MARKET AVERAGES ROLL OVER ON BAD HOUSING NEWS -- BONDS RALLY AS DOLLAR WEAKENS -- VIX BOUNCES OFF SUPPORT -- BUYING BEAR FUND INSURANCE

SHORT-TERM SELL SIGNALS ARE GIVEN ... The stock market is on the verge of suffering a downside weekly reversal at important resistance. After failing at its 200-day moving average, the S&P 500 has broken a two-month up trendline and is bearing down on its 50-day moving average. The daily RSI and MACD lines have turned negative. This looks more and more like the end of the bear market rally that started in mid-March. Consumer discretionary stocks are leading Friday's decline with homebuilders especially weak. Chart 2 shows the Consumer Discretionary SPDR (XLY) trading below its 50-day average for the first time in a month. Chart 3 shows the PHLX Housing Index breaking trendline support. Although commodity prices are higher, basic material and energy stocks are also selling off today. The fact that we're on the verge of a long weekend (and the "sell in May" philosophy) could also be prompting more profit-taking. The only groups showing relative stability this week are consumer staples, healthcare, and utilities. Transports are falling after failing a test of their 2007 highs. Airlines are especially weak.

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BOND PRICES BOUNCE ... Some money coming out of stocks is moving back into bonds. Chart 4 shows 7-10 Year Treasury Note Bond Fund bouncing off chart support at its February low. Chart 4 shows the Lehman TIPS bond Fund acting even stronger and trading over its 50-day average. [Bonds are in a tug-of-war between falling stocks prices (which help bonds) and rising commodities (which hurt bonds). In that environment, TIPS should continue to be a stronger bond choice. As bond prices rise, bond yields fall. Lower bond yields are hurting the U.S. dollar and supporting commodities like gold and oil.

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VIX BOUNCES OFF OCTOBER LOW... A couple of our contributing writers have pointed out that the CBOE Volatility (VIX) Index had reached potential chart support at its October low at 16. Since the VIX trades in the opposite direction of the stock market, any upturn from that support level could spell trouble for stocks. Chart 6 shows the VIX turning up this week (it's up 8% today). What's more, its RSI and MACD lines have turned positive. When the VIX turns up, the market usually turns down. And both appear to be doing just that. All of these trends suggest a more defensive stock market posture which could include bear fund purchases.

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SHORT FUNDS ARE BOUNCING ... Bear funds are especially useful when the market is showing signs of turning back down. Like right now. Chart 7 shows the Short S&P 500 ProShares Fund bouncing off its 200-day moving average. Its daily MACD lines have turned up as well. [This fund is a mirror image of the S&P 500). There are several other bear funds to choose from. Chart 8 shows the ProShares Ultra Short Dow 30 already trading over its 50-day line. This looks like an opportune to use one of them as bear market insurance.

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