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Buy Signal

Dow Jones Industrial Average   10,158
Value Line Arithmetic Index   1,669
30-Year Treasury Index   4.58%

The Big Picture for Stocks: Expect a short term bounce within a cyclical bear market.

Technical Trendicator (1-4 month trend):
Stock Prices
   UP
Bond Prices   UP

Our 1-4 month trend indicators have turned up. We reported last week that the sentiment indicators reached a buy point. This week, the momentum indicators have stabilized and turned upward, giving us the buy.

This is a risky buy signal. The market is still vulnerable to a crash if there is any exogenous bad news - a bank failure, terrorist attack, economic news, etc. And longer term, I believe we are in bear market that will last into 2006. I expect a fairly steady stream of bad economic news during the year, with earnings estimates coming down dramatically within a few months. It wouldn't be at all surprising to see the Dow reach 6500 sometime in 2006. But the indicators are positive for now, so we will go with the flow.

For our Special Situations track record, we will cover our shorts in these ETF's - SPY, MDY, and IJR (the large, mid, and smallcap indexes), as well as the Financial Select SPDR (XLF). Also sell the Grizzly short fund (GRZZX) as of Monday's close.

However, we will keep the short position in the Retail HLDRS (RTH). The charts look to me like many of the retailers are just now turning down. Also keep the long position in the Prudent Bear Fund (BEARX). This fund is a short fund, but also often owns gold shares. Gold looks like it is turning up again, so this fund is an OK hedge for now.

I suspect that the best place to find value is in the beaten up microcap stocks. Many of these stocks have been in their own bear market for a year, and could easily bounce a pretty good percentage amount. We have several of these on our Special Situations list.

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