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The Democrats put on quite a nomination party and the Republicans are due up this week though they will probably tone it down in a sign of respect to those threatened by Hurricane Gustav tearing through New Orleans this evening. Already there are reports that Gustav was clearly not Katrina’s big brother and is inflicting less damage than expected, however weather watchers have shifted their attention to two more tropical storms named Hanna and Ike. Both of these storms are directed at the Caribbean and are likely to lash the east coast of the US but given their distances from shore, their final destinations remain unpredictable.

Between the strategic wrangling occurring at the political level, the effects of severe weather at our doorsteps and changes in the economy, there is every possibility of being overwhelmed by the rapid shifts in stock market sentiment and the whipsawing action of sectors that are bullish in one week and dogs the next. At these times, it is best to concentrate on the greater themes of the period and for us that means looking at increased unemployment causing tighter pocketbooks leading to lower spending; higher commodity inflation adding further pressure; and an enduring credit crunch that could last for many months, if not years. These themes are analogous to large ocean vessels that have enormous time and space requirements in order to change direction. They simply cannot stop on a dime and steer into the opposite direction.

Keeping with the underlying theme of lower spending, if the personal incomes number is anything to judge by, it would appear that the party is officially over. With this spring’s economic stimulus checks a mere memory, the government released data on Friday reporting a drop of 0.7% in personal incomes for the month of July and this was the largest drop in incomes since August 2005. Thus, it was truly no surprise that consumer spending also saw a drop of 0.4% in the month of July as consumers shut their wallets in an effort to rebuild their own balance sheets. We would expect to see more of the same later this week when the Labor Department reports on employment for August. Payrolls are expected to have shrunk once more with the only question mark being the extent of those losses.

Technically Speaking

The broader markets continue to develop pennant formations since forging new lows in July however Friday’s move may be more telling of how the next few sessions will shape up. The abrupt reversal of Thursday’s strong upward performance was a powerful signal that both technical resistance is fierce and that the primary trend remains bearish. We would expect that this aborted attempt at rallying would mean more selling is likely as we begin the new week. Moreover, with summer vacations largely finished, there is an expectation that we will start to see an increase in trading volumes. A break below 1261 on the S&P 500 and/or 11,290 on the Dow Jones Industrials would put tremendous technical pressure on bulls likely leading to another leg lower.

Over in the tech sector, the 200-day moving average appears to be the key indicator. For the ND-100, price managed to float above this level in the early part of August while the Composite index found itself kept in check by this resistance level except for a few brief moments earlier in the month. Now Friday’s slide has both indices on the same south side of the 200-day MA but the bearish signal was more pronounced on ND-100, which touched a new three-week low.

Volume for all indices continues to be low however the expectation is that these trading volumes will begin to increase as more investors return from vacation this week.

New Buy Recommendations (in order of preference):

Sunoco Inc. (SUN) – Oil and gas refining is making a comeback after having been sold off for about a year. Since bottoming in July, SUN’s price has risen in conjunction with higher trading volumes and Friday’s move higher suggests that $40 approximates the new floor price for this stock. The weekly price reversal and the turn on the monthly stochastics also support the move to higher prices.

Fording Canadian Coal Trust (FDG) – Coal has evidently bottomed and is in the middle of a rebound. FDG touched its low in July and has since formed a solid base and, more importantly, developed a tight compression just below the $90 mark. Investors are buying into this stock but are careful to do it at prices below $90. This bullish pennant formation will not last much longer and in the process, FDG’s stock price will reach new heights.

James River Coal Co. (JRCC) – Similar story to FDG with a bottom developed in early August and now evidence of strong buying as volume has returned with the rise in price. The close of August 21 above $45 clears the way for a new leg higher given the break in resistance. Weekly stochastics are turning from a low point also giving traders an indication of the direction of price.

New Short Sales

Apple (AAPL) – Friday’s move slicing through support at $170 on increasing volume is a major clue to the direction that AAPL’s price is heading. The highs touched in December, May and now August are each lower than the previous and with the 200-day moving average within a few points of the current price, the likelihood of a new high is more and more remote. Weekly stochastics are now turning from overbought levels lending credence to ideas that its price will fall.

Research In Motion (RIMM) – Perhaps an ironic twist since these two have become competitors, however RIMM also failed at an important support level on Friday ($124) and dropped on increasing volume. Another similarity between the two stocks is the three tops, which in RIMM’s case occurred in November, June, and August. November’s top was not the highest and consequently we see the development of a head and shoulders top for RIMM. Much like AAPL, stochastics on the weekly chart have now begun turning and foretell a period of falling prices.

Stock Positions to Sell/Exit:

We were exited from PWR this week when our stop was reached.

Ashland (ASH) – Selling forces have dissipated on ASH and there is an even chance that the stock could be shaping up to form a rebound toward the $50 level therefore we recommend covering any positions immediately.

Portfolio Comments:

New stops have been added in bold 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