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[TTHQ Staff]

There are some stocks and some averages that have leading or confirming qualities as it relates to the big averages such as the DJIA, S&P and the NASDAQ. General Motors (GM) was one and over the last several years General Electric (GE) is another. General Electric bottomed in February of 2003 and made a higher low in March, a very positive divergence with the S&P and DJIA. The stock stayed mostly "in gear" with the DJIA and the S&P from the March low into January making higher highs with the averages with the exception of July 2003. This was followed by the decline into August. For the record this was also accompanied by a higher low in GE, as it made its low in mid July. General Electric peaked in January of this year and from that point made a series of lower highs into the February top for the DJIA and March top for the S&P putting this relationship on a very negative signal. It will now be interesting to see how it does when or if the DJIA and the S&P move below their March 24 low. As far as averages to averages we already have the venerable DOW Theory, and that tripped a sell signal back in March. There is now another minor negative signal in place on the DJIA Theory as the DJIA failed to move above its April 5 high confirming the DJTA. Both moved below their April low setting of a confirmed short-term signal but here too it will be important to see how they do when and if they move towards their March lows. Another index we have found that has leading qualities versus the broad averages is the XBD, which is an index of 12 brokerage stocks. Again there are not a lot of signals but the ones we get work extremely well. For example, at the March 2002 high it failed to move up above or even close to its January-February high. To this end we have two potentially serious problems with the XBD. The first is that it failed to confirm the new S&P high in March having peaked in February. More importantly in our view is the fact that last week it moved well below its March 24 low ands to its lowest level since late December. Unlike the DOW Theory, where either average can trigger a divergence, the XBD has leading characteristics in its relationship with the S&P and DJIA. By that we mean that a failure by the S&P or DJIA to confirm a new low or new high in the XBD is not a valid signal. It is only a valid signal when the XBD fails to confirm a new high or new low. The NASDAQ also has its benchmark and that is the SOX or semiconductor index. Due to the more volatile of both the SOX and the NASDAQ we seem to get a lot more signals from this relationship than we do from the XBD. Not to be outdone, we did see as minor divergence at the January high with the SOX peaking about two weeks prior to the NASDAQ. More importantly, as was the case with the XBD, the SOX moved below its March low. Given that this relationship like that of the XBD has leading qualities this cannot be viewed as a potential positive divergence but only as a negative signal. It also looks as though the SOX has completed a big head and shoulders top but this can not yet be confirmed. However, if it is confirmed it would give a price projection significantly lower and back towards the May-June 2003 low. On April 14 the percentage of NYSE stocks above their own 2100 day moving average moved below 70% rendering its first sell signal since April-May of 2002. We talked about this and even showed a chart in the April 19 report. Following that signal we have seen a number of comments explaining why this is not the indicator it used to be due to the proliferation of non equity vehicles traded on the NYSE such as closed wend funds, preferred issues and so forth. We can accept that to a degree but the truth is these same issues were the ones responsible for the buy signal on this same indicator in March of 2003 when it moved above 30% from below. Moreover, if we accept this argument then we also have to accept the argument that the run in the daily A/D line to above its 1998 high was equally distorted due to this same phenomena. We cans also argue that this in turn caused distortions in a number of other indicators such as the Arms index and a number of breadth related measures. We even heard that the sell signal from the 3-day oscillator on April 4 can not be valid due to this phenomena. As to the latter development, that sell signal while a day early worked quite well as did a number of other signals from that point. We do understand the idea behind the critics and we also see this as a potential explanation for why a number of indicators failed to work during the 2000-2002 decline such as the Arms. To this end we have finally begun to assemble data on the S&P 500. It is not complete as yet but there is enough to discuss. On the first front, the percentage of S&P stocks above their 200 day moving average only this past week declined below 70% from above confirming the signal from the total NYSE data. This indicator also had the same divergence going into the March top and the same divergent buy signal at the March low. We also have the advance/decline data and here we see a very interesting development as the cumulative A/D line for the S&P did not come anywhere close to its 1998 high. In fact it stopped just below its March 2002 high In some respects it does confirm those that are suggesting that the overall NYSE data is distorted. However, in a number of other respects it also is confirming the signals from the NYSE indicators. In addition, when looking at the A/D line of the S&P it also dispels the myth that the decline from the 2000 high in the S&P was primarily a function of the bigger more heavily weighted issues rather than a broad based decline. The S&P's A/D line moved in down sharply from its 2000 peak to its 2002 low confirming all the way down. Moreover, in March off 2003 it actually moved below its October 2002 low. The bottom line is that the weight of the evidence is such that it strongly argues that a move below the March low should be our minimum expectation over the medium-term. And the above discussion adds further to that assessment. However, the path in which the market takes to get there is another story. We do see the potential for a modest rally to get underway at any time to help to relieve the short-term oversold condition. The first part of a new month tends to have a positive bias and that adds some additional support to the idea that a bounce is possible. However, we are also up declining trend oscillators both on a daily and weekly basis. This along with the continuing breakdown in a number of medium and long-term indicators coupled with a still very negative sentiment backdrop continue to indicate that any rally from here will be nothing more than a very short-term affair related to either the post April 27 or possibly the April 5 decline. We remain bearish on the short-term with a stop of 1140 basis the S&P. Medium and long-term we remain bearish.