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Index Wrap

Small caps set bullish pace in 2nd quarter

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The major indexes finished the second-quarter with fractional losses after a bulls brought home the mail with the smaller-caps of the Russell-2000 Index (RUT.X) 448.37 -0.08% posting the biggest gain of the major indexes with an impressive 23% rise in the second-quarter.

For those that like to take a contrarian approach to investing with thought of "last quarter's winner will be next quarter's loser, July to October has the Stock Trader's Almanac showing that on a historical basis the Russell-2000's enters its weakest seasonal period, falling 4.4% on average.

Smaller-caps helped the broader NASDAQ Composite (COMPX) 1,622.80 -0.15% gain 20.9% from March to June, while the larger capped NASDAQ-100 Index (NDX.X) 1,201.69 -0.29% finished in the number three spot of index gainers with a 17.9% gain.

According to the Stock Trader's Almanac, July begins NASDAQ's worst 4 months of the year, despite the first trading day of the month finding the Dow Industrials gaining 12 of the last 13.

The often ignored AMEX Composite (XAX.X) 969.20 -0.15% wanted investors to know that while its components rarely get much attention, of the major indexes, it finished number 4 with a notable 17.5% gain and beat out the broader "big board" index's and NYSE Composite (NYA.X) 5,505 -0.08% quarterly 16.3% gain.

"The market" or what many refer to as "the market" had the S&P 500 Index (SPX.X) 974.50 -0.17% rising 14.8% in the recent quarter, with its narrower and larger-cap brethren in the S&P 100 Index (OEX.X) 490.39 -0.24% close behind with a 14.2% quarterly gain.

And the Dow Industrials (INDU) 8,985.44 -0.04, rose 993 points in the recent quarter, roughly 16-points per day, to post a 16.3% gain.

Here's how some of the various asset classes in the "Beetle's Balanced Benchmark Fund" have done since the end of last year, when we benchmarked the various assets to their December 31st close. The smaller to mid-caps of the Russell-2000 aren't listed, but perhaps some of their debt in the "junk bond" sector firmed with our representative Pacholder High Yield Fund (NYSE:PHF) $8.60 +0.35% has been, which holds the top spot for asset class with an impressive 39.61% gain.

Beetle's Balanced Benchmark - From 12/31/02 to 06/30/03 close

A quarterly recap of the major equity indexes show that the above 6-month benchmark finds the bulk of major index gains for 2003 having come in just the past three months. I've made note that interest income from the fixed income portion of the portfolio do not reflect and interest paid to holders, nor have any dividend payments from equities such as the Dow Diamonds (DIA) or S&P Depository Receipts (AMEX:SPY) been accounted for.

To start the quarter out, our April 1st Index Trader Wrap title of "Target for opportunity is there for the bulls" may have had a read and white target being drawn on a bear's back as the bullish % indicators for the major equity indexes were moving higher and for the most part, had the bulls offensive team on the field, and if similar to American Football, good field position near their own 40-yard line.

In recent weeks, the bulls have scored a "touchdown" going into the second quarter as the bullish % for the major indexes like the very narrow Dow Industrials ($BPINDU) bullish %, S&P 100 Bullish % ($BPOEX), NASDAQ-100 Bullish % ($BPNDX), and broader S&P 500 Bullish % ($BPSPX) have all reached well above the 70% level. How powerful and dominating have the bulls been in the second quarter? Even the very broad, or broadest of broad NYSE Composite Bullish % ($BPNYA) and NASDAQ Composite Bullish % ($BPCOMPQ) have seen the bulls send more than 70% of the stocks in these two indexes to point and figure buy signals, where a previous level of resistance selling gave way to higher prices.

But, just as American football's rules call for the scoring team to eventually turn the ball over to the opponent, I'm looking for bears to put a few points on the board in the third quarter, but the formidable offense shown by bulls has me thinking "field goals" for the bears, with no re-test of the march lows, will at most see a 50% retracement of the second-quarter's gains. I'll be keeping an eye on the "yardage markers" as depicted by the bullish %, but I'm beginning to agree with some of the longer- term market forecasters that 2003 could be "the year of the bull" after the bears "ruled the division" the past two years.

Again, no one can predict geopolitical events, but from what I see in just the "Beetles Balanced Fund" and substantial gains from the "junk bond" portion of the fixed income section, market participants seem rather firm in their convictions that some of the sloppy accounting from recent years and cost controls have given a shine to balance sheets and income statements in just the past six months. And risk, when compared to the safety of Treasury bonds when weighed against their lower YIELD reward offered, had higher grade corporates as depicted by the iShares GS $ InvestTop Corporate Bond Fund (LQD) gaining just over 4% in the recent quarter (excluding interest paid) as still rather risk averse bond bulls sought out some higher YIELDing debt among the blue chips.

For an end of quarter recap and forward look into next quarter, tonight I'm going to simply take a look at the major indexes in the scope of their March lows and recent highs. I'm also going to show current regression channels (2 Std. Deviations from close), which I think gives hint, along with some recent breaks below the shorter-term 21-day SMA, that the major equity indexes are starting to lose some of their bullish momentum and may simply tie into the higher levels of BULLISH RISK that the bullish % charts have been showing in recent weeks, and some of that risk being removed at a more noticeable pace in the narrower NASDAQ-100 Index (NDX.X).

S&P 500 Index Chart - Daily Intervals

We've been monitoring the homebuilders for weakness in recent weeks and profiled a few names for bears to begin picking away at with partial positions and the Dow Jones Home Construction Index (DJUSHB) 433.69 -2.07% slipped further below our 19.1% retracement from its March lows to recent highs. I've attached a retracement bracket of the SPX in similar fashion, which shows similar retracement to what we did with the DJUSHB. I'm looking for resistance to begin building at the SPX 21-day SMA, but feel at these higher levels of bullish %, the SPX will be hardpressed to get much above the 1,000 level in the coming month, let alone WEEKLY R2 of 1,003. A break much below the 972 level begins to have the broader SPX looking like it is following the homebuilders lower.

Today's trade saw the broader S&P 500 Bullish % ($BPSPX) see a net loss of 2 stocks to point and figure sell signals with the bullish % slipping to 78.6%. Since the bullish cycle high reading of 82.83% on June 16th, we've seen a net loss of 21 stocks to point and figure sell signals. Still "bull confirmed" and it would take a reading of 76% to have this indicator reversing into "bull correction" status.

The narrower S&P 100 Bullish % ($BPOEX) saw no net change in its bullish % and remains at 81% for an 5th straight session after reaching a recent bull cycle high of 82% on June 20th and 23rd.

NASDAQ-100 Tracking Stock (AMEX:QQQ) - Daily Interval

The base of the upward trending regression channel is established by anchoring from the March 12 lows to recent June 6th high and still shows a bullish channel in place. A 50% retracement of the recent bullish move from the March lows would have the QQQ pulling back to its December highs. Since the QQQ/NDX tend to "overdo" things a bit in an upward and downward move, I'm putting my quarterly "max decline" level at $26.56 if things get a little "overdone" as bullish risk looks to be removed as NASDAQ now begins its worst 4-months of the year.

Today's trade saw the narrower NASDAQ-100 Bullish $ ($BPNDX) see a net loss of 1 stock to a point and figure sell signal. This has the bullish % slipping lower to 75% and still "bull correction" status after reaching a bull cycle high reading of 91% from June 6th to June 19th. This bullish % action has be looking for FIRM resistance at $31.00 in the Q's, where the mid- point of regression and downward trend from the June 6th highs intersect each other. On Friday, the mid-point of this channel looks to have provided resistance, after offering support for the bulk of May. I think a longer-term bull in the QQQ might be well served to begin writing current month $31 calls or even August $30 calls to work down a longer-term bull's cost basis.

Dow Industrials Chart - Daily Intervals

Bulls shouldn't be giving much more room to a bullish stop than the 8,890 level as we had previously noted that the first sell signal the Dow would give in its conventional point and figure chart would be at 8,900. I like the way this WEEK's S1 level of 8,906 and current base of upward regression channel offer support at that level. With stochastics trying to turn up from "oversold" on the daily, the Dow might have one last "gasp" in it back to 9,200, but with the broader S&P 500 Bullish % slipping a little day by day, I think the Dow may be due for a rest. Bulls should be very pleased with the way the Dow has traded on its point and figure chart, and I'm going to guestimate that the Dow doesn't slip much below the 8,600 level this quarter.

Today we get new MONTHLY pivot analysis levels. It takes me a little while to get them on the charts with the new WEEKLY levels, but we'll take a look at them tomorrow evening.

Pivot Analysis Matrix

Jeff Bailey

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