· Markets in a holding pattern

Market Synopsis

President’s Day provided a timely opportunity to take a step back in this early part of 2007 and evaluate where the economy and the stock markets are heading since they are so intricately tied. There was no shortage of data reported over the past week and there was the added spectacle of Fed Chairman Ben Bernanke testifying in front of both the House of Representatives and the Senate on different days  part of the semi-annual hearings on Capital Hill.

Arguably the loudest bang was heard when the housing data was released on Friday morning showing that construction of new homes slumped 14.3% in January to an annual rate of 1.408 million, which is the lowest level since August 1997. The decline in the housing market is not only real but threatens to become the centerpiece of next year’s election. A significant drop in new construction coupled with a severe decline in home resales and an increase in foreclosures, will prompt both parties to address real estate as a campaign issue and to profess to have the solution. Naturally, the solution will most certainly involve more misdirected government spending and a host of new regulations concerning sub-prime borrowing. None of this will be of any real benefit but will provide a healthy supply of media sound bites.

Besides Friday’s report of benign wholesale inflation, which is seen as lifting some pressure off the Federal Reserve in their quest to subdue the inflation dragon, the fall in industrial production of 0.5% in January was indicative of the steady decline in manufacturing led by the automobile industry. North American car manufacturers are struggling with large inventories of unsold cars, which may take months to liquidate especially if a wave of unemployment hits the housing industry. Certainly the layoffs and plant shutdowns in their own auto industry have had an adverse effect on the auto sales numbers of late.

Presented with this data, one would presume that the stock market had begun to reflect the economic reality however a glance at the charts of stock indexes tells us a different story. Markets are discounting the probability of major downside risks and measures of volatility, such as VXN or VIX, continue to register new lows. This is perhaps the most important reason to consider adding gold to one’s portfolio.


Technically Speaking

Despite the news of slow growth and a surprisingly large decline in industrial production in January of 0.5%, stock markets continued to perform extremely well. Heading into the holiday weekend, the Dow Jones Industrials finished higher four consecutive days with most of the gains coming in the first two sessions and this, on increasing volumes. Still with the broader market, the S&P 500 managed a strong weekly gain supported by reasonable volumes. Both of these markets closed the week at or near their highs for 2007.

Meanwhile, in the tech sector, the Nasdaq twins were higher on three occasions this week with good volume supporting the move but while support is consistent at lower levels, Nasdaq remains locked in a lateral chart pattern. In the past three months, the Nasdaq market has moved very little in either direction.

Thus the consolidation phase continues without any strong indication of overall market direction. We reiterate that caution is our best ally at these times though we now identify the gold sector as having good prospects in the near term with a break out signaled as gold moved above $675 this week.


New Buy Recommendations (in order of preference):

Gammon Lake Resources (GRS)  We’ve discussed a few gold mining companies in recent weeks however we neglected to mention GRS whose chart has been shaping up very well in the past 2-3 months. With the strong evidence of buying late in the week and with the surge in the price of gold on world markets to around $675, GRS has quickly become our gold recommendation, as we believe another leg higher for gold has just begun.

New Short Sales  

None.

Stock Positions to Sell/Exit:

We were exited from several stocks this past week as stops were hit in addition to the one sell recommendation made last week on NYX.

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.