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The heightened risk of recession was front and center on Friday as Caterpillar released its quarterly results and they warned that their own forecasts put the chances of recession in the US at 50%. Thus, despite an increase in profits for this quarter just ended, the company predicted slower growth in 2008 and lower profits due to the sharp drop in new housing development across the US. Statements such as these from a firm that is a global leader and has operations in many rapidly developing economies, offer rare insight into the strength of the global economy.

Earlier in the week, data on US housing starts supported Caterpillar’s assertions as a surprise 10.2% drop in September sent starts to a level not seen since 1993. On an annual basis, housing starts have now fallen a stunning 30.8% and the end is still not in sight with the lethal combination of tighter credit, greater supply and falling prices conspiring to apply pressure on a market already reeling. Once the new year begins, large numbers of mortgage resets over the first three months of 2008 will intensify the downward pressure on prices and boost the available supply.

The effects of the implosion in the housing market have been largely contained in the financial sector, which encompasses financing and investment firms, mortgage companies and banks. Some of the largest American banks have come clean on their involvement and have acknowledged their sizable losses however their strong position ensures that they will be able to survive. This week, there are 163 firms of the S&P 500 reporting (121 reported last week) and many of these members are tech stocks far removed from the asset backed commercial paper trenches. Good news from these stocks could nullify some of the bearishness of the past week and provide a catalyst for a bounce.

Technically Speaking

Last Thursday’s one-day reversal was, as we mentioned last week, a defining chart moment. Equity indexes were generally weak every day since, culminating in an inexorably negative day on Friday. All sectors finished in the red on heavier than normal volume on this anniversary of 1987’s spectacular fall of 22% in the Dow Jones Industrials index. Analysts and television talking heads immediately drew comparisons to the point totals of the drops and although relatively close, the difference on a percentage basis renders such comparisons, utterly useless.

Looking closer we see that even while money is flowing out of these indexes in a very general sense as indicated by the high volume sell-offs, the distribution is still weighed more heavily toward the broader indexes – the DJ-30 and the S&P 500 – than the tech-heavy Nasdaq brothers, which is normal considering that the weight of financial issues affects the former by a much greater amount.

Interestingly, the last week of October is often the most profitable time to buy equities and a glance at weekly MACD charts partially supports this theory though conclusions cannot yet be drawn. On the S&P as well as the Nasdaq Composite, a clear bottoming in the fast MACD line from a substantial low is developing that might be signaling a return to higher prices. Naturally, patience should be exercised especially given Friday’s performance, which could also undermine this development.

Gold may be the one bright spot for investment if markets continue to tumble in this new week. A lower dollar is boosting the price of gold and it is now approaching the key $800 level dragging many gold stocks upward for the ride.

New Buy Recommendations (in order of preference):

None.

New Short Sales

None.

Stock Positions to Sell/Exit:

Omnicell Inc. (OMCL) – We were exited from this position on Friday on a small sell-off due to comments made by company officials that they would cease releasing backlog data with their quarterly results and instead would offer these figures once per year at year end.

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