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The federal government announced a bailout for Fannie Mae and Freddie Mac today after the beating they took the past couple of weeks on the stock market. Fears of a larger crisis loomed as investors were spooked by the possibility that the two guarantors of mortgages were on the brink of collapse. Until now, these government-sponsored enterprises (GSE) were considered to be failure-proof with the investing public believing that the government would never let such behemoths fail. However in the past weeks, comments from some officials added some ambiguity to their status and investors chose to sell their holdings.

The Bush administration was forced to clarify their position on the two GSE’s and consequently, their prescription for solving the crisis. Their plan involves the Federal Reserve whose emergency discount window will now be open to both FNM and FRE in addition to the numerous banks and investment brokerages capable of accessing it. In return, FNM and FRE must allow the Fed to oversee some of their activities, something that the two companies are loath to permit.

Having announced this development on the weekend, expectations are strong that Monday morning will see a substantial rebound on stock markets and especially for those companies within the financial sector. Markets have been tremendously weak and an action like this one acts as a catalyst for a rebound despite signs of a worsening credit crunch.

This week could become quite volatile, as there is economic data due for release such as consumer and wholesale inflation numbers plus industrial production and capacity later in the week. Moreover financials including the likes of Citigroup and Merrill Lynch will be releasing their quarterly reports as the reporting season kicks off in earnest.

One last factor that could affect markets is the testimony of Fed Chairman, Ben Bernanke, who is scheduled to make his semi-annual trek to Congress this week in order to bring the politicians up to date on the central bank’s initiatives and give his view of the economy. The question period for this testimony promises to be quite lively. Bernanke will be in the difficult position of admitting to moderate inflation in the economy while defending the Fed’s inaction with respect to interest rates, which only serves to weaken the dollar and causes higher oil prices

Technically Speaking

The broader indices continued to chart new lows on their respective charts. Meanwhile the tech sector as defined by the ND twins remains weak but above its March low. The ND Composite is quickly approaching the key level of its March low but it is the ND-100, which has best managed to avoid declining in relative terms.

All of the indices are subject to oversold conditions both on daily as well as weekly charts and it is for this reason that we believe a catalyst such as the bailout of FNM and FRE could trigger a wave of buying, particularly in the financial sector. Certainly looking at various charts suggests that many more companies are in a position to short but market sentiment appears to have moved to an extreme level so caution should be exercised here.

Though there are many investors who believe in the bullishness of the tech sector, the technical charts suggest that weakness here is about to be exposed with the quarterly results on tap. RIMM broke down in late June and shows no sign of recovery. Similarly, Microsoft and Cisco have seen their charts turn bearish in the past couple of weeks thus there is ample reason to be doubtful of the bulls in the room.

New Buy Recommendations (in order of preference):

Randgold Resources (GOLD) – This gold miner rose a not-insignificant 8.6% on Friday but it tends to have more volatile price swings than the average gold stock so we shouldn’t be surprised by the unusual move. The metal’s price is rising and GOLD’s stock price has once again jumped after the brief consolidation over the past week and a half. We expect the price of the metal to now surpass the $1000 level over the next few weeks.

New Short Sales

Ashland Inc. (ASH) – The announcement Friday of its purchase offer for chemical firm, Hercules Inc. was sufficiently bearish to send shares to their 2008 low on heavy volume. Already the company’s stock had been hit by some severe headwinds since marking a 2008 high in late May and had reversed much of that gain in the previous five weeks. However, Friday’s move signals that there is widespread disfavor for this latest corporate strategy.

Stock Positions to Sell/Exit:

Several of our long positions were exited at their respective stops this week including one of the gold miners, which partly contributed to our recommendation to add Randgold Resources. The oil and oil services sectors have been acting hesitantly in parallel with the price of oil lately and though we consider this a good sector to invest in generally, being whipsawed from our positions means that we should leave this sector alone for now.

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