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The half point cut in interest rates charged by the Federal Reserve was a surprising, bullish shot in the arm for stock indexes over the ensuing days but this action is unlikely to be more than a feeble attempt to salvage a very troubled housing industry and provides little relief to now illiquid commercial paper markets.

Essentially, the Bernanke-led Fed has ignored the monetary policy objective of the Federal Reserve Act, which is meant to ensure long-term growth in an environment of maximum employment, stable prices and moderate long-term interest rates. Instead this objective has been replaced with an inflationary policy instituted without consideration given to the recessionary conditions evident in the economy.

The former strong dollar policy was literally tossed out the window as overnight interest rates were lowered to 4.75% removing support for the dollar and causing its value to drop to new historical lows versus other foreign currencies. Moreover the risk of further losses on the dollar is high as a growing number of countries now have a lower propensity to add dollars to their mix of foreign reserves following the lead of China and some oil-rich Arab states. Meanwhile the decision by Saudi Arabia to retain its present interest rate in the days following the Fed Reserve cut was also a sign of diminishing dollar strength. Effectively, the Saudis have announced their intention to rid themselves of the dollar peg, which will most likely influence the monetary policy of other states in the region further undermining support of the dollar.

In order to attract foreign capital to fund the current account deficit, there is now a threat that the flight from US debt markets will mean higher long-term yields on bonds. These instruments form the basis for most mortgages and therefore the housing sector could be subjected to further downward pressure. Already this week, it was reported that new home sales fell 8.3% in August and the median price dropped by the largest decline y-o-y in 37 years, 7.5%. The carnage is expected to continue, as the inventory of unsold homes remains high at 8.2 months worth.

While the housing sector garners the most attention, a 4.9% fall in August durable goods orders reported this week was further indication that the potential for recession is greater than government officials are willing to admit. This was the largest decline since January and an abrupt reversal of July’s 6.1% increase.

Technically Speaking

The upward march continues for the stock indexes and in the case of the Nasdaq-100, it has culminated already in a new 2007 high. Notwithstanding this tech-sector leader, strength in the other indexes pales in comparison. Certainly prices have rebounded with the Dow Jones Industrials a mere stone’s throw from 14,000 and the Nasdaq Composite on the verge of a new 2007 high, however market internals do not reflect this strength and consequently we have little confidence in this latest rise.

In sum, the trading volumes on the rebound in share prices is significantly lower than in the period during which markets dropped considerably in late July and August. Technically, this leads us to surmise that a double top could be forming therefore we remain cautious overall on the prospects for stocks in the near term. If market indexes conquer these previous highs forcefully on a price basis, we would feel obligated to re-evaluate our stance.

New Buy Recommendations (in order of preference):

Echostar Communications Corp. (DISH) – As we’ve done in the past few weeks, we return to a previous long that has shown once again, bullish signs of life. DISH jumped through its 200-day moving average this week gapping higher in the process, on heavy volume. On its weekly chart, DISH had completed a Lindahl buy signal last week but this week’s strong performance suggests that a more powerful move has begun with a likely push toward the 2007 high in the near term.

Cerus Corp. (CERS) – This firm’s break out to a new 2007 high this week shows good promise. The daily chart with its double bottom hit in January and May coupled with this week’s break above $8 resistance puts bulls in the driver’s seat. On the weekly chart, this week’s move suggests that the resistance just above $9 that has held down this stock since early 2006 is about to fall by the wayside as well.

Cardica (CRDC) – This relatively small biotech firm built a solid base in the $5-6 range since late 2006 but broke out one month ago. Since that time, its stock has been consolidating at this new level between $8 and $11 however Friday’s move higher on strong volume is a good indication that the stock is set to move higher now.

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