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Federal Reserve Chairman, Ben Bernanke, was front and center this week in his appearance before the Senate Banking Committee testifying on the future actions of the FOMC given the developing situation in US credit markets. He was accompanied by Treasury Secretary, Henry Paulson, and by SEC Commission chief, Christopher Cox as all three were called upon to update the legislators on their latest actions, however Bernanke was by far the most important voice to be heard.

Though the media tended to ignore his statements about inflation, they were nevertheless interesting as Bernanke told the committee members that he believed that inflation should start to ease from its current level. His greatest concern in the near term was the unhealthy combination of higher prices for food and energy combined with a lower US dollar exchange rate. He noted however that should consumers begin to worry about inflation or if the Fed’s credibility were weakened, the Fed’s job would become more complicated.

Bernanke reiterated his view that economic growth was likely to slow considerably due to the tightening credit markets and the severe decline in the housing market both of which were unlikely to improve anytime soon. He also recognized the employment situation whereby job growth has been supplanted by job losses according to the latest data for January. Finally, Bernanke outlined the Fed’s actions taken so far to mitigate the economic fallout from the latest developments including the 225 basis points cut in overnight interest rates, the easing of rules surrounding Federal Reserve credit facilities, and collaborations with other central banks to inject capital.

Clearly Bernanke gave the impression that his concerns were concentrated around the slowing economy and the potential for further declines in housing and jobs as the odds seem to favor this outcome but that inflation remained a wild card that the Federal Reserve did not wish to ignore.

Technically Speaking

The four major indexes closed higher this week in a light bounce from losses of the previous week. Volume dropped on the weekly rise, which constitutes a bearish market characteristic.

Looking at the daily charts, there were some anomalies worth noting. In the broader markets, the Dow Jones Industrials and the S&P 500, closed Friday in rare fashion, in the opposite direction. The larger S&P managed to close up one point while the DJ remained stuck in negative territory and both saw their trading volume increase on the last day of the week.

Meanwhile the tech sector represented by the Nasdaq brothers closed out the week with a drop in value but did so on lighter volume, which could be interpreted to be somewhat bullish as we begin a new week. The weekly volume though eased and therefore any bullish ideas should be tempered by this longer term view.

Weekly stochastics for all four markets indicate that their previous overbought condition has been alleviated and this could render them susceptible to renewed selling especially as they approach certain resistance levels. To reiterate, the resistance for the DJ-30 is near 12,750, for the S&P 500, it’s near 1400 and for the Nasdaq Composite, the resistance is located near 2440.

New Buy Recommendations (in order of preference):

None.

New Short Sales

None.

Stock Positions to Sell/Exit:

Lloyds TSB Group (LYG) – With the bailout of Great Britain’s Northern Rock coupled with an expected increase in the dividend, Lloyds rebounded strongly in London today in reaction as fears of further weakness dissipated. We recommend exiting this trade since the near term is likely to see a greater propensity for a rising stock price.

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