Market Summary

The macro economic data released this week foretold a very weak 4th quarter and there are now several indications that a recession will follow in the coming months, perhaps by the second quarter of '07. Weakness in the housing market continues and inventories continue to grow, durable goods orders fell sharply and manufacturing is now contracting. Weakness in construction has spread from the housing market into the non-residential sector and is at its lowest level in 5 years. This across-the-board weakness led to unemployment claims jumping sharply. Consumer confidence is slipping, despite lower gas costs (which are about to start rising again, however, as crude oil futures rose each day this week) and Thanksgiving retail sales were correspondingly weaker than hoped for. Adding to the gloomy outlook were: signs that inflation is not decreasing quickly enough and further warnings, this time from the Chicago Federal Reserve President, that interest rates may need to go higher; and a further fall in the dollar. The bond markets reacted to this by further increasing the yield curve inversion and the federal funds futures market have priced in an 80% chance of a cut to 5% by March. The Federal Reserve's own model is predicting a 52% chance of recession.

The markets are starting to see the writing on the wall and the DJI and SPX had their second successive losing week, with losses of 0.7%, and 0.3% respectively. The NASDAQ, which dodged the bullet last week, was the biggest loser this week with a fall of 1.91%. December is usually a good month for the markets, as portfolio managers indulge in 'window dressing' to improve their yearly returns, so the markets may have one more leg-up to go before year's end. The technical indicators are not yet saying 'get-out' but I expect to start playing the head and shoulders top breakdowns very soon (look for substantial improvements in that area in the coming weeks).

The NASDAQ Composite is the most volatile of the major indexes and is the market likely to be hit hardest in a recession as investments in new technology are cut back. The weekly chart shows the Bollinger Bands contracting which is usually a sign that a consolidation is under way and that breakout to the up or downside will occur in the near future. This time, it is most likely to be to the downside and I would not be surprised to see the PSAR (the dot on the chart below) switch to a short position by next weekend.

There were 43 breakouts this week. If you were able to buy each of them at the breakout price and hold to the end of the week, you would have averaged a 2.3% gain, comfortably beating the market. We can expect that the number of breakouts will decrease as the market falls, but that they will still perform quite well. Stocks gaining over 10% above their pivot points were:W.R. Grace (GRA) up 14.4%; Genomic Health (GHDX) up 18.1% and Indonesia Fund (IF ) up 13.6%.

Should You Buy Low volume, Low priced Stocks? - Yes!

There has been some discussion on the forum about the viability of our TradeWatch selections based on their price and average volume characteristics. This is based on the general belief that one should only invest in stocks priced at least $10 and with an average daily volume of at least 100,000.

Lets consider the minimum price issue first. Its never been clear to me why a $10 stock would be preferable over a $6 stock (our minimum) so I looked at the current top 100 of an influential business daily and found: 10% have traded at less than $10 this year; 18% traded below $10 since January, 2005, and since 2000, 50% traded below $10. This year alone the 10 stocks that traded under $10 have gained an average of 190%. The stocks are SIM, IAAC, HRT, LQDT, PRFT, MIKR, COGO, JST, BAMM, PSPT. (Incidentally, four of these stocks were listed on TradeWatch this year: BAMM, COGO, PRFT and SIM.) I think this effectively makes the point that by limiting yourself to stocks priced over $10, you are eliminating a potentially profitable part of the stock universe, and eliminating stocks that could go on to be strong performers and qualify for the influential business daily's 100. Nevertheless, how do we explain that just yesterday, Nortel Networks (NT), did a 10:1 reverse split moving their share price from $2.15 to $21.50. Nothing changed fundamentally, but now the dogma allows you to buy it at 21.50 because NT has overnight garnered a perception of quality.

On the other hand, there is a logical argument based on liquidity requirements that higher average volume is generally better. Bid-ask spreads are usually tighter and there is a higher likelihood that your order will be filled with less slippage. Our Portfolio Simulation for the Buy at Open list shows that the optimum return (around 77% year-to-date) is with a $6 minimum price and minimum volume limit of 80,000. Raising the minimum volume to 100,000 reduces the return to 70%, and raising it to 200,000 reduces the return to a still very desirable 38% when the S&P 500 gained less than a third of that. Interestingly, the 10 stocks quoted above had a 50 day average volume of 90,000 at their lows of the year, indicating again that low volume can ultimately provide substantial returns.

Investment Advisors Using our Service

TradeRight Securities, located in a suburb of Chicago, is a full services investment management company and broker/dealer. They have been a subscriber, and user, of BreakoutWatch.com for some time now. They practice CANTATA and use Breakoutwatch.com as a “research analyst”. You can learn more about TradeRight Securities at: www.traderightsecurities.com. If you’re interested in speaking to a representative, simply call them toll-free at 1-800-308-3938 or e-mail gdragel@traderightsecurities.com.

PivotPoint Advisors, LLC takes a technical approach to investment planning and management. A breakoutwatch.com subscriber since May, 2004, they use breakouts, market signals, and now TradeWatch to enhance returns for their clients. Learn more at http://pivotpointadvisors.net or contact John Norquay at 608-826-0840 or by email at john.norquay@pivotpointadvisors.net.

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