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These next few weeks will be characterized by third quarter earnings reports and it is worthwhile noting that expectations have been ratcheted considerably lower in the days leading up to these announcements due to the collapse of the sub-prime mortgage industry. Nevertheless, much of the critical damage to earnings will be limited to homebuilders, financials and the retail sectors. In fact, sectors such as the tech sector and the resource sector are more likely to be immune to the sub-prime fiasco and with expectations so low overall, any boost could result in companies exceeding these forecasts leading to a rebound or at the very least support at current prices.

Mixed in with the earnings reports next week will be a couple of key economic indicators: industrial production numbers and the consumer inflation figure for September. The PPI released on Friday barely caused a ripple in the stock market as the 1.1% rate was all but ignored as analysts concentrated on the core rate of 0.1%, which conveniently strips out the food and energy price changes which are believed to be too volatile to be reliable indicators. The CPI is at the retail level and therefore impacts more directly. Stock markets are quite overbought presently and a negative surprise in the CPI could have a sharp downward effect on prices.

Technically Speaking

Market indexes achieved new highs this week however Thursday’s one-day key reversal on heavier than normal volume was the defining moment of the week. Inasmuch as Friday’s action saw a moderate rebound on lower volume, the inability of the markets to extend the losses from Thursday combined with an inside day is an important indicator of a certain lack of decisiveness. On the broader large cap indexes (DJ-30, S&P 500), there is a downward leaning MACD crossover on their daily charts from a high peak, which at the very least represents the strong probability that these indexes will not extend their climb from the August low. The tech sector is more ambiguous in this regard and that is surely a function of their composition while the broader indexes are burdened with those sectors likely to decline sharply – homebuilders, financials and retail. Therefore Thursday’s action has left some large question marks, which will undoubtedly become clearer as the week progresses.

Despite the recent gains, there is still cause for concern and that is the narrow focus of the index gains as most are concentrated in a handful of stocks. As explained last week, the difference in the rise in value between the Nasdaq Composite (measuring the entire market) and the Nasdaq-100 (measuring the top 100 non-financial firms traded on Nasdaq) highlights the divergence of large cap stocks over small cap stocks. This past week was no exception as the Nasdaq Composite rose 0.91% while the Nasdaq-100 increased 1.32%, a difference of 45%.

Evidently, we can and do deploy strategies to identify those stocks that are performing extraordinarily stronger in order to exploit this marked difference but it remains imperative that stops are utilized in order to prevent any sudden adverse move in price from having a detrimental effect on our portfolio.

New Buy Recommendations (in order of preference):

FreeSeas Inc. (FREE) – We return to a previous recommendation once more adding this marine shipping firm to the other three pure marine plays as well as the railroad and the air freight company. Though we don’t normally search for recommendations by sector, it would appear that this would be the case and certainly given the favorable nature of marine shipping at this time, we have taken the time to examine other companies’ charts in this sector. FREE gapped higher on a strong increase in volume in mid-week and this activity carried through to the end of the week setting up a strong potential for some follow through in the days ahead. The double bottom in Aug and Sept offered support on the daily chart and laid the groundwork for the Lindahl buy signal on the weekly chart.

Cognos Inc. (COGN) – Over the years, Cognos has been a recommended stock from time to time. This time however is significant because the stock has broken out from resistance on the monthly chart extending back to the year 2000. The gap higher on solid trading volumes on Monday was the initial spark and after some minor retracement, it extended this gain on Friday. While the daily chart is supportive of a continuation in the upward climb, it is the monthly chart with its long pennant formation culminating with the break out that we find most interesting.

New Short Sales

None.

Stock Positions to Sell/Exit:

Miramar Mining (MNG) – This stock was the subject of a takeover offer by Newmont Mining (NEM) this week and since NEM owned 15% of the stock already, we presume that there will be no other suitor attempting to take control. If one wishes to retain gold in one’s portfolio, it would be best served by purchasing Seabridge Gold (SA), the other recommended gold stock.

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