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Market Synopsis
In one week, the dominant near term trend for equities changed drastically. Last week we expressed caution over falling indexes that had an air of fatigue about them and in the first week of the new year, we are forced to reconsider our hypothesis.
There is no doubt that some of this unusually bullish action in equities was related to short-covering however given the immense volumes traded (two of the four trading days witnessed over 2 billion shares traded on Nasdaq while the other two stopped just short of this mark), there is a strong likelihood that momentum will result in further gains. And this action was not an isolated event in tech shares or any other sector of the market but rather was shared across the board by all stock indexes.
There is a strong probability that the distribution that we have been watching over the past month as stock indexes settled lower was related to funds that wished to take profits on some positions and close out losing positions before the calendar year end. Moreover the normal inflow of new investment dollars meant that these funds needed to put some money to work at the start of the new year especially important considering their characteristic aversion to holding cash.
Perhaps this rally was made even stranger given that the yield curve on bonds was situated so close to inversion. The normal comparison of the yield on 2-year notes to 10-year was not inverted by the end of the week with the respective yields being 4.35% and 4.37% however the comparison of 2-year to 5-year yields was indeed inverted with a difference of 0.3%. Furthermore, if we assume that the Federal Reserve will raise overnight interest rates at the end of January to 4.50% much like analysts believe, this will mean that the Fed rate would be higher than every yield except the 30-year bond.
While we can choose to ignore this situation as long as possible, we should prepare ourselves for the inevitable recession that follows an interest rate inversion. Notwithstanding a normal preparation, it is helpful to remember that a problem is never a problem until it is a problem.
If we were heading for recession we would expect to foresee this potential long before the actual occurrence simply by studying the stock indexes and at this point in time, they are suggesting nothing of a sort. On the contrary, indexes appear to be powered by strong corporate performance: solid cash flow and growing profit margins. Friday’s employment report offered a glimpse of the consequence of that performance with another 108K jobs added in December, which while below forecasts, is likely to be revised higher in the coming months much as November’s numbers were, taking the initial estimate of 215K new jobs to a revised 305K.
One crosscurrent that seemed to be ignored last week amidst the noise of rising stock prices was the increase in price of a barrel of crude oil. Evidently, rising oil prices could put a massive dent in stock prices but perhaps surprisingly, crude oil inventories are more than 10% higher than a year ago. Refinery capacity is undoubtedly the bottleneck being faced today with Gulf region refineries output cut due to Hurricane Katrina. A year ago, refineries were operating at 96.8% capacity but right now capacity is 89.7% though this is a large increase from the low levels reached after the storm.
Technically Speaking
Both the Nasdaq Composite and the S&P 500 powered their way to new highs this week and in fact, these levels had not been seen since 2001. The Dow Jones Industrials fell just shy of the top reached in 2005 but considering the current situation, it will likely achieve this in the days ahead. Undoubtedly, the most impressive characteristic in the charts of all three large cap indexes was the weekly price bar – a large outside up week. Furthermore, the daily charts of both Nasdaq Composite and the S&P ended the week with significant breakouts from the consolidation and retracement through December marking very bullish signals to follow.
While some retracement is to be expected, the underlying trend has changed and for now, we wish to be buyers of shares.
New Buy Recommendations (in order of preference):
Nuvelo Inc. (NUVO) – Perhaps this stock is hard to buy given the meteoric rise this past Thursday but the chart is difficult to ignore. The large gap higher is indicative of how much higher the company is being valued after Bayer agreed to pay up to $385 million for a shot at sharing the hefty sales that Nuvelo’s blood-clot dissolving drug could bring. Before Bayer came along, the entire capitalization of the company was roughly $380 million.
Progenics Pharmaceuticals
(PGNX) – In a pure coincidence, this stock is quite similar in that Wyeth is
paying up to $416.5 million to Progenics to share the wealth that would result
from their late stage development drug that treats gastrointestinal dysfunction
for patients treated with pain killers. This company’s stock gapped higher on
Dec 23 with the announcement and then gapped higher once again on Friday
signaling its intention to move even higher.
Sierra Wireless (SWIR) –
Sierra has been in the dumps for almost two years when their Aircard modems for
laptops stopped generating as much interest and sales lagged. Fortunately for
Sierra, research and development has resulted in both important improvements in
wireless connectivity and the development of internal chips that replace the
former user of PCMIA slots in laptops. Added to that is the possibility of
using these chips in handheld PC’s means that there is a very large market
about to be introduced to fast wireless connectivity. The chart is finally
recognizing this change and with the announcement on Wednesday that Sierra’s
quarterly revenue and profit forecast is being revised higher, we are seeing
the first steps of a nascent recovery. The gap in September combined with
Thursday’s gap resulted in a strong monthly chart and the weekly price bar
itself is a solid outside bar.
Englobal Corp (ENG) – This
oil services company broke out to a new 52-week high on Friday, which combined
with the gap in December signals the start of a significant move. Exploration
for oil is evidently at capacity drawing all available equipment into use given
the price of crude and because of it, virtually all oil equipment service
companies are benefiting.
Seabridge Gold (SA) – This
is a speculative gold play that is hedged to the price of gold and with the
price of an ounce around $540, Seabridge is an interesting play. After the
break above $7, there was a fast move above $10 but the subsequent retracement
took price below $8. Now with price climbing above $9, it would appear that the
entry here is a good one.
New Short Sales
None.
Stock Positions to Sell/Exit:
None.
Portfolio Comments:
New stops have been added to the list while others have been modified. Those that have blanks, are being carried unstopped for now. Please see our complete list of stops in the table below.
List of Current Stock Recommendations:
Action Ratings. The following is the legend for designating immediate action
for our stock recommendations. The first is B, meaning the stock is timely
to buy but the case for doing so right here is not overwhelming. Either the
stock may have gotten ahead of itself and may be vulnerable to a retracement or
else the stock has been performing disappointingly but may simply be
regrouping. B+ and B++ indicate stocks for which there is a technical case
to buy now, with plusses adding weight according to how many there are, up
to a maximum of two. Stocks rated H are ones to hold, awaiting confirmation
to buy more or to sell. SELL, of course, means what it says. It seldom pays
to override this designation. In the case of stocks held short, the rating is S
where positions should be retained. S+ and S++ indicate stocks for which there
is a technical case to add to the positions with plusses adding weight similar
to long positions. The maximum number of plus signs is 2.
N.B. There are no longer restrictions on foreign stocks held in Canadian retirement savings accounts.
|
Date of Entry |
Name |
Symbol |
Entry Price |
Current Price |
Stop |
Action Rating |
|
|
Amer Sci & Eng |
ASEI |
71.08 |
66.81 |
|
H
|
|
|
Birch Mtn Resour. |
BMD |
6.65 |
7.15 |
|
B+
|
|
|
Plexus Corp |
PLXS |
20.15 |
24.83 |
|
B
|
|
|
Radiant Systems |
RADS |
13.78 |
12.24 |
|
H
|
|
|
Redback Networks |
RBAK |
11.78 |
14.94 |
|
B
|
|
|
Sigma Designs |
SIGM |
13.10 |
15.10 |
|
B
|
|
|
Tom Online |
TOMO |
20.66 |
21.51 |
|
B
|
|
|
Transcanada Corp |
TRP |
21.34 |
31.31 |
27.50 |
B |
|
|
USA Truck Inc |
USAK |
29.30 |
30.87 |
|
B+ |
New stops in BOLD
* Stop on a closing basis
** Buy if above entry price
*** Split-adjusted price