Stockscom Report for Sunday Nov 12 2006

Publisher: Colin Alexander        Editor: Ken Wilson (450-691-4617)

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·        Midterm elections result in double victory for Democrats

Market Synopsis

There was little economic news this week but that mattered little since the election dominated the news. Though the shift in control of the House was expected, the loss of control in the Senate was surprising and sent a strong signal to the White House that the electorate is unhappy with the Bush administration. While some analysts interpreted the results as a blow to the economy, an argument could be made that the potential for political gridlock might be the best option to prevent further wasteful spending. Throughout his term as president, George W. Bush never had the intestinal fortitude to veto a spending law and that was after an assortment of state representatives saddled the bill with yet more amendments to spend more money for more special interest groups. Now with President Bush on one side and the other side composed of a majority of Democrats, the likelihood of hand in hand cooperation has been reduced substantially. What is more likely to happen now is frivolous spending is out and earnest attempts at compromise without overburdening taxpayers is in.

Certainly one could argue that the Democrats will want to spend feverishly because the stereotype Democrat does just that – increases spending and taxes, however the hard reality is that there is widespread concern across the political spectrum that the federal debt is out of control and this gives both parties an opportunity to claim that they are doing something that greatly benefits the economy and the financial future of the country. Moreover, President Bush is less likely to continue rubber-stamping massive spending bills that are authored by Democrats and not Republicans. This possibility also invites speculation on whether President Bush will invoke the presidential veto power on occasion given the propensity of bills to be of a Democrat character especially in the lead up to 2008.

Technically Speaking

Stocks bounced in reaction to the election for despite the party of big spenders winning the election, the lifting of uncertainty (a very depressing force on equities) was a powerful incentive to return to the trading floor and buy shares. The current bull run has been relying on momentum to carry it further and certainly technical strength, at this point, is sufficient to carry on the rally. Thursday’s sell off though, on much higher volume, put the rise into question and we must play a waiting game now to see whether there are any lasting effects of this slide.

The key points are that we must go back to June 30 to see a day where volume on a down day exceeded that of Thursday’s on Nasdaq. However when that day occurred in June, the market had already lost more than 7% over the preceding 7 weeks and was more than half way to its eventual bottom in July. Evidently, this time the heavy volume has occurred in far different circumstances.

Technically, the Nasdaq has succeeded in remaining above its 25-day moving average, which has guided the upward move and acted as firm support when sellers held the edge. Perhaps it makes sense not to dwell long on the daily chart for if we are to look at the weekly chart, we see that this week marked the completion of a Lindahl buy signal and broke clearly through the congestion marking the high for the year.

Similarly, the Dow Jones Industrials and the S&P 500 have both been well supported by their respective 25-day moving averages on the rise from their summer bottoms. The upward sloping channel remains in place, unbroken, and what little resistance has developed is probably more of a symptom caused by the approaching 1400 level on the S&P than on any other tangible development. And like the Nasdaq, these two indexes also developed Lindahl buy signals on the weekly charts after this week’s performance.

New Buy Recommendations (in order of preference):

NYSE Group Inc. (NYX) – On Friday, this stock popped through its 2006 high as it gapped higher to begin the session. Since Thursday was also a strong day on considerable trading volume, there is some question whether the entry here is correct however after some consideration, we believe that the strong move of the past two days only serves to emphasize the inherent strength in the stock. The NYSE is following in the footsteps of the Chicago commodity markets that also came to market in the past few years, namely CME (symbol: CME) and CBOT (symbol: BOT). We would like to mention that a look at the Nasdaq market (NDAQ) was considered however after analyzing both, we chose the strongest of the two to recommend.

Goodyear Tire and Rubber (GT) – The tire company backfired earlier this year causing the stock to tank however Thursday’s release of their quarterly results proves that Goodyear is back on track and showing some interesting strength in their markets. Technically, the gap higher on Thursday, left an island bottom and largely completed a reverse head and shoulders formation, which are powerful signals to buy and a move of just over a dollar higher than its current price would trigger a new high for 2006.

Gold has begun moving upward once more having cleared the resistance at the $620 level and is almost certainly heading higher now. Investors should strongly consider adding to positions in Miramar Mining (MNG) in order to take advantage of the current situation.

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.

New stops in BOLD

* Stop on a closing basis

** Buy if above entry price

*** Split-adjusted price