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Amid more news this past week that the economy continues to fumble on one or two cylinders, bulls pointed to the few bright spots evident to counter any argument that recession is upon us. Inflation figures would seem to be the primary area giving bulls hopes as the latest data from February showed a 0.1% increase in both the overall rate as well as the core rate. Coming a close second was the news that new home sales were not as bad as predicted but housing statistics are notoriously inaccurate and subject to revisions in later months. The five-month trend is generally accepted as the most accurate assessment of the housing sector.

A lower level of inflation for one month does not make a trend nor does it represent a rebounding economy, however it could inject some much needed confidence in the dollar enough to stem its collapse and put a temporary bottom on the dollar at the very least. Since many commodities are priced in US dollars, there is an additional benefit that a dollar recovery could reduce inflationary pressures in the near term.

Tomorrow is the last day of the month and the first quarter. The four major indexes are all located at points near where they began the month and we are thus interested to see on which side they will close. Moreover, the end of the week will bring another employment report where it is anticipated further weakness in the jobs survey will be announced.

Technically Speaking

Market indexes have maintained their lateral movements of the past weeks and their recent upward tilt. There is a lack of conviction in these daily moves preventing us from being more decisive about their direction over the short term. Longer term outlooks remain quite bearish however and there are no technical reasons to believe that the primary trend is anything but down.

There are two noticeable pockets of strength that we’ve detected worth discussing. The first is the apparent bullish break out in the Dow Transports on Monday this week. The index broke through resistance at the 200-day moving average and topped the February high but failed to top the December high. On the daily chart, the Transports appear to be generating an inverted head and shoulders formation, which would indicate further upside potential with the neckline located around 5000 and a target close to 6000. But if one were to take a longer term view of the Dow Transports, the situation becomes a little murkier.

Opening up a weekly chart view gives a wholly different perspective of the same index. This latest weekly move could result in failure on the right shoulder of a much larger head and shoulders formation that began back at the beginning of 2006. If the current move completed the right shoulder it would signify a much greater move in the opposite direction toward 2800.

Already by week’s end, the Dow Transports had fallen back below the 200-day moving average on the daily chart and market internals were turning bearish.

The other pocket of strength is the steel and iron sector and this one does not share the longer term ambiguity of the Dow Transports. Companies such as US Steel and Cleveland-Cliffs exhibit strong charts at all levels: daily, weekly and monthly. We would presume that these companies are benefiting directly from the lower dollar and seeing an increase in demand for their products. Simply stated - infrastructure projects in developing economies are unlikely to be abandoned simply because of a recession in the US.

New Buy Recommendations (in order of preference):

US Steel (X) – US Steel broke out this week to a new high having completed a long pennant formation begun in the first half of 2007. On the daily chart, X recently verified support at both the 40-day and 200-day moving averages and on Friday, completed a Lindahl buy signal.

Arcelor Mittal (MT) – Arcelor is close to breaking out and importantly, is trading above the key $80 level where it has found substantial resistance over the six months. At its current level, it appears to be readying itself for a run toward the high of $83.88 reached in late October 2007. A successful test of the 40-week moving average in January and a confirmation of a Lindahl buy signal on the weekly chart this week are important indications that Arcelor is heading higher.

Cleveland-Cliffs (CLF) – After reaching a new high in February, CLF backed down and solidified its base near $105 testing and retesting this support level before resolving to the upside. Similar to Arcelor, CLF is likely to break out very soon to a new high.

New Short Sales

None.

Stock Positions to Sell/Exit:

We were stopped out of one gold position and three banks held short this week.

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