Weekly Newsletter 10/08/10
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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  

The markets would appear destined to move higher, at least in the short term,  as almost everyone believes that the Federal Reserve will now undertake further "quantitative easing". The trigger is the disappointing employment numbers and the Fed's mandate to promote full employment.

This is being called the "Bernanke Put" which follows what is known as the "Greenspan Put" and refers to the Fed increasing liquidity and thereby virtually guaranteeing that there will an inflation in asset prices (including equities). The likelihood of further quantitative easing was implied in the statement released after the last FOMC meeting ("is prepared to provide additional accommodation if needed") and we will know after the next one (November 2). Until then stocks are likely to trend higher, although valuations certainly already have some of the anticipated stimulus priced in.

Whether or not the continuation of the "Bernanke put" will achieve its objective of resuscitating employment is a controversial one. One commentator, Peter Brookvar, contends that it was these policies that created the 2008 recession in the first place. While we find his argument persuasive, his solution, the market based setting of interest rates, is unlikely to happen without the dissolution of the Federal Reserve!

It's also possible that the FOMC will not announce "additional accommodation" in November. Although private sector employment is growing slowly, it is growing (the economy created 65k jobs in September). The dollar would fall even further putting the trade balance in an even worse situation and further raise the cost of imports. (The Fed conveniently excludes food and energy from the CPI so it can pretend there is low inflation). Also, one member of FOMC, Thomas Hoenig,  voted against the current policy at the last meeting.

Earnings season started this week. I expect earnings to be mostly in line with expectations and that they will have little effect on the market direction.

The housing market recovery took a hit this week with the revelations of fraud in the foreclosure business. It seems the mortgage lenders are showing as much attention to detail in foreclosures as they did in writing loans in the first place. The breaking scandal has the potential to stress the banks further, force housing prices lower, and delay the recovery of the housing market. Most distressing is the evidence that the financial sector has not changed its pillaging ways. I found Barry Ritholz' explanation of the underlying causes scary but illuminating as I had never heard of MERS before. I was relieved to find my own mortgage was not listed there.

 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

In our weekly commentary we usually pay most attention to the trend in the NASDAQ Composite in the belief that most breakouts occur on that exchange. Although we felt anecdotally, that that was true we never actually did an analysis to verify it. Today we correct that oversight.

Our database at any one time holds approximately 6500 stocks. This number varies up or down as companies come and go but is reasonably consistent.

The data base is overweighted in NYSE stocks compared to the NASDAQ. The breakdown by exchange is:

Presence in Database
Am Ex

However, the confirmed cup-with-handle breakouts are heavily weighted in favor of the  NASDAQ:

Confirmed Breakouts
Am Ex

While we don't expect you to factor this into your stock selection, that is choose a NASDAQ stock over a NYSE stock, I think it does give some insight into which index is the more important one for our purposes. Incidentally, its the NASDAQ trend that is used in our cup-with-handle backtest tool.

 Market Summary Overview of market direction and industry rotation
Index Value Change Week Change YTD Trend
Dow 11006.5 1.63% 5.55% Up
NASDAQ 2401.91 1.31% 5.85% Up
S&P 500 1165.15 1.65% 4.49% Up
Russell 2000 679.29 0% 7.13% Up
Wilshire 5000 12196.2 1.65% 6.08% Up
 Best Performing Index
1 Week 13 Weeks 26 Weeks Year-to-Date
Wilshire 5000
1.65 %
NASDAQ Composite
7.93 %
Dow Jones
0.08 %
Russell 2000
7.13 %
 Best Performing Industry (by average technical score over each period)
1 Week 3 Weeks 13 Weeks 26 Weeks
Beverages - Brewers Beverages - Brewers Beverages - Brewers REIT - Residential
 Most Improved Industry (by change in technical rank2)
Textile - Apparel Footwear & Accessories
+ 41
Wholesale - Other
+ 100
+ 149
Music & Video Stores
+ 187
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. 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 49 24.08 5.7% 4.15%
Last Week 36 21.15 6.54% 3.1%
13 Weeks 324 24.38 14.33%
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 QLTY Quality Distribution Inc. 111
Top Technical INTX Intersections Inc. 73
Top Fundamental TDSC 3D Systems Corp. 66
Top Tech. & Fund. TDSC 3D Systems Corp. 66
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 RFMD RF Micro Devices Inc. 109
Top Technical SHOO Steven Madden, Ltd. 43
Top Fundamental LULU Lululemon Athletica Inc. 48
Top Tech. & Fund. LULU Lululemon Athletica Inc. 48
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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