Weekly Newsletter 09/15/07
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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

Since the current rally began on August 18 we have been bullish about the markets because we believed the Administration and Federal Reserve would not allow the housing, sub-prime mortgage debacle and resulting credit squeeze to drag the markets down. The policies followed since mid-August have successfully steadied the markets and this week produced sizeable gains. The DJI had its best week since April and gained 2.51%, while the NASDAQ Composite gained 1.42%, and the S&P 500 rose 2.11%. Volumes remain below the 50 day moving average, in part because the average was moved higher by the wave of selling in August, and also because although confidence is returning, there is still uncertainty over the condition of the major financial houses.

While the Fed and Treasury may have saved the stock market, at least in the short term, it is uncertain if they can save the economy. Friday's economic news showed retail sales and industrial production during August were lower than analysts expected. If auto sales are excluded, which were artificially high due to sales promotions to make way for the 2008 model year, retail sales fell 0.4%, indicating that consumers are tightening their belts. This comes after news last Friday that the economy is shedding, rather than creating, jobs. The Federal Reserve is widely expected to cut interest rates by 0.25% on Tuesday with the chances of a 0.5% cut apparently diminished. A 0.5% cut would further rally the markets but there is also the possibility that they will hold rates steady to support the dollar and avoid stoking inflation. The impact on the stock market would then be extreme, which makes a 0% cut unlikely.

The number of stocks making breakout attempts improved this week although a relatively small number, nine, were confirmed. You will recall that a breakout is only confirmed if the volume is at least 1.5 times the 50 day average and as we noted above, those averages have been elevated by the August sell-off, so it is more difficult for a stock to qualify as a successful breakout. Those that we did count as 'successful' made a healthy gain by week's end by an average of 4.12%. Two stocks, CBLI and NWK made intra-day gains of over 20%. Only one of the breakouts, IRBT closed the week with a small loss, of 1.5%.

 New Features this Week Additional Value that we added this week

No new features this week.

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

Comparison of Successful Alerts to Alerts Issued - Revised with Performance Results

Last week we published some statistics on the number of alerts that were considered successful at the day's close compared to the number of alerts issued and the total number of times stocks appeared on each of our watchlists. We were surprised by the apparently high success rate of breakdowns from flat base patterns and have reviewed our calculations. There was indeed an error and the correct numbers for breakdowns from the flat base patterns are shown below.

  Watchlist Total*AlertsBOSuccess %
Buy Alerts  
  Double Bottom 1350447617336.3%
  Flat Base Top 24199116636131.0%
  Flat Base Bottom1010839213434.2%
  Head & Shoulders BottomNo data available
Short Alerts  
  ShortSale Watch20849347170220.2%
  Flat Base Top 24199764 400 52.4%
  Flat Base Bottom10108378 204 54.0%
  Head & Shoulders Top663556532156.8%
* Total is the total number of times we listed a symbol on the watchlist. Because a symbol can appear for several days in succession before a breakout occurs, this is not a particularly meaningful number in itself.

As an exercise we also looked at the returns possible from shorting stocks if they breakdown from the either a flat base top or bottom compared to market conditions. We compared the period since July 1, 2007 to the overall returns since March, 2005 when we first started issuing breakdown alerts. The average returns from the breakdown price to the subsequent low, before the price recovered to the breakdown price were:

  Flat Base Top Flat Base Bottom
Period Return % Days Return % Days
Since 1/7/07 6.9 10 3.9 5
Since 3/5/05 3.5 9 2.9 7

The conclusions to be drawn from this twofold:

  1. Shorting is more profitable in a downtrend. No surprises there!
  2. Shorting a stock that has fallen into a flat base (or rectangle bottom) is less profitable than shorting a stock that has risen to a flat base (a rectangle top).



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 Market Summary Overview of market direction and industry rotation
Index Value Change Week Change YTD Market1
Dow 13442.5 2.51% 7.86% enter
NASDAQ 2602.18 1.42% 7.74% enter
S&P 500 1484.25 2.11% 4.65% enter
 Best Performing Index
1 Week 13 Weeks 26 Weeks Year-to-Date
Dow Jones
2.51 %
Dow Jones
-1.07 %
NASDAQ Composite
3.73 %
Dow Jones
7.86 %
 Best Performing Industry (by average technical score over each period)
1 Week 3 Weeks 13 Weeks 26 Weeks
Aerospace/Defense - Major Diversified Aerospace/Defense - Major Diversified Aerospace/Defense - Major Diversified Foreign Utilities
 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 9 10.15 8.31% 4.12%
Last Week 7 11.23 6.27% 1.15%
13 Weeks 212 11.92 8.52%
Breakout Count for Week
Data Storage Devices
Networking & Communication Devices
Business Services
Research Services
Semiconductor Equipment & Materials
Closed-End Fund - Foreign
Industrial Equipment & Components
Steel & Iron
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 MEA Metalico Inc 99
Top Technical BWTR Basin Water Inc 50
Top Fundamental PDE Pride Internat Inc 41
Top Tech. & Fund. CALM Cal-Maine Foods Inc 53
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 SILC Silicom Ltd 55
Top Technical SILC Silicom Ltd 55
Top Fundamental SILC Silicom Ltd 55
Top Tech. & Fund. SILC Silicom Ltd 55
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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