Dow Jones 8,264.39 +78.08  8:23 pm EST, Sat., July 27, 2002  NASDAQ 1,262.12 +22.04  For info, visit access.smallcapnetwork.com .  S & P 500   852.84 +14.15  To be removed, please click here .  Russell 2000   382.26 +4.15  VOLUME 02: ISSUE 51 SmallCap Digest Weekend Edition:  Where Are The Markets Headed?  Here Is the Answer **One of Worth Magazine's top 250 financial advisers will be answering any questions readers may have about financial planning or related topics.  Questions maybe sent to editor@smallcapnetork.net ** This weekend we have a special edition of the SmallCap Digest.  Here is the answer...actually here are four answers to where the markets are headed.  The SmallCap Digest asked some of the most respected experts on the stock market to tell us where they think we are headed.      As the Chief Executive Officer and Founder of TrendFund.com, Michael J. Parness' online guise, Waxie, guides subscribers through bull and bear stock market conditions.  A trend-trader, Michael's value lies within seeing future market trends. Responsible for the direction and momentum of the company, his knowledge and unconventional approach have earned him respect within the investment community and acclaim as a financial advisor.  Since of April 2000 we have been advising clients to get out of the market as investors and strictly trade.  At 4600 we called the Nasdaq to 2500.  At 2500 we called it to 1500 and we now call the Nasdaq to 700. At 12,000 on the DOW we called it to 8000.  At 8000 we called it to 7000 and now we call it to 5000. So, you ask, WHY?  Why will the DOW close one day at 5000 or below and the Nasdaq close at 700 or below? The answer is rather easy.  Since most of what we do is based on Market TRENDS and trends are based on human emotion, we simply need to look back throughout history to know that during Bear markets P/E ratios shrink to something around 5 - 10 X's earnings.  As humans we never get things exactly right, so we tend to overshoot things both ways. It's why trading the stock market and not investing in it has been so profitable for us at Trendfund.com. One only needs to look around themselves to see that there are still so many companies, particularly techs, that are BUBBLE STOCKS: ebay (EBAY) Electronic Arts (ERTS) Newport Corp (NEWP) Qualcomm (QCOM) Tons of companies are simply overvalued by any historical or otherwise measure.  EBAY traders at roughly 17 X's REVENUE.  This is absurd and not likely to last. DOW 5000 and Nasdaq 700. Mark it down, it'll happen. Detail There is a growing sense of panic and the markets are experiencing high volume, climactic selling across the board. Virtually every single equity sector and industry are included in this waterfall decline and there are no safe havens, not even gold. This is the very definition of capitulation. It is happening. It's not pretty. It is historic. It will most likely reach a short-term climax at the support levels we have previously defined: Dow 7400-7565 and S&P 776-778. That should happen when most investors least expect it, probably today. As we await the denouement of the parabolic decline, intraday cross currents are becoming stronger and less predictable. We have been seeing premature short covering rallies followed by equally quick sell offs. Today (Wednesday) European bourses are down 3-5% and this should fuel more negativity in US markets, creating what will hopefully be the final 'wash and rinse' day. Buying weakness is not working, so there isn't much for the bulls to do until the bears have eaten their fill.  Prepare, but don't anticipate. Remember, the first mouse gets whacked and the second mouse gets the cheese. In whatever time frame you trade, buy the first pullback after you are sure the bounce has started. Don't try to pick the exact bottom. Technicals As we mentioned previously, the 38.2% retracement of the entire Bull Market from 1982 occurs at Dow 7565. That would roughly correspond with our S&P target of 776, which is the 61.8% retracement of the 90's bull market and a simple 50% decline from the top in March 2000, along with another important fib extension. These levels make ideal near-term targets.  We see the present action as the first leg of a 3-part capitulatory process that will last into 2003-4. What kind of long-term targets can we expect? FYI, the 50% retracement of the entire Bull Market takes us to Dow 6267 and the 61.8% retrace would land us at 4971. Those are reasonable targets for the 2nd and 3rd phases of the capitulatory leg and you can bet that pure value investors will have them on their radar. We can expect a number of very tradable mini-bull rallies during that corrective market process, but to really make money during this period investors must learn to short sell or hedge their portfolios with puts, bear funds or in some other similar manner. The SmallCap 600 closed just two points away from its September lows, which is another reason to expect a bounce very soon.       Let's See If We Get A Rally Off Of Oversold And Over-Pessimistic Levels. By Mark Boucher, TradingMarkets.com Click Here for a free trial   Wednesday's huge turnaround rally did occur on big volume And sentiment, the VIX, the TRIN, and a host of oscillators show the market was deeply oversold. However, the usefulness of many of these tools in a major bear market is more doubtful than is normally the case. So the real test will be whether the recent lows will hold and whether we can get some follow-through, breadth, and leadership off of any low that will support at least another bear-market rally that is catchable in distance and duration. So far the jury's far from out, and it looks like a bear rally is all that should be hoped for. What is frightening is how the last minor leg of the bear market took nearly everything down with it. Even most of Asia and Eastern Europe followed the U.S. and European markets lower. Base metals reversed their breakouts of long-term patterns and turned down sharply. Cotton is following the grains in a weather bull market, but Lumber has weakened and bonds have strengthened. None are yet at recession-discounting levels, but the trend is not positive.  And the real worry is that if the market now turns lower once more, these economic leading gauges could start to discount recession. Recession from here would present a very bleak outlook. Property and other holdouts would likely face the same delayed-effect fate of stock prices, and stocks would likely continue another big leg lower. Yes we could make money out of such a decline, but bear markets are a lot tougher than bull markets, and there are so many other negative side effects to one's wealth that this is not something to look forward to. But now it is definitely something to watch out for. Breadth indications over the latest week showed total downside dominance. Continue to wait for a 9:1 up/down volume day, the 5 day moving average of advancing volume to be 77% or more of total volume, an 11-day A/D ratio of 1.9 or more, or a 10-day A/D ratio of 2 or more, and a couple good O'Neil Follow Through Days to make for a totally confirmed bull move. But again, don't be surprised to see a couple follow-through days and no further breadth confirmation, leading to a small but barely catchable upmove similar to what we had off of the Sept. lows on any potential rally.      David Fried is the editor and publisher of The Buyback Letter, the only investment newsletter devoted to finding opportunities among companies that repurchase their own stock!  Mr. Fried has been a featured guest on CNBC's "Money Club", "WEVD"'s "Market Wrap" with Bill Bresnan in New York City and many other regional radio broadcasts. He has also been profiled in the New York Times, Los Angeles Times, Barron's, Bottom Line Personnel, Kiplinger's Personal Finance, Forbes, Business Week and numerous other publications.  When times are uncertain it helps to periodically review the overall economic picture. The "Big Trends" presented below will help you keep a clear head in what always feels like a crazy market.  Underneath the market noise are, as always, solid realities that ultimately rule the day no matter what investors' near-term hopes or fears may be. Big Trend #1: The inflation trend  Since 1920, the S&P index has gone up an average of 15.5% when inflation was in the 2%-5% range.  When inflation topped 5% the S&P average rose just 1.3% per year.  Currently inflation is running well below the 5% mark. The inflation trend remains very positive.  Big Trend #2: The long-term bond yield vs. S&P yield Peter Lynch, the famed fund manager of The Magellan Fund during its glory days, uses the following rule of thumb: When yields on long-term government bonds exceed the yield on the S&P 500 by 6% or more, sell stocks and buy bonds. As of June 30, the yield on the S&P 500 was 1.50% while the yield on 30-year government bonds was approximately 5.47%. The difference between the two yields is 4.07%.  Yield Indicator: Positive Big Trend #3: Action of the Federal Reserve Bank  The Fed lowered interest rates 11 times last year. The Fed has changed its bias to neutral. For a while we have felt that the next move by the Fed would be to raise rather than lower interest rates. However that is no longer a certainty.         Fed Indicator: Neutral Big Trend # 4: The yield curve Currently the yield curve is positive. As of June 30, the spread between a 1-year Treasury bill and the 10-year bond was 2.70% and the 30-year bond currently yields 5.47%, 3.34% more than the 2.13% yield on the 1-Year Treasury bill. Economists generally feel that an inverted yield curve indicates that an economic slowdown is imminent. The yield curve is in order.  Yield Curve Indicator: Positive Big Trend # 5: Valuation Recent market declines continue to take the froth out of the high-flying big-cap stocks. The S&P 500 is down about 48% from its peak. Recent price declines in the stock market combined with low interest rates have moved our Valuation indicator from negative to neutral. Buying value in this market remains extremely important.                  Valuation Indictor: Neutral Big Trend #6: Investor sentiment We add the total bullish percentage readings of Investors Intelligence, Consensus Index, AAII Index and Market Vane, as reported in Barron's every Sunday, and average this figure for the month.  We consider an average reading of over 200 to be negative while readings of under 150 are positive. The average total reading for the five weeks ending June 30 was 127. This reading is the same level as it was for last September, the month of the World Trade Center attacks. We have not had a monthly reading of over 200 since December 2001.  Readings over 240 have marked market highs over the past few years while readings of about 130 have marked market bottoms.              Sentiment Indicator: Positive Big Trend #7: Earnings Sentiment We track the quarterly positive and negative earnings surprises as reported in Barron's every week. We feel that positive surprises and revisions are bullish for the market as they indicate that professional analysts have been too negative, while negative revisions indicate that analysts have been too optimistic.  During the just-concluded quarter, positive quarterly earnings surprises beat negative surprises 88-37, a ratio of just over 2-to-1. Fiscal year earnings revisions surprises were essentially equal. This indicates that analysts' current estimates for 2002 earnings are probably about right, meaning there will be an absence of upside surprises to drive the overall market. Earnings Sentiment Indicator: Neutral Summation Commentary Four of our seven indicators are positive (inflation, yield, yield curve and sentiment), while three indicators are neutral (the Fed, valuation and earnings sentiment). Our indicators are telling us that the investment climate is positive at this time.  D I S C L A I M E R : The SmallCap Digest is an independent electronic publication committed to providing our readers with factual information on selected  publicly traded companies. SmallCap Digest is not a registered investment advisor or broker-dealer. All companies are chosen on the basis of certain financial analysis and other pertinent criteria with a view toward  maximizing the upside potential for investors while minimizing the downside risk, whenever possible.  Moreover, as detailed below, this publication accepts compensation from third party consultants and/or companies which it features for the publication and circulation of the SmallCap Digest or representation on SmallCapNetwork.net.  Likewise, this newsletter is owned by TGR, LLC.  To the degrees enumerated herein,  this newsletter should not be regarded as an independent publication.    Click Here to view our compensation on every company we have ever covered, or visit the following web address:  http://access.smallcapnetwork.com/compensation_disclosure.html for our full compensation disclosure and http://access.smallcapnetwork.com/short_term_alerts.html for Trading Alerts compensation and disclosure. All statements and expressions are the sole  opinions of the editors and are subject to change without notice. A profile, description, or other mention of a company in the newsletter is neither an offer nor solicitation to buy or sell any securities  mentioned. While we believe all sources of information to be factual and reliable, in no way do we represent or guarantee the accuracy thereof, nor the statements made herein. The editor, members of the editor's family, and/or entities with  which the editor is affiliated, are forbidden by company policy to own, buy, sell or otherwise trade stock for their own benefit in the companies who appear in the publication. The profiles, critiques, and other editorial content of the SmallCap Digest and SmallCapNetwork.net may contain forward-looking statements relating to the expected capabilities of the companies mentioned herein. THE READER SHOULD VERIFY ALL CLAIMS AND DO THEIR OWN DUE DILIGENCE BEFORE INVESTING IN ANY SECURITIES MENTIONED. INVESTING IN  SECURITIES IS SPECULATIVE AND CARRIES A HIGH DEGREE OF RISK. THE INFORMATION FOUND IN THIS PROFILE IS PROTECTED BY THE COPYRIGHT LAWS OF THE UNITED STATES AND MAY NOT BE COPIED, OR REPRODUCED IN ANY WAY WITHOUT THE EXPRESSED, WRITTEN  CONSENT OF THE EDITORS OF SMALLCAPNETWORK.NET. We encourage our readers to invest carefully and read the investor information available at the web sites of  the Securities and Exchange Commission ("SEC") at http://www.sec.gov and/or the National Association of Securities Dealers ("NASD") at http://www.nasd.com . We also strongly recommend that you read the SEC advisory to investors concerning Internet Stock Fraud, which can be found at  http://www.sec.gov/consumer/cyberfr.htm . Readers can review all public filings by companies at the SEC's EDGAR page. The NASD has published information on how to invest carefully at its web site.