Weekly Newsletter 06/23/07
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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

NASDAQ Market Signal Reverts to 'exit'

Friday's large sell-off brought up another distribution day for the NASDAQ and our market model again signaled an 'exit'. This was the fourth reversal in June alone and is indicative of the nervousness that pervades the markets. For the week the DJI lost 2.05%, the S&P 500 slipped 1.98% and the NASDAQ Composite gave up 1.44%.

The markets were roiled on Friday by fears that the full effect of the subprime lending debacle has so far been hidden from investors and that when the full extent is known there will be a "blood bath" among one or more hedge funds to rival the collapse of Long Term Capital Management which failed in 1998 with a loss of $4.6 billion. It is believed that certain hedge funds are carrying mortgage backed securities on their books at unrealistic levels and that if they were 'marked to market' the funds would be insolvent. The extent of this could be revealed in auctions that Merrill Lynch is holding of $800 million Bear Sterns mortgage backed assets. More details here. Of greater concern is the risk to the larger financial community. Bloomberg reports that the SEC is concerned about the 'systemic risk' that could result: U.S. Securities and Exchange Commission Chairman Christopher Cox said yesterday that the agency's division of market regulation is tracking the turmoil at the Bear Stearns fund. ``Our concerns are with any potential systemic fallout,'' Cox said in an interview. …

We can expect that if such a catastrophe occurs a rescue operation will be organized as was the case with the LTCM collapse and that financial institutions will survive!

The short term effects on the markets could be disastrous though while the storm is being weathered but we can also expect the Plunge Protection Team to step in at some point.

In the short term, it will be best to be in cash until the storm passes.

The effects on the consumer and the larger economy are likely to be severe. Mortgage rates are rising rapidly and home loan applications are consequently falling which will further depress the struggling housing market. Quoting Bloomberg once again:

Rising Rate Pushes Housing, the Economy to a Blood Bath

The worst is yet to come for the U.S. housing market. The jump in 30-year mortgage rates by more than a half a percentage point to 6.74 percent in the past five weeks is putting a crimp on borrowers with the best credit just as a crackdown in subprime lending standards limits the pool of qualified buyers. The national median home price is poised for its first annual decline since the Great Depression, and the supply of unsold homes is at a record 4.2 million, the National Association of Realtors reported.

``It's a blood bath,'' said Mark Kiesel, executive vice president of Newport Beach, California-based Pacific Investment Management Co., the manager of $668 billion in bond funds. ``We're talking about a two- to three-year downturn that will take a whole host of characters with it, from job creation to consumer confidence. Eventually it will take the stock market and corporate profit.'' Confidence among U.S. homebuilders fell in June to the lowest since February 1991, according to the National Association of Home Builders/Wells Fargo index released this week. Housing starts declined in May for the first time in four months, the Commerce Department reported yesterday. New-home sales will decline 33 percent from 2005's peak to the end of this year, according to the Realtors' group, exceeding the 25 percent three-year drop in 1991 that helped spark a recession.

The S&P 500 closed below its 50 day moving average on Friday and is showing a possible head and shoulders pattern. The H & S is a bearish pattern when confirmed, which occurs when the price drops through the neckline at about 1460. Note that it has rallied twice since forming the right shoulder at 1538.71 and failed to beat that level, indicating that the pattern may well be confirmed eventually.

On a brighter note, with fewer breakouts occurring this week (just 7 compared to the recent average of 20), our subscribers were automatically reigning in their pace of new investments. The average breakout rose 1.9% by week's end, however, showing a positive return while the indexes were drowning.

 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

Go to Cash Until the Bear Stearns Situation is Resolved

Markets are likely to be volatile until the extent of the subprime CDO (Collateralized Debt Obligations) debacle is known. Also, there are several economic indicators released next week that will affect the markets (existing home sales on Monday, new Home Sales on Tuesday, Durable Goods Orders on Wednesday and GDP on Thursday) and the FOMC meets on Wednesday with a press release to follow on Thursday at 2:15 pm.

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 Market Summary Overview of market direction and industry rotation
Index Value Change Week Change YTD Market1
Dow 13360.3 -2.05% 7.2% enter
NASDAQ 2588.96 -1.44% 7.19% exit
S&P 500 1502.56 -1.98% 5.94% enter
 Best Performing Index
1 Week 13 Weeks 26 Weeks Year-to-Date
NASDAQ Composite
-1.44 %
NASDAQ Composite
0.65 %
NASDAQ Composite
0.66 %
Dow Jones
7.2 %
 Best Performing Industry (by average technical score over each period)
1 Week 3 Weeks 13 Weeks 26 Weeks
Industrial Equipment Wholesale Industrial Equipment Wholesale 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 7 19.38 4.4% 1.89%
Last Week 28 19.77 5.39% 0.9%
13 Weeks 318 20.31 12.48%
Breakout Count for Week
Home Furnishings & Fixtures
Semiconductor - Specialized
Oil & Gas Equipment & Services
Oil & Gas Pipelines
Closed-End Fund - Equity
Beverages - Soft Drinks
Communication Equipment
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 CUP Peru Copper Inc 108
Top Technical SIL Apex Silver Mines Ltd 33
Top Fundamental CPX Complete Production Services Inc 32
Top Tech. & Fund. CPX Complete Production Services Inc 32
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 TGE TGC Industries Inc 69
Top Technical TGE TGC Industries Inc 69
Top Fundamental TGE TGC Industries Inc 69
Top Tech. & Fund. TGE TGC Industries Inc 69
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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