· Stocks step higher as earnings season approaches
 

Technically Speaking

The four major markets are continuing their most recent trends higher and this week was no exception. In spite of the gloom related to an economic slowdown in the first quarter and the troubling situation with subprime mortgages, investors have shown resilience and have extended their buying sprees a little longer. Volume has been unspectacular though it retains an uncanny steadiness but, importantly, this situation could be in for a test.      Prices on all the major indexes are quickly approaching their respective closes from February 26. Currently, the Dow Jones Industrials reside just 20 points lower, the Nasdaq Composite is off by less than 14 points and the S&P 500, perhaps symbolically, surpassed its close of Feb 26 on Friday. Interestingly, the Nasdaq-100 failed to close at a new April high on Friday unlike the other three indexes and is situated about 14 points lower than its own Feb 26 closing level. On the weekly charts, all of these major indexes succeeded in extending their gains of the past four weeks albeit, by slim margins.

Earnings will be front and center for the next few weeks as first quarter results are released. Expectations are generally favorable for stocks as corporate earnings remain at historically high levels. In a strange bit of irony, one of the reasons for the decline in durable goods orders we’ve seen lately is the lack of capital investment occurring and while this is slowing down growth in orders, it benefits the bottom lines of corporate earnings and results in more cash in the companies’ treasuries.

Notwithstanding the strong earnings expected, the true question is whether these earnings will be seen as exceeding estimates or meeting them. Merely meeting expectations would serve to offer a catalyst to market bears and, given the lack of volume on the most recent rebound over the past 4-5 weeks, there is every reason to believe that a double top could be in the making. We don’t necessarily expect a large decline such as the one we saw at the end of February and into March, however we would advise caution and emphasize the use of protective stops.


New Buy Recommendations (in order of preference):

Merck & Co. (MRK)  Friday’s gap higher was the key factor in this recommendation. Not only was it a remarkable move on extraordinarily heavy volume indicating strong interest, price broke through the trading range that had enveloped this stock since October, 2006. Whenever a large corporation such as Merck experiences a strong gap higher, it normally pays to ride the wave to a higher valuation. The fact that it has broken out from a range only serves to underline the development of the buy signal.


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.