Publisher: Colin Alexander Editor: Ken Wilson (450-691-4617)

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Markets may have rebounded strongly this past week but we consider this action to be symptomatic of a wave of short covering that will quickly dissipate. Daily charts this week produced some wildly volatile price swings with the strongest moves occurring in the financial sector. Meanwhile the vastly oversold character on the weekly charts buoyed the bullish behavior and we judge this to have been a large influence in the stock price movement.

Nevertheless, stock price changes this coming week will reflect the economic data to be released starting on Monday with the ISM purchasing managers survey, an indicator of near term conditions for a variety of manufacturers. Then on Wednesday, productivity data and factory orders will be announced while on Friday morning the always-important monthly employment report for November will be released. Much of this data will be used for Fed-analysis – an attempt to predict with reasonable certainty, the direction and the measure of an interest rate movement, which in this case is to be determined the following week.

Chairman of the Federal Reserve, Ben Bernanke, was uncustomarily blunt in his assessment of the economic environment suggesting that payroll data would help him make a decision on interest rate policy when the FOMC meets. And the number two man at the FOMC, Vice-Chairman Donald Kohn, stated that uncertainties in monetary policy required flexible and pragmatic policymaking, which was interpreted to mean that due to the on-going turmoil caused by the subprime crisis, the Fed was leaning toward another rate cut on Dec 11.

Technically Speaking

The rebound in market indexes was far more intense than we had expected taking into consideration the enormous impact that the subprime situation has produced in a very real and tangible manner. The Dow Jones Industrials climbed 5% from their close on Monday and finished the week above its key 200-day moving average. Whether this is sustainable is certainly fodder for media talking heads however it is worth noting that the weekly stochastics have begun a rebound from very oversold conditions and Fed heads including Federal Reserve Chairman Bernanke himself, offered sufficient quantities of sound bites this week to allay fears of a Fed standing pat on interest rates next week when the FOMC meets. More likely given the shape of the chart and of the general weakness evident in the rebound, there is a strong likelihood that a thrust to 14K would fail leaving the chart susceptible to the creation of a bearish head and shoulders pattern.

Similarly, the S&P 500 finds itself in a situation where the force of a long overdue rebound runs counter to the general trend resulting in at least some temporary relief for bulls. However a move toward 1556 would likely be met by renewed selling and the creation of a head and shoulders formation leading to further technical selling.

The tech sector is not immune to this development and indeed the Composite index almost touched 2700 before longs bailed out of their positions on Friday leading to a closing reversal. Though the index is once again above its 200-day moving average, its grip appears to be loosening and resistance is winning as both the Nov 14 high and the July peak conspire to prevent the Composite index from topping 2700.

The ND-100 is the least supportive of this possible development (H&S) owing largely to the absence of financials from its component stocks. The right shoulder of a potential head and shoulders formation has already surpassed the left shoulder and although this isn’t an absolute necessity in defining such a formation, the pattern is far more reliable when the right shoulder is lower.

Net-net we view this week’s action in equities as a mild case of short-covering and not a parade of investors putting new money to work in stocks.

New Buy Recommendations (in order of preference):

None.

New Short Sales

None.

Stock Positions to Sell/Exit:

The rebound in the financial sector proved to be far more forceful than we believed would occur and the whipsawing in price movements was equally stunning. Both long and short positions believed to be well-insulated from the market noise, succumbed to the remarkable volatility witnessed last week and left us as observers on the sidelines but with very manageable losses.

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.

¹ Peabody Energy spun off its coal assets into Patriot Coal on Oct 31 at a ratio of 1 share of PCX for every 10 shares of BTU held.

New stops in BOLD

* Stop on a closing basis

** Buy if above entry price

*** Split-adjusted price