The May Fidelity Fund Portfolio has been posted to the newsletter portion of the website. To access the newsletter, simply click on the "Subscribe Now" tab, establish a username and password, and you'll have full access to the Dynamic Growth newsletter and portfolio. This free trial will end on June 1, 2007.

Our Top 10 Fidelity Sector Fund portfolio for May was posted this morning. There are several changes this month as we see investors add more defensive issues to their portfolios.

As we speak, the stock market continues to set "new highs" as corporate earnings are blowing away reduced analyst expectations. Is this new leg up in the market warranted, or are investors being set up for fall ? Only time will tell.

Let's examine a few issues;

On the Bullish Side;

1) Short interest on the NYSE is at record levels, and the market is rallying as shorts covered their positions driving stock prices higher. Short interest can cause a short squeeze which adds fuel to market advances.

2) In the options pits, a high put-call ratio exists which is viewed as a contrarian indicator and a reason to go long.

3) Corporate earnings are beating lowered expectations.

On the Bearish Side;

1) During earnings season companies with the best earnings tend to be among the first to report, while companies that disappoint report last. The best reports issued have come from the home appliance area which has to be attributed to new appliance purchases by consumers who borrowed equity from the mortgage market, as well as consumers along the Gulf Coast who's homes were destroyed during hurricane's Ivan, Katrina, and Dennis.

2) Investors use of margin (money borrowed from brokerage firms to buy stocks) is higher now than it was prior to the tech bubble in 2000. In March, margin debt was at $293.2 billion in March, up $134.58 billion from 2002.

3) Hedge fund debt rose from $177 billion in 2002, to $1.46 trillion in 2006.

4) Corporate profits are better than expected for the quarter, but the quality of those earnings need to be examined. For example, many companies are issuing better than expected results because of stock buybacks and foreign exchange gains.

I really don't have a problem with stock buybacks, but foreign exchange gains (profits from a higher Euro being coverted into the lower dollar) are adding to the revenue gains which are translating into an earnings surprise. That's all well and good, but earnings surprises because of higher sales translates into a better economy. Without the added revenue from foreign exchange gains, would earnings this quarter be as robust? I don't think so.

5) Insider selling ratios are coming in at a rate of 17:1, 19:1, 28:1, 30:1 almost daily. Do you think these insiders know where the quality of their companies earnings are coming from? I'll bet that they do.

Going forward, my sense is the consumer is beginning to roll over, and the mortgage market that got homebuyers into so much trouble is affecting retail sales. While the market can continue to trend higher on short covering and a short squeeze, that will soon come to an end. When it does, what will we be left with to drive the markets higher?