Weekly Newsletter 07/12/08
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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 technical condition of the market continues to decline and further losses are in store. The two charts below, of the NASDAQ Composite and S&P 500 show how the markets have fallen now for five successive weeks and that the volume trend is up. That means distribution is accelerating. Note that during the bear market rally mid-March to mid-June, the weekly volume was always below the 13 week average, meaning that accumulation never overcame the distribution that had preceded, while over the last five weeks, volume has been consistently above the average.

NASDAQ Composite
S&P 500
The optimism that followed the Bear Sterns rescue has evaporated and a new pessimism pervades the market as it contemplates the possible bankruptcy of Fannie Mae and Freddie Mac (F&F). Together they hold $5.3 trillion of debt with $3.7 trillion in mortgage backed securities. St. Louis Fed Chairman Poole estimates that F&F are already insolvent if fair value accounting rules are applied.

Adding to this gloomy picture, investment manager Bridgewater Associates now estimates that global financial losses will rise to $1.6 trillion. That is four times the value of writedowns that have been recognized so far. It is clear things are going to get worse! Just how much worse is described by Nouriel Roubini in his blog yesterday. The Professor was among the first to warn of the impending crisis back in 2006 and was scoffed at during 2007 but lately has been accorded the respect due. In August of 2006 he correctly predicted the eventual severe losses at F&F. Readers of this newsletter know we have frequently quoted him and do so again now:

"Expect a much sharper fall in equity prices in the US, advanced economies and emerging markets from current levels in the rest of 2008 as a severe US recession and global slowdown and a severe financial crisis and credit/liquidity crunch takes a more severe toll on earning of non-financial firms. In a typical US recession the S&P 500 falls – from peak to trough – by 28%; and this is not your typical run of the mill mild recession."

Roubini recommends being in cash or inflation-indexed bonds. He is also stridently opposed to the "mother of all bailouts" that a rescue of F&F would entail. See "How to Avoid the Mother of All Bailouts".

 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

Are breakouts buyable when they pullback?

Conventional wisdom has it that you should not purchase a stock that has risen by more than 5% above its breakout price. The question then arises as to whether a stock that has risen above the 5% limit and then pulled back within that range is buyable. Our Recent Breakouts report lists all stocks that have broken out in the last 90 days and indicates which ones are within the 5% limit. It also shows the highest intraday high reached until the date of the report, so it is easy to identify those that have exceeded the 5% limit and then pulled back. The motivation behind the report is to show which stocks offer a second chance buying opportunity.

A subscriber asked if there was any analysis available of how these 'second chance' stocks perform. It is not a question we've studied so we undertook a brief analysis of how these second chance stocks perform compared to those that don't pull back. We looked at stocks that broke out from a cup-with-handle base in each year since 2004 and divided them into two groups:

  1. Stocks that exceeded the 5% limit within the first 30 days after breakout and then pulled back to within 5% of the breakout price
  2. Stocks that did not pullback to within range during the first 30 days after breakout.

We then looked at the highest closing price achieved either before they failed (that is fell to 8% below their breakout price) or during the 12 months following breakout if they did not fail within that 12 month period.

Year No.
No. > 5% No.



Avg. Gain of
Avg. Gain
2004 1223 975 831 639 37.5 75.0
2005 1327 1030 852 594 46.3 75.0
2006 1272 970 822 646 38.8 67.7
2007 676 533 444 369 27.7 59.4
2008 444 319 279 137 18.8 28.4
Note: the number of breakouts fell in 2007, 2008 because we changed the watchlist criteria to only include stocks with an RS Rank of 80 or more instead of an RS Rank of 70

The results show that although the 'second chance' stocks perform less well than those that do not pullback, they nevertheless provide a very acceptable return.

We don't think this shows that you should automatically buy stocks that have pulled back within range. But what it does show is that if you hold a breakout that has not pulled back within 30 days, you should hold out for a bigger than average gain.


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 Market Summary Overview of market direction and industry rotation
Index Value Change Week Change YTD Market1
Dow 11104.5 -1.63% -16.29% enter
NASDAQ 2239.48 -0.26% -15.56% exit
S&P 500 1239.93 -1.82% -15.56% enter
Russell 2000 670.36 -4.0% -13.12% N/A
 Best Performing Index
1 Week 13 Weeks 26 Weeks Year-to-Date
Russell 2000
1.84 %
NASDAQ Composite
-2.59 %
Russell 2000
-4.87 %
Russell 2000
-12.49 %
 Best Performing Industry (by average technical score over each period)
1 Week 3 Weeks 13 Weeks 26 Weeks
Independent Oil & Gas Independent Oil & Gas Independent Oil & Gas Agricultural Chemicals
 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 10 23.15 4.83% 1.96%
Last Week 10 23.31 4.38% 1.82%
13 Weeks 317 24.08 13.63%
Breakout Count for Week
Rental & Leasing Services
Closed-End Fund - Equity
Closed-End Fund - Debt
Specialized Health Services
Medical Appliances & Equipment
Medical Instruments & Supplies
Home Furnishing Stores
Electric Utilities
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 RNWK Realnetworks Inc 96
Top Technical HI HILLENBRAND, INC. 48
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 HVT Haverty Furniture Cos 62
Top Technical CYBX Cyberonics Inc 49
Top Fundamental CYBX Cyberonics Inc 49
Top Tech. & Fund. CYBX Cyberonics Inc 49
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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