· Stocks slide and we turn cautious
 

· Note the new stops on many recommendations
 

Market Synopsis

Despite indications that the economy may be righting itself after a slowdown in the spring, US stock markets ended the week sporting a black eye. The good news on the economy came on the heels of midweek reports from the Conference Board and the Philadelphia Federal Reserve, which painted a much more optimistic picture of the economy than had been portrayed previously. And even the housing data released earlier in the week contained a glimmer of hope as building permits for multi-family dwellings rose in the last month.

The Conference Board’s Leading Economic Indicators (LEI) for May showed an increase of 0.3% topping expectations for a rise of 0.2% and furthermore, they revised April’s data to 0.3% from 0.5% indicating that the drop was not as severe as first thought.

Meanwhile, the Philly Fed index touched its highest level in two years this month led by new orders, which hadn’t been this high since March 2006. Though this report is based on activity in the Philadelphia Fed region, it is often considered to be a reliable barometer for the country at large.

To the average observer, news such as this would typically be considered bullish for stocks and the general economy however, this week stocks were pressured by the revelation that a highly leveraged hedge fund managed by Bear Stearns was on the brink of failure having made significant bets on the subprime mortgage market. Margin calls prompted moves to liquidate assets and when a rescue plan broke down with Merrill Lynch, it sparked a move to auction assets to the highest bidder regardless of price in a rapid fire-sale. By the end of the week, Bear Stearns announced a plan to use $3.2 billion of its own money to bail out the fund but there is concern that a second larger fund begun in August of 2006, also managed by Bear Stearns, is in an even more precarious position with riskier investments and could collapse as well.

The key notion to take from this is that the financials sector is in trouble and this could very well spell trouble for the entire market if there is a continuation of these types of failures. A much larger slide in equities could result from this explosive situation, for if there is one thing that the market cannot stand, it’s uncertainty.

Technically Speaking

A week after volume propelled prices higher in an extraordinary day, we were subjected on Friday to an even more powerful move to the downside that immediately signals a yellow-flag, warning us to take a cautious attitude toward the markets. Of the four major indexes, the Nasdaq twins and the S&P 500 experienced the most notable volumes and while the Dow Jones’ volume remained smaller than the previous Friday’s, it nonetheless did indicate that there was tremendous selling pressure.

These sharp price swings seen over the past month do not characterize a strong bull market and while we still hold the significance of the historic new high on the S&P in esteem, there is ample evidence of a general weakening led by financials and housing-related issues. Moreover, the action in bonds has altered the landscape for stocks these past few weeks as technical factors have generated buy signals for debt in anticipation of higher interest rates, which normally acts as a detriment to stock investors.

Support for the DJ-30   lies near the most recent low around 13,250 with lower support around 12,750. Correspondingly, first level support for Nasdaq Composite is located near the lows at 2535 while lower level support comes into play near 2500 and finally, for the S&P 500, firm support is found at the 1475 level.


New Buy Recommendations (in order of preference):

Columbus McKinnon (CMCO)  This manufacturer of equipment for materials handling broke out on a gap higher a month ago and proceeded to pass the next month backing and filling as it digested the move. On Friday, it jumped higher on heavier-than-normal volume, which is just the signal that we look for on the daily chart, signaling its intention to move higher. Widening the view to the weekly chart, we see that it has spent more than a year developing a cup and handle formation with Friday’s move to an all-time high helping to serve notice that it has completed this step. 

New Short Sales  

None.

Stock Positions to Sell/Exit:

We were exited from Matrix Service on our stop.

Many positions saw their stop prices revised this week on account of the weak action in stock indexes and the individual charts, which appear to be under certain pressure in some cases.

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.