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With the winding down of the earnings season, a continuing story of a weak housing sector and being in the midst of summer holidays, the potential for further declines for equities becomes a real possibility. Across the board, heavy losses have been inflicted on stocks as investors dive for cover. If it’s not the issue of weaker earnings, then it’s due to a slowing economy. If it’s not a slowing economy, it’s naturally tied to the sub-prime implosion. Everywhere we look we see an excuse to sell and get out of equities and it is that fear (and greed) that drives investors to make short-term decisions.

One might say that these short-term investors are but a minority of investors, however it is the trade at the margin that drives stock prices. For share prices to rise a healthy amount of buying is required to ensure that these prices continue to rise; there must be a consistent buying pressure. But it doesn’t take a group of sellers, as many people believe, to force stock prices lower. Instead it requires only that buyers step back from the fray and hesitate. Hesitation then has a chance to grow into refusal and both hesitation and refusal mean that fewer buyers are competing for the same shares.

So is the cause of the recent collapse in stock prices directly connected to the decline in the housing sector? Undoubtedly, the biggest economic issue of the year is the excruciating drop in the housing market. Not only are houses no longer selling, mortgage lending has veered toward tight, conservative terms. Those people attempting to sell homes tend to belong to one of five groups: a) homebuilders b) people affected by work transfers c) speculators d) people who can’t afford the home that they’re residing in and e) homeowners who would like to sell in order to buy a bigger or smaller home. In all of these cases, the losses, if any, will be allotted to the individuals or, in the case of the homebuilders, the companies building. Similarly, the fallout from tighter lending standards in the mortgage industry and the failure of mortgage lending companies will be assumed by those who have capital invested in these companies. The net result of this situation is that losses are limited, which is unlike the previous crisis of the savings and loan institutions in the 1980’s.

The difference between the S&L crisis and the housing situation now is that the former involved the failure of over 1,000 S&L institutions that were insured by a federal agency, the Federal Savings and Loan Insurance Corp, meaning that their customers had their losses insured. This dire situation shook the foundations of the entire banking industry and some of the key players in this debacle even did jail time. Clearly this is not the case in 2007. Certainly some large banks, the most notorious being Bear Stearns, will bear the brunt of some of these losses but they have adequate capital to withstand the fallout.

More likely the drop in share prices then is due to a recognition that stocks cannot continue to rise unabated especially when earnings cannot keep pace. Moreover, the slowdown in the economy over the first half of 2007 is being given its due. Ironically, it’s a comment from Bear Stearns that is the most appropriate under the current circumstances. The bank told analysts during a conference call on Friday that it is preserving capital to weather the current storm in credit markets. Investors would do well to heed that advice.

Technically Speaking

Slipping below its 200-day moving average, the S&P 500 has become the leader to the downside. In the process, the S&P has violated the February high and is now taking aim at the low from March as its initial target lower. The velocity of the fall has been quite impressive however the 40-week moving average at 1392 and the 25-month moving average at 1341 also provide potential areas of support.

Of the other indexes, it is the Nasdaq Composite, which is closest to equaling the feat of the S&P. Currently located only 19 points above its 200-day moving average, this level corresponds closely to the highs of January and February earlier this year, but heavy selling appears unlikely to abate anytime soon. Lower support at the March lows near 2350 would be a natural target at this point as would the 2006 second quarter highs near 2375.

The Dow Jones Industrials has resisted the downward rush and remains surprisingly high but appears vulnerable to a sharp decline especially after Friday’s drop of nearly 300 points. That close nullified any rebound from Tuesday’s losses and has indicated further tests of lower targets will follow.

Of all the indexes, the Nasdaq-100 remains somewhat of an anomaly. Friday’s close did not violate the low from Wednesday nor other lows touched in May and June. The index is well above its March lows and its 200-day moving average proving that while stocks are heading lower, there is reluctance to sell large cap technology issues at this juncture.

New Buy Recommendations (in order of preference):

None.

New Short Sales

None.

Stock Positions to Sell/Exit:

We were exited from Robbins & Myers (RBN) upon hitting our stop.

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