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Halloween will be extra special this year as the FOMC two-day meeting ends that day with a decision on interest rates. Federal Reserve Chairman, Ben Bernanke is expected to announce that the overnight interest rate will be cut by either 25 or 50 basis points from the current 4.75%. Ironically, earlier the same day, the first estimate of third quarter GDP will be released and this is expected to show moderate growth of 3.0+%, however due to the deterioration of market conditions brought on by the sharp decline in housing, the Fed is arguably worried that recession is closer than it appears in the mirror.

In fact, stock markets have an uncanny ability to predict recessions and with stock indexes within a few percentage points of their peaks, one could argue that the Fed has abdicated its primary responsibilities of conservative monetary policy in support of the currency and the supervision of banking in the US. Indeed it is crafting policy designed to help the largest US banks escape from the morass that they themselves have created. The toxic subprime waste was the fruit of mortgage financing that entailed little or no documentation in support of loans thus ensuring that people, who normally would be refused a personal loan, were instead qualified for pre-approved mortgages worth thousands.

The midweek announcement that Merrill Lynch wrote down $8 billion in mortgages and related assets was a wake-up call to other financial institutions and investors. This was the largest amount of any institution to date and calls into question the write downs of other firms that have already announced their quarterly results. It now appears likely that these other companies may have neglected to reveal the entire story of their own situations since many of them signaled that their own losses were in the millions or low billions. Unfortunately, these companies can legally avoid reporting some of their amounts as the losses are held in off-balance sheet entities. If this sounds suspiciously like Enron, then you are not alone in your beliefs.

The key factor with regards to banking though is that the subprime mess is not a one-shot quarterly affair that terminates with the third quarter’s report. The situation remains fluid and is bound to worsen as we move into the spring of 2008 when a large increase in mortgages will be due to have their interest rates reset amid a vastly changed environment for mortgage financing.

Technically Speaking

Stock indexes bounced back from losses incurred the week before finishing with closing reversals on all of the major indexes. Volumes were higher in support of this move, which will be seen by many as a bullish sign especially given that it occurs in the autumn, a time when markets normally find their annual lows.

The dichotomy of the market continues with the tech sector’s superior performance sending the Nasdaq twins back towards their 2007 highs while in the meantime, the broader indexes, namely the Dow Jones Industrials and the S&P 500, remain weighed down by an overbearing, weak financial sector.

There is light at the end of the tunnel however. As we mentioned last week, the weekly charts display MACD graphs that have bottomed and are now turning higher and the turns are occurring at substantially lower points on the broader markets though we doubt very much that this will represent an opportunity to earn a higher return from these indexes again due to their composition and the weight of financial stocks.

Gold may have started the week slowly but made up for it by the end of the week closing very close to $800. While we were exited from Seabridge Gold, investors should consider either buying individual companies such as SA, AUY, GG or ABX or simply buying the Gold ETF traded under the symbol GLD.

New Buy Recommendations (in order of preference):

Tyler Technologies (TYL) – Tyler is a software firm specializing in systems for local governments. Their quarterly results released on Thursday were instrumental in TYL leaping to a new 2007 high on Friday. On the weekly chart, we see that this move completes the break out from consolidation begun in the summer of 2006 and it is worth recalling that a break out from such a long period usually signals the beginning of a significant leg higher.

VistaPrint Ltd. (VPRT) – The strong gap higher on Friday breaking through resistance at $44 and reaching a new high for 2007 on heavy volume were all significant factors in this recommendation. On the weekly chart, a Lindahl buy signal was completed this week with an outside price bar finishing the sequence.

Memc Electronic Mat. (WFR) – Returning to a previously recommended stock, we chose this because of Friday’s strong performance due its solid quarterly results. The gap higher on heavy volume left a long, six month island and it achieved a new all time high at the same time.

Uranium Resources (URRE) – This uranium miner spent much of 2007 consolidating and testing its gain from the lows reached in late 2006. The jump on October 12 on heavy volume was confirmed on Friday with another move on strong supporting volume and MACD on the weekly chart shows a sharp turn from a low suggesting that a break out to a new high is imminent.

Steel Dynamics Inc (STLD) – This steel producer was strong all week and the sector is outperforming on the basis of expanded global consumption of steel. Touching a new high for 2007 and supported by heavier than normal volumes the past two weeks, STLD appears to have begun another leg higher. On the weekly chart, the MACD chart displays a completed turn and crossover of the slow MACD from a low point on the chart.

Peabody Energy (BTU) – With the weaker dollar, certain stocks in the coal sector including BTU have popped up as investors recognize that their sales and profits are ramping up. BTU is breaking away from an 18-month consolidation and is set to test its all time highs near $76.

New Short Sales

None.

Stock Positions to Sell/Exit:

Several positions were exited on their respective stops due to the whipsawing activity seen this week. While some of these stocks were perhaps sold prematurely, we view the action as indicative of whether they were being held by strong hands or weak. A good example of this was VDSI, which dipped to our stop price yet bounced and then subsequently collapsed upon the release of its disappointing quarterly results.

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