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Market Wrap

No recession in site for Wall Street with GDP numbers beating street estimates by a mile

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        WE 1-29          WE 1-22          WE 1-15          WE 1-08
DOW     9358.83 +238.16  9120.67 -219.88  9340.55 -302.77  +461.89  
Nasdaq  2505.89 +167.01  2338.88 -  9.27  2348.20 +  3.79  +152.22  
S&P-100  640.44 + 30.06   610.38 -  6.08   616.46 - 19.56  + 32.08  
S&P-500 1279.64 + 54.45  1225.19 - 18.07  1243.26 - 31.43  + 45.93  
RUT      427.22 +  4.78   422.44 -  4.61   427.05 -  4.18  +  9.27  
TRAN    3202.37 +138.57  3063.80 - 84.73  3148.53 -211.75  +210.97  
VIX       26.53            32.85            29.75            23.88
Put/Call    .47              .54              .56              .48

No recession in sight for Wall Street with GDP numbers beating street estimates by a mile

The market rallied again Friday on positive economic numbers for last quarter. The GDP report came in showing +5.6% annual growth and street estimates were only +4.4%. This actually might be too strong and provide evidence to the Fed that the economy is in fact overheating. Amazing turnaround! Just a few months ago the Fed was lowering interest rates and warning of the global flu that was approaching our oasis of prosperity. Now only a couple of months later the Fed might even be forced to raise rates again to keep the economy growing at a steady pace and not succumb to the dreaded inflation bug. Big AL G. has his hand on the throttle and we are at his mercy. He has done a good job making us take our medicine in the past. We may not like it but our overall health is much better for all the vaccinations along the way.

From the rally on Thursday and Friday you would think Brazil had disappeared. Rest assured it is still there and could bite us this week. The U.S. cash flow out of Brazil is accelerating. On Friday over $500 mln fled the country, up from a -$300 mln daily average at the beginning of the week. The Real fell another -7.1% and is now down to 2.1 to the U.S. dollar. This is a -42.3% drop since January 13th when they decided to let it float. Brazil raised it's interest rates to 37.5%, the second hike for the week. In spite of these efforts to slow the cash drain there appears to be no end in sight. Rumors are growing that Brazil is planning to default on it's debt AND freeze bank accounts. This is a very deadly time bomb and the ticking is getting faster every day. Something major needs to happen very soon or we are in for some serious problems.

As if we did not have enough to worry about, the Fed meets this week for a two day session. Any decision about rates will come on Wednesday. We are not really worried about a hike due to the Brazil problem and no one expects another cut. The worry is just that anytime the Fed meets it is possible for bad things to happen.

If we can slip by another three or four weeks without Brazil self destructing and taking several other countries with it, we should accomplish our trading goals for the year. We have entered into the "split zone". Just imagine Rod Serling on voice over in the back ground and the Twilight Zone music building in your subconscious. (Hey, this is print, it is the best I can do!)

The number of companies announcing splits has exploded and the oportunities to profit are enormous. We are going to expand our reporting of stock splits starting today and try to play as many as possible. Let me remind you that there are several ways to play a split. Some traders think there are as many 6-8 times to make a play. We are more conservative and tend to only focus on two. 1) Pre-announcement expectation. 2) Pre-split run. See the split section in today's newsletter for the description of the plays.

The forecast for the week is fundamentally and technically bullish but sentimentally bearish. Say what ?? We feel that the market internals are improving. The advance/declines closed positive two days in a row with advances increasing. The transportation sector which must confirm any Dow rally surged off a double bottom on Friday. The jump was news related due to a coordinated rate hike by all the major carriers and we need to see some follow through next week. The S&P-500 and Nasdaq set new highs again. The S&P appears ready for a breakout move. The Nasdaq is in a breakout mode but could suffer some profit taking soon. The Dow is currently working on a string of higher lows and should retest the recent highs in the mid 9400s this week and if that is successful then the all time high of 9647. The OEX broke out Friday to a new high and is at a pivotal point. All the technicals look great. The downside is "all the technicals look great". The amount of bullishness is overwhelming. The absence of bearishness is very concerning. It takes a balance of both factions to support a market rally. The VIX is now way under 30 at 26.53 and dropping. The put/call ratios continue to fall and are now .47. If you were bear hunting the outlook is bleak. Normally when everything looks too good to be true it normally is! The two things that can hurt us are Brazil and the cessation of earnings. Once the euphoria of positive earnings announcements is over and we have two months before the next round we will need some other form of positive news for the street to focus on. Which news should be making headlines then? Brazil, Latin America and China. Not very positive in our book. If the market rolls over on Brazil worries after earnings then we could be looking at some serious downside risk. Our advice would be to play the rally. But don't plan to hold any longer than needed to make a quick profit and out again. Plan your entry and exit points carefully. In a global warning environment the weekends are particularly dangerous. Major global currency events tend to happen on Mondays before the U.S. market opens. Play it safe and live to play another day.

Good Luck

Jim Brown

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