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As the summer season unwinds into September, stock markets continue to experience upheaval as nervous investors attempt to interpret the latest news concerning the housing industry. Both President Bush and the Federal Reserve Chairman, Ben Bernanke, offered soothing words on Friday, the former with proposals to help homeowners faced with the prospect of a high cost mortgage refinancing and the latter with some acknowledgement that the latest economic news had gotten the attention of the Federal Reserve and that they stood prepared to act if necessary to ensure a stable banking system and a monetary policy reflective of the current economic reality.

These solutions, while suppressing some complaints that the government is not responding properly to the current crisis, is unlikely to stem the cries that every developer, mortgage broker, real estate salesperson, mortgage finance specialist, and debt rating agency be found guilty of massive fraud. The Democrat nominees have lost no time assigning blame to these various factions absolving the homeowners of all blame purporting that they were incapable of understanding what was expected from them.

The unraveling situation in the housing industry will broaden over many months and throughout 2008 as mortgage resets continue to trigger. Inasmuch as a presidential campaign begins shortly, there is the potential for candidates to express a willingness to add numerous regulations to the current legislation in housing as scapegoats are identified. Furthermore, the decline in housing will cause a drop in economic activity and the higher mortgage costs will hit consumers’ wallets thus increasing the potential for recession.

This economic slowdown is likely to develop over time and in association with the sub-prime difficulties. Financial stocks will be the most vulnerable to weakness as their exposure to these problems will be the most notable. Technology shares will be less liable to surrender gains under these conditions and could represent an interesting investment strategy.

Technically Speaking

The midweek bounce on stock markets was a warning shot that the decline may have completed its bottom testing. And certainly in the case of the Nasdaq-100, the close on Friday at its Aug high was a signal that the Nasdaq market was not simply following the broader markets in lockstep.

While the other markets were unable to match the accomplishment of the ND-100, they did however all succeed in closing the month with reversals on the monthly charts thus serving to issue a powerful bullish signal.

It’s important to note that the Nasdaq twins were the leaders in this rebound and this should not be considered unusual given that the vast majority of recent losses have been felt more by financial firms than by other sectors of the economy. The tech-based indexes have proven themselves to be the best bet for weathering the current storm.

New Buy Recommendations (in order of preference):

Excel Maritime Carriers (EXM) – We go back to some of our previous stocks including this firm that was sold on its stop a few weeks ago. This shipping company has rebounded strongly from the heavy selling that touched it and it closed at a new high on Friday. Though this might be a little extended at current prices, it certainly has strong indications that a move higher has begun.

Vasco Data Security Intl (VDSI) – And another stock that we held until the recent turmoil forced us to the sidelines is recommended once more. VDSI closed Friday near its all time high and much like EXM, it has rebounded very strongly from the drop in share price in mid-Aug.

Diodes Inc. (DIOD) – This semiconductor stock closed at its 2007 high on Friday, accomplishing this on an increase in volume and a gap higher sending a strong signal that a move higher is pending. On the weekly chart, this stock has traded in a broad range of roughly $20-30 since the beginning of 2006 and is now showing indications that a breakout is imminent.

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