Summary

Five-day trading weeks cannot produce results much flatter for stocks than last week did, and it contained an expiration to boot! My seven-measure tracking group produced respective average and median returns either side of zero. Was this a sign of an approaching turn in the market? I believe it probably was -- a turn for the worse. And in this case, worse just might turn out to be much worse. I'm not issuing a flashy "Sell All Stocks Immediately!" pronouncement. However, the way the situation is potentially shaping up, you might not be unhappy a month or two from now if you did just that.

The Stock Market

Using my seven-measure tracking group as a proxy, last week was about as flat as the world was once thought to be. Four of the components rose, three fell, with returns running in a range of +0.4% for the Russell 2000, to minus 1.1% for the NASDAQ 100. The overall results were an average return for the group that was slightly negative, a median return that was about +0.1%.

With almost half of 2004 now behind us, stock returns have to be terribly disappointing to the bullish camp, considering what expectations were as this year was beginning. Through yesterday's close, the tracking group was up an average 0.9% from 12/31/03, although the median return was a better +1.6%.

Following are numbers I believe are even more telltale than year-to-date returns. As of Friday's close, here is what the tracking group looked like, vis a vis respective 2004 closing highs. Look also at how long ago, on balance, these were established.

For months, my technical and fundamental work have been pointing to a bad June-July period for stocks. Equities will likely escape June in decent enough fashion: for the month through yesterday, the DJIA, S&P 500 and NASDAQ 100 had registered respective returns of 1.8%, 0.8% and minus 0.9%.

Moreover, Wall Street is about to participate in as well as to accommodate quarter-end "window dressing," the four times a year when investment managers try to fool their clients into believing the managers did something they really did not do during the quarter. These events are not quite as exciting as they used to be, however, since regulators began expressing increasing displeasure with the manipulative markups and the like that were once a bit more flagrant than they are at present.

Nevertheless, I continue to believe what's ahead for stocks, and probably not far ahead, either, will be quite unpleasant!

Was yesterday's reversal, coming on top of last week's flat performance, the beginning of this troubled period? Maybe, maybe not, although today should tell us more. If the market were to produce another configuration like yesterday -- up early, selling off into the close -- it would not be a good sign.

And against the overall backdrop, let's not forget the current spin being peddled by those incessantly showcased on CNBC and the other venues in the regular propaganda loop. The shtick goes that come 6/30, the sky will clear and everything will be just fine. To wit: Iraq will be turned over to Iraqis and the long-awaited June meeting of the Federal Open Market Committee will be out of the way.

Being the spoilsport I am, I see both events as having the strong potential to breed more problems, not less. Iraq under Iraqi control, despite how nominal this status might be, is an Iraq one step closer to an out-and-out civil war. And as far as I'm concerned, when it comes to bad alternatives, US and British troops are likely better off fighting a guerilla war than being in the middle of a civil one.

As to next week's FOMC meeting, read on ...

Interest Rates

Have a look at this:

Although the FOMC should hike the Federal Funds Rate by half a point next week, it is very unlikely this will happen. Greenspan may speak with bravado at his confirmation hearing and in other public settings, but I suspect he is scared to death of the carry-trade monster he personally created. Or maybe he is delusional and really believes there is no problem. If so, this would make Greenspan even more dangerous, if that is possible!

At any rate, as matters presently stand, look for the much-expected 25 basis-point increase in the funds rate on 6/30. On the other hand, I suspect the above run in fed funds futures has it about right for the balance of 2004 -- a good chance the funds rate will be at least double what it is at present.

Therefore, in coming weeks, the Treasury curve will increasingly reflect the possibility, which means higher yields, of course. Which leads me to the following comment.

At present, the model bond portfolio has a 200,000 (par value) short position in the Treasury 5.375s of 2/15/31. This is about half the total short the account is allowed, per its investment guidelines, which limit short positions to 40%. I am entertaining the idea of taking this position to the maximum that is permitted, and I may try to do this before next week's FOMC meeting.