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A very weak employment report was the catalyst for an already nervous stock market on Friday leading to a sell off of stocks and capping an eminently bearish start to 2008. The December employment report showed payrolls gained a meager 18K, the lowest gain in more than four years, and more importantly the oft-neglected household survey counted job losses of 436K driving the unemployment rate from 4.7% to 5.0%, a jump that caught many analysts by surprise.

The markets were already reeling from Wednesday’s announcement that the December ISM index of purchasing managers had fallen to 47.7% from November’s 50.8%. This level is the lowest since April 2003 and the first negative reading (below 50%) since January 2007. The new orders portion of the index was particularly ominous with indications from only 15% of firms surveyed showing a rise in new orders for the latest month. Immediately, this news lead to speculation from many economists that weak industrial activity coupled with the depressed housing sector is proving to be an insurmountable one-two punch driving the US into recession.

Surprisingly though, economists are divided on this issue of whether the US is, in fact, in recession. Evidently the government is able to point to positive GDP figures (which are always backward gazing) to state that rumors of recession are effectively premature but this statement displays a blatant disregard for the severely eroded housing industry and the concomitant weakness in construction, the seized credit markets as well as the downturn in manufacturing as expressed by the ISM survey. It is undeniable that these conditions are exerting a tremendously sluggish force on the economy.

While one week does not make a year, the losses in the stock markets are nonetheless important guideposts for medium term movements as the strength and percentages of their respective declines were important enough to warrant the attention of technical analysts and certainly indicative of future bearish action.

Technically Speaking

Though volumes were mainly lower due to the holiday season, trading volume on Friday was quite significant and surely would have exhibited an even more bearish character if it had occurred in a week without a holiday. Nevertheless with the Dow Jones Industrials and the S&P 500 each barely above their respective November lows, the head and shoulders formations are essentially complete. We now look for a decline in the DJ equaling the move from the neckline to the top of the head, a distance of about 1400 points. Similarly, on the S&P, this drop equates to approximately 165 points.

The deterioration in the tech sector was also rather remarkable with losses on Friday alone of 3.8% on the Nasdaq Composite and 4.3% on the Nasdaq-100 index. Contrary to the broader indexes, the Nasdaq twins slid well below their November lows but remain for the moment significantly higher than their respective August lows, which is not the case for the DJ and S&P. This comparatively weaker performance by the tech sector over the past few weeks suggests that some bias toward selling tech has occurred, a sector that was heretofore more immune to the general malaise in stock markets.

Given the oversold nature of the markets brought on by the sell off in stocks this week, we would anticipate some rebounding to occur before a continuation of the slide re-ignites.

New Buy Recommendations (in order of preference):

None.

New Short Sales

HSBC Holdings PLC (HBC)

UBS AG. (UBS)

We wish to modify our short positions by adding two additional stocks to the pool of banking stocks. The entire sector is tremendously weak and these two are particularly solid opportunities for shorting.

On Friday, HBC dropped below previous support around $82 that contained prices since mid-November. Now the 2005-low of $77.23 is likely to fall by the wayside on the way to a test of support at the 2004-low around the $70 mark.

Similarly on Friday, UBS gapped lower and closed near its November low, which leads us to believe that this support will also fail. Further support is found near the 2005-low in the $38.50 area and the 2004-low around $32.30.

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.

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