Despite a large percentage move for the major indices last week, the tape leaves
much to be desired. While the Nasdaq and Nasdaq 100 climbed slightly above some
resistance levels last week, and a few select breakouts have succeeded, there
appears much more wrong than right with this tape:

First, the major indices lack any accumulation. Other than Friday's options
expiration -- which caused volume to surge -- and Thursday's higher volume
churning action on the Nasdaq, volume has been absent when the indices have
moved higher. This underscores the lack of demand for stocks from the big money
crowd. Moreover, the Russell 2000, NYSE Composite, Dow, and s and p 500 have
lagged considerably and created divergences that do not correlate well with a
market seeing high levels of money flows. Until this changes, caution is
warranted.

Second, leading stocks continue to form late-stage faulty bases. While
late-stage bases can work if the patterns are constructive, most of the leaders'
basing patterns have fundamental flaws such as wedging handles, low levels of
accumulations, or v-like structures. At a minimum, these stocks need more time
to correct these flaws and build proper bases.

Third, stocks that have attempted to breakout have acted rather sluggishly.
While a few names like ATHN and PSMT have broken out and advanced, larger liquid
leaders such as GMCR, MA, V, and PLCN have struggled when they have attempted to
breakout. In strong markets, liquid leaders will breakout and give a patient
investor little chance to buy them as they will advance rather quickly. The
sluggishness of these breakouts argues that -- at the very least -- the market
needs more time to base-build.

Fourth, the few stocks that are leading come from industry groups that are
rather defensive in nature, such as the auto-replacement part stocks, gold
miners, utilities, discount retailer and "dollar stores", medical stocks (which
tend to be of a more defensive posture), and large-cap consumer stapes like
Procter and Gamble and Colgate. When recession-proof defensive names are
leading the market, it does not bode well for a sustainable uptrend.

Fifth, stocks that are economic bellwethers have absolutely lagged this rally.
Names like Federal Express and Caterpillar have acted extremely weak and refuse
to rally with the broad market.

Sixth, emerging markets -- which have lead rallies the past few years -- refuse
to do so. The charts of Brazil, Hong Hong, mainland China, or the other Asian
emerging markets remain in horrid shape.

Seventh, the financial stocks still act highly distributive. While most of the
large banks have held their August lows, they cannot gain much traction and lack
any volume to the upside. While banks do not have to lead a rally, continued
deterioration in the technical patterns of these stocks does not correlate well
with a sustainable uptrend.



Despite the negative characteristics I described, it is always possible that the
market is in a "repair stage" similar to what we saw in the summer of 2010.

In 2010 (after a severe intermediate correction from May to July), the market
bottomed on July 1, followed-through, and had a similar rally to today's rally
with little power or leadership from growth stocks. Then, for the last three
weeks of August, the indices sold off aggressively, but did not undercut the
July 1 low. During those three weeks, the stocks that would provide leadership
for the fall rally began to tighten up and act constructively such as AMZN,
RVBD, CMG, SINA, and PLCN. The market staged a lasting follow-through on
September 1. Unlike the July follow-through, leaders broke out almost
immediately and began monster moves. The power from breakouts early in
September was the key ingredient that was missing from the July rally.

The recent rally has similar characteristics to the "flawed" July 2010 rally,
which ultimately set the stage for the "real" rally in September 2010. If that
is the case, we should watch closely for a wave of selling similar to August
2010, where the leadership tightens up, coils, and sets up to break out in a few
weeks.

Of course this is just one possibility and trying to predict where the market
goes or what course it will take is fool's gold. But, by examining the weight
of the evidence, I am left to conclude that the market's recent rally is
somewhat feeble, and not the "fat pitch" where the prudent speculator would want
to be aggressively long and expose large amounts of capital. THAT CAN CHANGE IN
A MOMENT'S NOTICE, but until powerful breakouts succeed (other than a few
exceptions), and quality liquid growth stocks break out of proper bases, the
prudent speculator should remain patient and be ready to seize this opportunity
when it occurs, whether it's next week, next month, or next year.

This email was sent by Edward Hornstein, 60 east 42nd street, suite 1144, ny,