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A lower dollar was the key to surpassing earnings expectations for three of the largest names reporting last week. IBM, Coca-Cola, and Google offered surprising quarterly reports based on significant increases in business from outside the US resulting in strong revenue growth in rising currencies. Their respective bottom-lines received a very welcome boost and shareholders responded positively in two of the three with Coke evidently not being considered as "the real thing".

Now as we enter a very busy earnings week with 157 constituents of the S&P 500 reporting, we will see whether the lower dollar’s positive effects are broad-based among companies with substantial earnings from international markets. Moreover, expectations are running quite high after reviewing the quarterly results from industrials, Caterpillar and Honeywell, on Friday. Both reports glowed with references to the above trend growth occurring outside the US and the benefits that they are deriving from this elevated level of global economic activity. Investors will be dissecting reports from the likes of Dupont, 3M, and Boeing for similar indications of this industrial activity and earnings from abroad.

While earnings reports should give the stock market reason to rebound, the underlying difficulties in the financials will continue to pressure that sector in particular and the overall market once the good news is fully digested. Citigroup’s report on Friday morning was sufficiently better than expected (read: not as depressing as many expected) that its stock price gapped higher and broke overlying resistance at the $25 level. Short-covering as a result of the technicals should provide a boost for the coming days however the potential for further writedowns and the need for more capital infusions are likely to apply pressure to this stock and consequently a move above $35 is highly unlikely.

The BOE is preparing to announce a rescue for British banks Monday copying much of the strategy of the Federal Reserve. The BOE will take virtually all mortgage backed securities as collateral swapping them for government bonds in a bid to open up the domestic credit markets, which have seized in much the same manner as in the US. Interestingly, the plan involves a much smaller amount of funding compared to the Fed at around $100 billion whereas the Fed’s TAF now totals $310 billion as we outlined last week. Similar to the US, this central bank injection will be viewed as a positive development and support higher stock prices in the financial sector in the near term.

Technically Speaking

The ability of the markets to disregard bad news and surge on good news has transformed this on-going slide into a bear market rally of some substance. The Dow Jones Industrials was instrumental in this reclassification, as it broke through the key resistance level of 12,750 and in the process, leaped outside of the downward trend in motion since October. There was also confirmation of this move provided by the Dow Transports, which finished the week at a seven-month high and accomplished this on completion of an inverted head and shoulders pattern. Since the bottom to neckline measured 1000 points, we have reason to believe that the transports could rise an additional 900 points from its current 5100.

As for the S&P 500, it also managed to break through its downward trending channel but ended the week under 1400 – a key resistance level for the S&P but this is probably going to fall since the momentum on this rally appears to have substance.

As for the tech sector, both the Nasdaq brothers gapped higher and closed at the top end of their respective downward trending channels however the Nasdaq-100 topped both its February and April highs while the Nasdaq Composite settled for topping its April high only.

There is a strong likelihood that follow through this week will push the latter three markets into unequivocal rally modes. However we must keep in mind that this is a bear market and until major new highs are made, it remains a bear market. Price volume relationships clearly demonstrate that these markets, though rebounding, are doing so minus significant internal strength.

New Buy Recommendations (in order of preference):

Caterpillar (CAT) – Caterpillar’s surprisingly good results caused the stock to gap higher on heavy volume Friday and finish the session very close to its all-time high reached in July 2007. On the weekly chart, CAT completed a Lindahl buy signal this week and stochastics on both the daily as well as weekly charts are favorable for a continuation of the current thrust.

Petrobras (PBR) – The Brazilian energy concern ended the week at an all-time high after rising more than 8% on Monday. PBR appears poised now to begin a new leg higher on the daily chart after having moved sideways since November of last year. There are other oil companies that could also be bought at these levels most notably Nexen (NXY), which appears to be breaking out of a long sideways trend lasting two years.

FMC Technologies (FTI) – This engineering company often is regarded as an oil and gas service company due to its focus on this particular industry. Similar to the other recommendations, FTI touched a new all-time high this week as the industry sector was one of the top gainers along with the oil and gas sector. With crude oil selling for $116 per barrel, there is renewed interest in oil and a new sense of urgency that oil prices are not about to fall substantially. FTI rose on heavier than normal volume this week in the lead up to its quarterly report due to be released a week from Monday.

Union Pacific (UNP) – Though the railways have less exposure to rising currencies, Union Pacific is riding a bullish wave as it closed at a new high on Friday and appears ready for a new leg higher. The rise in exports from the US coupled with the company’s deep involvement in moving record coal volumes is finding its way to the bottom-line if we are to believe the bullish technicals.

New Short Sales

None.

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.

New stops in BOLD

* Stop on a closing basis

** Buy if above entry price

*** Split-adjusted price