has no conscience. Wall
Street wants to know as soon as possible who will win and plan accordingly.

The Dow Jones fell on Friday when Bush failed to fall below 50% in the polls
despite release of pictures of U.S. soldiers abusing Iraqi prisoners of war by
parading prisoners naked with black sacks over their heads, and imitating sex.
http://story.news.yahoo.com/news?tmpl=story&u=/ap/20040501/ap_on_re_mi_ea/prisoner_abuse&cid=540&ncid=716
The U.S. military stood behind, or next to the blindfolded naked prisoners and
made finger gestures or funny faces to show folks back home the fun they have.
Bush made an appearance at the White House and said he was "disgusted" but did
not apologize. Bush's buoyancy in the polls is incredible, he should be at 35%.
Like his father who was a one-term and done, Bush has no idea about real life.

As pictures of American soldiers holding black bags over Iraqi prisoners heads
while they stripped them down for Polaroids to send to the wife were released
by CBS News Friday, Mr. Bush was quick to appear at the White House door and
call it disgusting and intolerable. He should have remarked on those black bags
over naked Iraqi prisoners heads, "Bring it off." Britain faces the same scandal.

Third, the U.S. military Field Marshals appeared to have brokered a deal with
1,100 former generals of the Saddam regime to take over security in Fallujah
so the Marines can pull out and save those 500-pound bombs for softer targets.
Those former generals are from Saddam Hussein's own hand picked private guard,
and they were supposed to have been tried for war crimes, not be given jobs.
U.S. administration in Iraq is finally showing it is a chicken with no head.
Senator Frank Lautenberg (NJ) called Dick Cheney a "Chicken-Hawk" on Thursday.
A chickenhawk is someone who never served in the military but who likes a war.
What do you call a macho ex-Vet who won't fight - like Kerry? A "Tiger-Dove"?
A deal to hire Saddam's former generals should have helped stocks. It didn't.

Fourth, Kerry finally came out swinging in Philadelphia, City of Brotherly Love,
http://news.yahoo.com/news?tmpl=story&u=/ap/20040430/ap_on_el_pr/kerry_plant_security_15
blasting Bush for ignoring threats on American soil in favor of bankrolling Iraq.
Democrats were angry Kerry was keeping quiet while dropping in the opinion polls.
Then on Friday, Kerry took the high road at Westminster College in Fulton Missouri,
where Dick Cheney had spoken earlier this week. Kerry wants NATO involved in Iraq,
the U.N. involved, the Iraqis involved, but the Bush administration was quick to
point out that this has already been done. Kerry said nothing about Bush's role.

Last few months, when Kerry has fallen noticeably in the polls, stocks declined.
Each time, Kerry would reappear after a week with a story, and stocks rebounded.

Fifth, Google goes public in $2.7 billion IPO. Problem is, it's a Dutch auction,
and neither the Morgan Stanley's bringing it on, nor investors bidding will win.
You bid a price, a price is set, if your bid is above, you buy. Below, you don't.
The first day price surge IPO investors were used to in the bubble years is over.
The drooling greed that conjures up in the mind of new issues lovers should have
been enough to turn any market from swiss cheese into hard sausage, but Friday,
Google's IPO euphoria was anything but as Internet stock prices were trashed.

Thursday, the Dow was oversold and due to bounce. The election looked clearer
as Bush dropped below 50% approval rating. The military was brokering a truce.
Kerry was raising his voice to be heard, Bush testified in private in secret.
The more Bush hides in the Oval Office, the more likely he's a one-term wonder.
The market does not care who wins, only how soon it finds out, like Bush at 35%.
Despite release of embarrassing photos of U.S. soldiers stripping Iraq prisoners,
Bush did not fall in the polls Friday, since Kerry did not take advantage of it.
Truce in Fallujah Iraq is unclear, and could fall apart after the prisoner pics.

NASDAQ COMPOSITE INDEX analysis:
Nasdaq Composite closed 1,920.15 -38.63 at 3.1% below sliding short-term trend.
Nasdaq rarely gets more than 4% below its short-term moving average, and March
lows for Nasdaq were 1899, a support level if selling continues on Monday, May 3.
The tech stock Nasdaq is so oversold, I expect it to move higher, news or not.
Nasdaq stochastics declined from Thursday's 10%/23% to a very oversold 0%/5%.
Remember, stochastics show where the market is relative to most recent trading.

Nasdaq stochastics are the lowest (most oversold) this year, even more so from
those seen at Nasdaq's March low at 1899. In late March, Nasdaq rallied to 2079
and since peaking April 5 (when Marines surrounded Fallujah), has given back 159
or 88% of the late March, early April gains. At Nasdaq 2079, I wrote to readers
Nasdaq had left a substantial chart gap between 2015 and 2045 and would decline
to trade in that chart area to "fill that gap" and that's what it did for April.

First quarter earnings reports for Nasdaq leaders Intel, Microsoft and Qualcomm
were stellar, and all 3 bellweather tech stocks raised future guidance. No good,
as stock prices have fallen for many of the reasons outlined above, but also from
overvaluation in the 11-month historic gain which began the day Bush invaded Iraq.

Nasdaq rose from under 1300 to over 2100 in just 10 months, overshooting worth.
Nasdaq is only trading down to more realistic prices and chasing out weaklings.
The TV media (CNN, CNBC, FOX) would have you believe because Nasdaq broke down
down to close below its 200-day moving average on Friday at Nasdaq 1933, that
the party is over, and stocks are going to collapse. They validate it with high
volume statistics in the latest selloff, and negative advance-decline numbers.

If you follow good advice and buy stocks which outperform, advance-decline is
irrelevant. Advance-decline is only relevant if you buy mutual funds holding
a large portfolio of stocks which move in line with the market as a whole.
You may reduce risk by diversification in a mutual fund, but you will never
gain enough to be a Warren Buffet or Donald Trump. Mutual funds are for those
who don't want to learn exactly what they are buying when they fund their 401K.

Nasdaq was oversold on Thursday, and Google's news should have sparked a rally.
The Google IPO did not boost Nasdaq tremendously, since it is a Dutch auction.
Go SEARCH. That is what Google does, with the IPO money, Google will rival
competitor Yahoo by offering email (Google Mail) and soon, job ads, personals.
The SEARCH that Google provides has made the Library Dewey Decimal obsolete.
Don't believe me? Ask Jeeves, Look Smart. Get Excite about the MSN Butterfly.
All of those competitors to Google saw their stock prices get trashed Friday.

Thanks for reading this edition of Stock Market Direction by Steve Zito.
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