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Late rally fades in early morning

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Floor traders said yesterday's late session recovery in stocks was fueled by shorts closing some positions, as they didn't want to hold large short positions into the weekend.

This morning's stock futures show that the bulk of yesterday's late rally in stocks is about to be erased as S&P futures trade lower by 7.2 points at 904.30, NASDAQ futures are slipping lower by 12.5 points at 952.00 and Dow futures are down 50 points at 8,655.

This morning's stock futures action would paint a slightly lower open for stocks as fair value for the S&P 500 today is $0.76. HL Camp has their computers set for program buying at $1.66 and set for program selling at $-1.76. Fair value for the NASDAQ-100 today is $2.70.

Economic news out this morning has the Labor Department reporting that initial claims for state unemployment benefits rose by 20,000 in the latest week to 387,000, which was slightly higher than consensus of 375,000. The more meaningful four-week average which smoothes out the more volatile weekly data rose to 386,000 from a 14-month low. The Labor Department said it remains difficult to decipher the last 3 weeks of jobless claims as annual furloughs in the auto and textile sectors are not fully accounted for in seasonal adjustments. Meanwhile, continuing claims for benefits rose by 5,000 to 3.5 million, the first increase in five weeks. The four-week average of continuing claims dipped to 3.54 million, the lowest since March.

Later this morning at 10:00 AM EST, ISM (formerly national PMI) will be released. This would be considered a broader pulse of purchasing activity than yesterday's lower than expected Chicago PMI (reported 51.5% vs. consensus of 56.8%). Economists are looking for a 55.3% reading. Reading above 50% indicate expansion, while reading below 50% depict contraction.

Introducing Beetle's Balanced Benchmark Fund

Yesterday the juices started flowing when I got an e-mail that was marketing some new bond-related "IShares" that are listed on the AMEX. Oh goody! Finally a way we can all track some type of PRICE movement in bonds instead of just YIELDS on a chart! While these new bond-relates IShares are new and we have little charting history, with time they will develop and allow us to analyze their action technically, only with PRICE instead of YIELD.

Last night, I started a new mutual fund called "Beetle's Balanced Benchmark Fund."

What this hypothetical fund allows the investor to do is take $8,000 and place an equally weighted amount in 8 different investments.

The perceived "safest" investment could have the investor placing $1000.00 in the US Dollar as depicted by the U.S. Dollar Index (dx00y). The thought here is, if I place $1,000.00 in my wallet right now, in 1-day, I should still have $1,000.00 in my wallet. Of course this doesn't take into consideration any gain/loss of purchasing power as it relates to global currency fluctuations, but you'll soon find out just how the Beetle's Balanced Benchmark Fund will track this over time.

Those willing to take a little more risk can portion $1000.00 into the Lehman 1-3 year Treasury IShares (AMEX:SHY) $81.26. These shorter-term Treasuries may be perceived as "lower risk", as this basket of shorter-term maturities will eventually mature in about 1.79 years and the underlying bonds are backed by the full faith an credit of the U.S. Government. According to the IShares description, this security will generate approximately 2.66% YIELD as of June 30th update.

Those willing to take on further risk can portion another $1,000 into the Lehman 7-10 year Treasury IShares (AMEX:IEF) $82.52. These intermediate-term Treasuries may be perceived as "low- medium risk" as this basket of intermediate-term maturities will eventually mature in about 6.29 years and holding are backed by the full faith and credit of the U.S. Government. Current YIELD is approximately 4.59%.

Those investors willing to take on even further risk can portion another $1,000 into the Lehman 20+ year Treasury IShares (AMEX:TLT) $82.53. These longer-term Treasuries may be perceived as "medium to higher risk" as it relates to Treasuries, only because uncertainty lies in what takes place between now and 20+ years from now. According to June 30, 2002 information, the weighted average maturity of this basket of bonds is 24.22 years with a YIELD of 5.64%.

Those fixed income investors willing to take on even further risk can portion another $1,000 into the GS $ InvesTop Corporate Bond IShares (AMEX:LQD). These bonds are higher YIELDing at 6.3% and are backed by the full faith and credit of the company's that have sold these debt instruments in the past. These are debt OBLIGATIONS of the company's that sold the bonds, but there is no guarantee that the company's will be able to make the interest payments. The average credit quality of the bonds is S&P/Moody's A-/A3, with an average weighted maturity of 10.5 years.

It wouldn't be a "benchmark" type fund if we didn't offer some type of exposure to equities, so investors looking to take on further risk can portion $1,000.00 each into the Dow Diamonds (DIA) $87.15, S&P Depository Receipts (SPY) $91.16 and the NASDAQ-100 Index Tracking Stock (QQQ) $23.85.

With $1,000 equally weighted amounts of capital exposed to 8 different investments representing various asset classes and various degrees of "perceived" risk, it will be interesting to see how you come out in the following days/weeks/months.

Beetle's Benchmark - Hypothetical $7,995.94 from 06/31/02 close

I've placed the 8 previously mentioned types of investments into a portfolio within my q-charts portfolio tracker. I've decided to try and "sort" these various investments on what many financial analysts might consider "lower risk" investments at the top and scale down toward "higher risk" investments.

Over time, based on the flows of capital, "smart money" will always win out and will buy low and sell high.

Yesterday, we received some important economic data from the second quarter U.S. Gross Domestic Product report. Everyone's on a level playing field and we all have the same information.

How will "smart money" vote in the coming sessions? Will the "lower risk" asset classes that offer smaller potential returns win out? Many investors have plowed their money into cash in the past year and have sworn off the markets. Some have stashed away what's left of their trading accounts into the bond market. There are still those that believe that equities are the place to be at such depressed levels.

However, those that have been around these markets over the last five years and have lived to still be trading have found out that the various investments above have seen multiple peaks and valleys in just the past 12-months and have made for some excellent gain potential as long as the trader was long or short the right asset class at the appropriate time. In fact, many have done well and didn't necessarily pick a top or bottom.

Over the next weeks/months and hopefully years, I'll show this portfolio either intra-day or in one of my market wraps. Maybe, just maybe we'll be able to identify some "trends" or interesting action taking place that will give us hint of where smart money is casting its vote.

You will also note that I've "split" the portfolio into two separate pieces, with a "Subtotal" under the US Dollar to Corporate bond fund investments which is a very generalized divider of perceived "lower risk" investments. And the lower half has also been subtotaled to see how three different types of equities perform.

By constantly comparing the "Value" column against the "Cost" column, we'll have a feel of how things unfold from yesterday's close.

The sign of a bottom in equities?

Many subscribers have noted in the past that the popular CNBC television program may profile a certain type of "asset class" analyst on their program to talk about the fantastic gains that have been experienced in a sector over the last year. Sometimes, it's been the "kiss of death" and that asset class reverses markedly in the following months.

Now, it is unfair to say that CNBC or any other media outlet is always the last to show up and signal a top. I've traded long enough that I too have bought a top and sold a bottom more than just once. The key has always been to protect capital with a stop in the underlying equity.

However, it is at least interesting that all of a sudden (July 26th), there are some IShares that represent fixed income investments, which an options trader can trade and can also be traded just like an equity.

It's a fantastic opportunity for traders no doubt. What's kind of interesting is if one were to pose the question "Why now and not 2-years ago?" Has it taken "irrational exuberance" in the bond markets and hunger for bonds to avoid equity risk by the masses to finally get a product like this to the markets?

For a much more complete description of these new Ishares, you can visit http://www.ishares.com/home.jhtml;jsessionid=2NTGF3MTZUEAYCQBB2BRB5QKAZSNQD50?_requestid=6858

Internet HOLDRS (AMEX:HHH) - Weekly Chart Interval

Many investors are familiar with "internet stocks." In the late 1990's, they were the "investment of choice." While Al Gore claimed to have invented the internet, it was the AMEX that listed the Internet HOLDRS (AMEX:HHH). The HHH was a great investment for bulls for about 7 months, but it's been a better investment for bears in recent years. The AMEX however saw some good trading revenues and execution fees no doubt, but with little volume interest anymore, new products are needed to help generate some revenue.

Jeff Bailey
Senior Market Technician
Option Investor

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