Weekly Newsletter 05/12/07
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Market Summary Weekly Breakout Report Top Breakout Choices Top 2nd Chances New Features Tip of the Week
Prior editions of this newsletter with our valuable Tips of the Week are available here.
 Weekly Commentary  

Market Summary

The preference for large-cap stocks was evident again this week as the DJI gained 0.46%%, the S&P 500 squeaked by with just an 0.02% rise but the NASDAQ Composite slipped 0.39%. This was the sixth straight week of gains for the DJI and S&P 500. The week started cautiously ahead of the Federal Reserve's Open Markets Committee meeting. Investors expected that the Fed would keep interest rates unchanged and were reassured that although the inflation rate remains a priority, the FOMC statement did not imply a rate increase would be necessary to contain it. They were further reassured on Friday when core wholesale prices were unchanged and stocks recovered from a sell-off on Thursday following weak-same stores sales figures. Hopes for an interest rate cut seem to trump concerns over consumer spending at the moment because stocks rose on Friday despite further evidence of reduced consumer spending when the Commerce Department reported that retail sales declined 0.2% in April compared to March. Consumer spending accounts for 2/3 of GDP spending so falling consumption has the power to derail the hoped for 'soft landing'.

The economy is weakening and consumers are spending less. GDP 1st quarter growth is expected to be revised downward to possibly as low as 0.5% (Bloomberg News) and some economists believe 2nd quarter growth will be zero or negative. So why are the markets doing so well? One explanation for the continued upward trend is that money is still flowing into equity Mutual Funds and ETF's at a healthy rate. Net inflows directed at domestic equities were $3.4 billion in the seven days ended May 9 (AMF Data Services). This increases demand for equities and so prices rise in response to the demand. At the same time, money managers and savvy investors are aware of the possibility of a recession and so place these funds in liquid (large cap) investments as a defense against a sudden downturn. This explains why the DJI and S&P 500 are outperforming the NASDAQ. If we accept this explanation, then the underlying question is where is the cash coming from and when will it end? One possible explanation is that full employment increases flows into pension and 401k funds and these flows are directed towards equities because these offer a better return currently than fixed interest investments and real estate. The collapse of the housing market, while hurting the consumer, also causes a redirection of available investment funds away from housing speculation and into equities. If this analysis is correct, then we conclude that as long as a recession and job-losses are avoided, then large-cap stocks are likely to continue to gain.

The 5-year S&P 500 chart shows that redirection of investments from real estate into equities may well have occurred. From the start of the current bull-market in late 2002, the S&P 500 traded within a channel until last September when it broke through the upper channel and has traded largely above that long term upper channel since then. The chart also shows that there was an increase in volume around that time which would be consistent with more money entering the markets. That time period coincides closely with the decline in the housing market.

The number of breakouts fell back this week but their performance by the end of the week substantially beat the market averages with a gain of 3.8%.


 New Features this Week Additional Value that we added this week

There were no new features added this week.

This Week's Top Tip Tips for getting the most out of our site

The Importance of Volume

Stocks rise and fall based on supply and demand but the strength of the move is measured by paying attention to volume. This is well known and we don't claim any special insight for pointing it out. But we do emphasis the importance of volume in most of our reporting and provide you with the tools to evaluate the strength of move based on volume.

  • Each day, our daily 'Today's Breakout and Top Ten Report' includes a commentary on how the day's volume compares to the previous day's and to the 50 day moving average.
  • Our 'Equivolume Charts' provide a concise and visual representation of volume, accumulation and distribution and a comparison to the moving average for the three major indices.
  • Our standard charts include not just volume bars but the Up/Down Volume Ratio displayed in green, yellow and red bands.
  • Our enhanced T/A charts include several additional volume metrics such as On Balance Volume and the price/Volume Oscillator.

Our innovation is in developing volume indicators that apply specifically to breakouts and improve your chances of picking winning breakouts as they happen.

Our first volume indicator is the 'PVI' or Price/Volume Indicator that relates to the likelihood that a stock on our CwH list will breakout the following day. PVI classifies the price/volume action on the day the watchlist is published by looking at three conditions :

  • did the stock close higher than the day before?
  • if so, was the volume greater than the day before?
  • if so, was the volume greater than the day before and above average?

This results in five possible outcomes, each of which is assigned a score.

Price/Volume Action PVI
Price does not rise over previous day
Price rises over previous day on lower volume and volume less than average
Price rises over previous day on higher volume and volume less than average
Price rises over previous day on lower volume and volume is above average
Price rises above the previous day and volume is above average

It is important to understand that the values assigned to the PVI are to allow us to classify the possibilities and are not intended to imply relativity between the classifications. That is, a PVI of 0.6 is not 3 times better than a PVI of 2, for example.

We introduced the PVI on October 29, 2005 and described it on our newsletter of that date together with performance results.

Our second volume indicator 'VADVR' (Volume to Average Daily Volume Indicator) helps you determine which breakout alerts are likely to be most successful. Although a breakout volume of 1.5 times the 50 day average is considered the minimum for a confirmed breakout, our analysis showed that a VADVR of 2.5 was the optimum.

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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 Market Summary Overview of market direction and industry rotation
Index Value Change Week Change YTD Market1
Dow 13326.2 0.46% 6.92% enter
NASDAQ 2562.22 -0.39% 6.08% enter
S&P 500 1505.85 0.02% 6.17% enter
 Best Performing Index
1 Week 13 Weeks 26 Weeks Year-to-Date
Dow Jones
0.46 %
Dow Jones
2.02 %
Dow Jones
4.76 %
Dow Jones
6.92 %
 Best Performing Industry (by average technical score over each period)
1 Week 3 Weeks 13 Weeks 26 Weeks
Tobacco Products, Other Tobacco Products, Other Tobacco Products, Other Tobacco Products, Other
 Most Improved Industry (by change in technical rank2)
+ 54
+ 99
Long Distance Carriers
+ 213
Long Distance Carriers
+ 210
Charts of each industry rank and performance over 12 months are available on the site

1The Market Signal is derived from our proprietary market model. The market model is described on the site.
2The site also shows industry rankings based on fundamentals, combined technical and fundamentals, and on price alone (similar to IBD). The site also shows daily industry movements.
 Weekly Breakout Report How confirmed breakouts performed this week
# of Breakouts
Period Average1
Max. Gain During Period2
Gain at Period Close3
This Week 17 18.92 7.62% 3.84%
Last Week 27 20.31 8.12% 4.09%
13 Weeks 304 21.54 12.11%
Breakout Count for Week
Closed-End Fund - Debt
Specialty Chemicals
Business Software & Services
Application Software
Education & Training Services
Management Services
Personal Services
Semiconductor Equipment & Materials
Independent Oil & Gas
Diversified Machinery
Textile Industrial
Grocery Stores
Apparel Stores
Communication Equipment
Telecom Services - Foreign
1The average number of breakouts in each week over the previous 13 weeks.
2This represents the return if each stock were bought at its breakout price and sold at its intraday high.
3This represents the return if each stock were bought at its breakout price and sold at the most recent close.
 Top Breakout Choices Stocks on our Cup-and-Handle list with best expected gain if they breakout
Company Name
Expected Gain1
Best Overall LPSN Liveperson Inc 94
Top Technical CRYO CryoCor Inc 92
Top Fundamental HURN Huron Consulting Group Inc 35
Top Tech. & Fund. HURN Huron Consulting Group Inc 35
1This is the gain predicted by our Expected Gain model if the stock breaks out. Expected Gains for all cup-and-handle stocks are published on our site.
 Top Second Chances Stocks that broke out this week and are still in buyable range
Company Name
Expected Gain1
Best Overall GVP Gse Systems Inc 94
Top Technical CYD China Yuchai Int Ltd 72
Top Fundamental JOSB Jos A Bank Clothiers 20
Top Tech. & Fund. JOSB Jos A Bank Clothiers 20
1This is the gain predicted by our Expected Gain model after the stock has broken out which uses the volume on breakout as a predictive term. Because the model variance is +/- 38% the expectation can be negative.

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