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

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The employment report for the month of May was the catalyst for a major downward move on Friday. While the number of job losses largely met expectations, the jump in the unemployment rate to 5.5% was a shock to analysts and immediately put the premise of recession back on the front burner after many had begun steering away and had turned toward the alternative prediction of very slow growth. The household survey portion of the employment report was the culprit as the increase of 861K in unemployed persons carried the unemployed total to 8.5 million and was itself the largest increase in total unemployed since January 1975.

Following the report, the dollar experienced a dramatic sell off against a basket of other currencies extending its substantial loss from Thursday and surrendering much of its gain since late May. Stock markets meanwhile, had to contend with more than the pressure uncovered as a result of the poor jobs report, the threat of inflation and especially the largest single day jump in the price of a barrel of crude oil combined to send nervous investors scurrying to the exits. Actual inflation data will be released next Friday and expectations are that consumer inflation including food and energy numbers will be quite strong – something that the Federal Reserve is concerned with.

Friday’s slide in the stock markets was more strongly felt in the housing and financials sectors. The markets are telling us that the sub-prime debacle is not over, nor is it even coming to an end. On Thursday, the Mortgage Bankers Association revealed that in the first quarter, the percentage of homeowners both in the foreclosure process and those starting the process reached levels not seen since 1979. Furthermore, there is anecdotal evidence that credit is once again tightening and banks are finding it more difficult to operate in this environment.

Technically Speaking

Friday’s sharp fall in equity prices is truly all that mattered this week. The Dow Jones Industrials closed the week below its April low and has broadcast its intention to test the March lows, which are unlikely to hold. The successive lows from October 2007 to March 2008 marked the distinct path of a bear market and the subsequent rebound testing the 200-day moving average in the process, was sufficient to establish the formation of a pennant. Now the normal historical pattern is to test that low and continue in the direction of the major trend.

Similarly, the S&P 500, though not as weak as the DJ-30, exhibits the same signs of breakdown and at the same level – the 200-day moving average. The S&P is comparatively stronger due to the lower concentration of financial sector companies than that found in the DJ-30.

Taking that comparison further, we see that the Nasdaq twins remain inside their upward moving channels though it is worth noting that the Composite index closed Friday very close to the lower boundary of the channel and gives every indication of imminent failure. The Nasdaq-100 remains much higher in its channel and even above its key 200-day moving average. Naturally, the comparative strength in the tech sector is explained by the complete absence of financial sector companies in the ND-100 and their relative scarcity in the Nasdaq Composite.

New Buy Recommendations (in order of preference):

None.

New Short Sales

Allied Irish Banks (AIB)

Credit Suisse (CS)

Well Fargo (WFC)

These three banks have charts suggesting that a break lower is in the cards for each of them especially for AIB and WFC given that they closed at new 2008 lows on Friday. On all timeframes, daily, weekly, and monthly, the dominant direction has turned down and while AIB and WFC have completed their modest pennants off the rebound in March, CS is still developing one with a small lag.

Stock Positions to Sell/Exit:

Two positions were sold at their respective stops – PBR and RDC. Due to the higher risk element in the market, we tighten stops and have recommended exiting many of our positions. (See chart below).

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