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STOCK MARKET DIRECTION by Steve Zito Newsletter on Market Direction
Technical Indicator Analysis of the Dow and Nasdaq Composite Index
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STOCK MARKET DIRECTION by Steve Zito Newsletter for Monday, Oct. 4, 2004

Information in this newsletter based on prices from Friday, Oct. 1, 2004
Dow Jones Industrial Average
---------------------------------------- 10,192.65 +112.38 (+1.11%)
Nasdaq Composite Index
----------------------------------------- 1,942.20 + 45.36 (+2.39%)
Standard and Poors 500 Index
----------------------------------------- 1,131.50 + 16.92 (+1.52%)
10-Year Treasury Note yield
-------------------------------------------- 4.191% + 0.072

DOW JONES INDUSTRIAL AVERAGE analysis:
Dow Jones Industrial Average closed 10,192.65 +112.38 at 0.69% above Dow's 7-day
moving average. For months, the TV financial news has usually blamed stock market
declines or lack of new Dow highs on the negative effects of crude oil price gains.
So, naturally on Friday when the nearest contract month for oil futures closed over
$50 a barrel ($50.12) for the first time ever, the Dow and Nasdaq staged huge gains.
I have written that crude oil prices have nothing to do with stock market declines.

The most likely reason the Dow Industrials and especially Nasdaq advanced on Friday
was the hands-down whuppin' that John Kerry gave George W. Bush in their televised
Presidential election debate on Thursday night that 62 million Americans watched.
How did Kerry beat Bush as 70% of CNN/Gallup respondents declared in Friday's poll?

Kerry made concise, clear, rational statements of fact while Bush made weird faces,
contorting lips and tilting his head to make himself look like a Chevy Chase mime.
Am I the only person who watched who thought Bush looked like a bizarre caricature?

Bush tried to say nuclear twice, but uttered "nuke-ee-lar" the frequent mistake his
supporters have labeled "Bushism." Bush said that Kerry is sending "mexed missages"
when Bush wanted to say, "mixed messages." Am I the only one noticing Bush's attempt
to speak clearly became a bumbling slurred diatribe that only the diehard Christian
fundamentalists could turn the other ear and continue to listen with any interest?
Bush made a fool of himself in a debate the Republicans arranged to focus on Iraq.

Kerry came into the debate underestimated with low expectations, but did very well,
unless one watched FOX TV Network or CNBC Squawk, which called the debate a draw.

Everyone else from CNN and the major TV networks, to newspapers and election polls
gave Kerry a unanimous decision, with Kerry scoring points from the opening bell in
round one until a final knockout blow with, "I made a mistake talking about Iraq...
you made a mistake in invading Iraq, Mr. President." Bush looked disturbed at that.

Bush was impatient, raised his pointed finger in the air to begin rebuttals before
Kerry ended talking, and Bush appeared to always be on verge of losing his temper.
Bush repeated over and over, his defense of Iraq, and never mentioned China, Korea,
South America, Africa, nuclear weapons on the black market in former USSR, or death.
Bush never admitted that Americans are dying to hold ground in Iraq without purpose.

I have written all year that the stock market wants Kerry in the White House, except
for oil stocks (mostly based in Texas) and oil service stocks. The XOI and the OSX
have staged impressive rallies since Bush gave his acceptance speech at a Republican
convention to begin September. Contrarily, Dow since early September fell from 10,375
to as low as 9,950, while Bush attained as much as a 13% lead in election voter polls.

Since Bush's election lead began to slip a week ago from 13% to 5% (Monday, Sept. 27)
the Dow has rallied from 9,950 to 10,192. Latest polls just this weekend have Kerry
in a tie with Bush as a result of the Thursday night TV debate, yet expect Dow's move
on Friday to reverse as the Dow is extremely overbought, and the economy is weakening.
Measured by increasing weekly jobless claims, or lower consumer confidence, it's weak.

This Monday, insiders on Wall Street will be leaked next Friday's US employment data
and trade on that. In other words, if stocks fall, the jobless data will be negative.
The jobless numbers for September are reported first Friday of the new month, Oct. 8.

Dow stochastics rose from 69%/71% on Thursday to extremely overbought 100%/81% Friday.
Readers who bought DJX Oct 102 and Oct 101 put options should continue to hold them.
Dow Jones option index DJX (the Dow divided by 100) closed at 101.93 +1.13 (+1.12%).

S&P Retail Stocks RLX closed 410.67 +2.76 (+0.68%) should be watched for weakness.
While home refinancings can keep credit card debt used for consumer purchases from
the inevitable debt collapse that the U.S. keeps postponing, bankruptcies are rising.

AMEX Oil Stocks Index XOI closed 707.14 +8.40 (+1.20%) at 1.60% above its 7-day MA,
stochastics extremely overbought at 100%/78%. XOI is up from 618 back on August 24.
Oil stocks started their 27-trading day advance just before Bush was re-nominated.
What appeared to be a blowoff XOI top with a 20-point one-day move on Sept. 21 to
XOI 696 was easily surpassed within days when crude oil hit $50 for the first time.

What the XOI gains have been telling investors is that Bush would be re-elected.
Bush has championed free markets, ownership (such as gas guzzling SUV's), all while
never uttering a word regarding energy conservation, reduction in crude oil imports,
but did mention in his TV debate he won't let other countries dictate U.S. policies
when Kerry questioned Bush's refusal to enter into treaties to fight global warming.
The 67% of American residents who live in mortgaged homes will feel the heating oil
bite taken out of wallets this winter, which the Farmer's Almanac says will be cold.

Oil Service Stocks OSX closed 123.17 +2.38 (+1.97%) at 2.17% above its 7-day MA,
stochastics overbought at 85%/72%. OSX stochastics have been overbought for 27 days.
Oil service stocks began their 32-trading day advance earlier than oil on August 17
at OSX 102, and the OSX has had 22 up days and 10 down in its impressive 21% rally.

While oil stocks are buys with high cash flows, high dividends, captive customers,
and a President who cares more about protecting oil fields in the Middle East than
baseball fields in the slums of Detroit, oil service stocks are more risky and hence
more variable. When they gain, they outpace oil stocks. Oil stocks are the customers
of oil service firms, except for Halliburton, who biggest customer is VP Dick Cheney.

When crude oil prices are high ($50 a barrel is 5 times higher than $10 back in 1998
when Bill Clinton was President), oil firms spend more of budgets for oil exploration.
Oil service firms are the ones who build, operate, and lease oil rigs on land and sea.
Oil service firms lease multi-million dollar rigs out by the day, and lease rates are
5 times higher today than 5 years ago, especially in hurricane-plagued Gulf of Mexico.
Why would anyone expect the OSX to go down? If everyone is bullish, and all those who
will invest in oil service have done so, when no one is left to buy, OSX stocks fall.
That may be Monday. It may be tomorrow. It may be when Kerry wins the election Nov. 2.
Readers were advised to buy OSX puts for Dec. 90 at 0.10 and Dec. 95 at 0.30 lately.

Phila. Gold and Silver Stocks XAU closed 101.06 -0.89 (-0.87%) 1.98% above 7-day MA,
stochastics overbought at 80%/83%, and the XAU rally since August 26 was comprised
of a sudden sharp rise to XAU 95 just before August XAU options expired, which gave
readers in XAU August 90 calls a 17-to-one return, followed by no movement through
Sept. options expiration, then a second sudden sharp upward move from XAU 92 to 101.

Gold gaining, following on the heels of crude oil and other basic materials prices.
Gold was labeled an inflation barometer, then called a political stability indicator,
then sold by central banks during the Clinton years to seek high bond yield returns,
and only since Bush took power, has gold reemerged in movement similar to inflation.
Gold has no value other than that placed on it by buyers. Worldwide supply of gold
exceeds demand for physical uses of gold in teeth, jewelry, and electronic devices.
Gold is purely a momentum play at $420 an ounce. When the oil markets collapse, so
will the gold and gold stocks. When the XAU hits 110, buy Dec 100 puts on the XAU.

Phila. Bank Stocks BKX closed 99.11 +1.53 (+1.57%) at 1.13% above its 7-day MA,
stochastics overbought at 99%/91%, on upside reversal of a recent downtrend from
a mid-Sept. BKX peak at 100. Why would banks reverse to the upside with the jump
in interest rates from below 4.0% in the 10-year T-note to 4.19% in the last week?

Bush has introduced TV ads on Friday to counter his TV debate loss on Thursday in
which Bush reiterates his defense of ownership as top American goal, focusing on
home buying, home selling, home renting, home loans, home building, and everything
except creating jobs for the homeless. Who funded the four-year home building craze?
Banks, who else? Banks take a cut, buying, selling, refinancing. Pays $300 lunches.
Bank stocks bet on Friday that Bush will emphasize home ownership in his debate #2.

Biotechnology Stocks BTK closed 530.75 +6.45 (+1.23%) at 1.29% above its 7-day MA,
stochastics at 100%/70%. Up from the BTK low 448 on Aug. 10, appears to be rising
faster than the other indices mentioned here. The biotech stocks peaked at BTK 569
at end of April and fell straight to BTK 448 in less than 4 months, before regaining
68% of summer's total decline in the last 37 trading days. Is it just a retracement?
Hard to say, and hard to determine if Kerry will be good for biotech research in 2005.

Phila. Semiconductor Stocks SOX closed 401.91 +17.71 (+4.61%) 3.71% above 7-day MA,
with stochastics overbought at 100%/68%. The SOX index is different that the upside
consensus in all the other indices mentioned herein. Why is that? One would believe
that the SOX index would lead tech and U.S. stock markets higher, but the SOX index
is saying that China will move from stealing US tech secrets to mass producing them
in the next 4 years leading up to the Beijing Olympics. Ever met an honest Communist
country and then championed their entry into the World Trade Organization? Bush has.

His brother Neil Bush made $2 million a year as a consultant to China's chip execs,
as revealed in divorce records years ago. No one ever criticizes China's policies.
Except Ralph Nader, who appears as candidate on ballots in 32 states, none critical.
Bush and Kerry debated foreign policy on TV for 1 1/2 hours, never mentioned China.

NASDAQ COMPOSITE INDEX analysis:
Nasdaq Composite closed 1,942.20 +45.36 at 2.19% above its seven-day moving average.
Nasdaq stochastics rose from 88%/72% Thursday to extremely overbought 100%/93% Friday
and sentiment may shift from selling rallies to buying the dips if Kerry continues to
outpace Bush in coming election poll results. The only investors who believe that Bush
is good for tech heavy Nasdaq are those who believe that George Sisler still holds the
single season baseball hits record at 257. Ichiro broke the 84-year old record Friday.
Under the Bush administration, even oldest U.S. baseball records are being outsourced.
America has 290 million people, and cannot produce the best hitter in its own sport.

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