Market Summary

The markets closed out a strong week with a mild correction on Friday following the release of a jobs report that showed further evidence of a cooling economy. The report contained mixed signals, however, as figures for August were revised upwards, and they surprisingly showed no sign of employment in the housing sector easing. Earlier in the week, investor's cheered the DJI finally setting a new closing high on Tuesday, and continued to add new highs on Wednesday and Thursday. The other major indexes also performed well with the S&P 500 setting a new 5-year high and the NASDAQ Composite continuing its march towards its 5-year high set in April this year. For the week, the DJI gained 1.47%, the NASDAQ Composite gained 1.84% and the S&P 500 1.03%.

The impetus for the week's gains came from falling oil prices, which are 25% below the high set in July, and a conviction that the Federal Reserve will not raise interest rates further. Fears that the popping of the housing bubble would curb consumer spending have also retreated as long term interest rates have remained low, despite the increase in short term rates, making homes still relatively affordable and thereby providing some price support. Investors are comfortable, for the time being, that although the economy is slowing, the proverbial 'soft landing' will be achieved. The elephant in the room that is being ignored in the run up to the election is that inflation, at 3.5% per annum, is still much higher than the Fed's target rate of 2%. The bond markets are less sure a soft landing will be achieved and are pricing in a 32% chance of an interest rate cut at the FOMC's January meeting. A rate cut would signify an economy that needs stimulus rather than an economy in excellent health, so there is an apparent divergence between the stock and bond markets on the economic outlook.

In terms of expectations for the NASDAQ, there is no change from last weeks prognosis, which saw the index as on target to test resistance at the July high.

The number of confirmed breakouts jumped to seventy this week for an average gain by week's end of 2.4%, comfortably outpacing the markets.

More Additions to the TradeWatch Portfolio Simulation Tool

Thank you to those of you that have made suggestions on how to improve this valuable tool. This week we've added options to limit the price of stocks that are selected and also set a minimum volume limit. The default values for the selection screen are now set for the year to date and give a very good return against the S&P 500. The screen has also been modified to provide more help in its use. Using the default values, the simulation gives a return of 64.4% year-to-date compared to a gain in the S&P 500 of 8.4% (as of Thursday, 10/5/06). These are real returns using a purely mechanical approach of buying at open and selling at open based on our buy and sell signals and include brokerage fees ($7 at Scottrade, but you can enter your own commission costs).

It is important to remember that the 'Buy at Open' list is derived from stocks that have a high 'expected gain' after breakout as predicted by our Expected Gain Model. Our research for the model showed that stocks with lower prices and lower average daily volumes generally give the best return, and that result leads the model to predict a higher expected gain for low price, low volume stocks. Consequently, there is a predominance of low price, low volume stocks on the Buy at open list. Some purists may prefer higher priced, higher volume stocks but our study found that they do not deliver the best returns after breakout, compared to others we include in our cup-with-handle search criteria.

The Portfolio Simulation screen now looks like this:

The results look like this:

This tool is still undergoing testing and enhancement. It is available to all subscribers and guests and you can test the tool here. I encourage you to try different options, and if you find any errors then please let me know. Also, let me know what you think of this tool and how to improve it.

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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