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

Subscriptions and Administration: Pierre Fichaud (toll-free: 866-487-9711)

For our purposes, the overall direction of the stock market is defined by the direction that the markets have taken since the last, major unsurpassed peak or trough reached, which remains October. Two of the keys to the overall direction of the markets continue to be the situation surrounding the credit market quagmire and signs of rising inflation. On Friday, the markets took the 0.6% increase in consumer inflation to be a good sign because the core rate stripping out volatile food and energy prices was up a meager 0.2% and within analysts’ range of expectations. Evidently there were no ugly headlines from the credit market camp to deter traders from stepping in to buy shares.

Next week, the wholesale inflation figures will be released (Tuesday) along with housing numbers and while negative surprises may be in store, the reaction could still be muted. More likely, it would take an event bordering on the importance of a bank collapse similar to Bear Stearns to move this market significantly lower.

So if inflation is running hot, or at least the part that includes (necessary?) food and energy, and the credit markets remain tight with banks reluctant to lend to each other for fear of losing their collective shirts, what is keeping the market from falling further? Not much except the technical patterns.

All the major markets are oversold judging by their stochastics and we would even assert that the broader markets are quite heavily oversold having been largely held in a tight sellers’ grip since the last days of May. A combination of a slow news period and an oversold indication on stochastics allows for a bullish resolution, if only temporarily. What is not beyond the realm of future possibilities is the increased risk of warnings of disappointing second quarter earnings especially from financial firms.

Last week, the Senate Banking Committee heard that while only four banks had failed in the first five months of the year, there were ninety banks deemed to be "problem banks" and taken together, they held $26.3 billion in assets. The Federal Reserve’s number-two man, Donald Kohn, held that bank holding companies would continue to report weaker earnings and further asset write-downs in the coming quarters. Certainly Lehman Brothers has felt the heat of late with short-sellers preying on its apparently weak condition. These sellers had big expectations – they expected Lehman to announce further asset write-downs on mortgage-related instruments and that’s what they got when Lehman pre-announced their earnings last week. The official release of their earnings is tomorrow and analysts are keen to hear more details of the damage and Lehman’s strategies for resolving them. Two other brokerage firms report next week: Goldman Sachs on Tuesday and Morgan Stanley on Wednesday and both could be catalysts for a continuation of the downward trend in place, particularly if either misses expected earnings by a wide margin.

Technically Speaking

Stock markets rebounded with varying strength by week’s end and the Dow Jones Industrials managed to mark a gain for the week in contrast to the other three majors. The broader markets fared much better overall as the S&P 500 closed the week with only a slight loss totaling less than a point.

The tech-sector as viewed through the lens of the Nasdaq twins also rebounded but failed to regain its early week losses. More importantly however was Tuesday’s breakdown on the Nasdaq as it slid through the lower boundary of the upward trending channel that had guided price since the bottom reached in March. Now the tech-sector has joined the broader markets in their channel failure.

As mentioned before, stochastics played an instrumental part in this rebound and though the markets remain vastly oversold, the upward move in the latter part of the week might have been sufficient to allow further downward movements. At most, the Nasdaq twins have little wriggle room left before returning to touch the boundary of their channels and this usually marks a point of failure.

New Buy Recommendations (in order of preference):

None.

New Short Sales

None.

Stock Positions to Sell/Exit:

Nearly all of our longs have now been exited mostly through the use of stops that were triggered this past 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