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Despite the lack of economic data this week, alarm bells went off in the retail sector. Several retail outfits including Nordstrom, J.C. Penney, and Abercrombie & Fitch announced sharp drops in their quarterly results and ratcheted down expectations for future quarters. Over at Best Buy, in a completely different retail sector, the story was similar if not more emphatic. The CEO of Best Buy said it best commenting that, "(s)ince mid-September, rapid, seismic changes in consumer behavior have created the most difficult climate we've ever seen. Best Buy simply can't adjust fast enough to maintain our earnings momentum for this year." The sudden decline in consumer spending at Best Buy has left the company admitting that they are in no position to predict holiday spending levels and there is a strong likelihood that the same applies to other retailers regardless of sector.

Friday morning’s report from the Commerce Dept. only served to confirm what these retailers are witnessing. For the month of October, consumer spending fell 2.8% from September and 4.1% y-o-y from October 2007. There was no surprise that automobile sales were responsible for a large chunk of this decline. For the month, autos dropped 5.5% from September and an astounding 23.4% from a year ago. And in an ominous sign of future difficulties, the overall inventory-to-sales ratio rose from 1.27 to 1.29 indicating that inventories of everything are growing faster than demand, which will necessitate some adjustments to lower production moving forward.

Meanwhile, with automobiles piling up on the dealership lots, there is no surprise that the Big Three are pleading for help to the federal government. Late on Friday, there was word that they have found a sympathetic ear with the Democrats and that work was being done to develop some semblance of a bailout plan for the car manufacturers. Ford and GM were under tremendous pressure this week when Deutsche Bank analyst, Rod Lache, exhibited rare candidness for an analyst when he put a price target of $0 on GM shares. He based this conclusion on the fact that they would be in contravention of debt covenants by the end of December given their extraordinary rate of cash burn.

As for the other bailout, the originally $700 billion, morphed into $850 billion intended to offer life support to the banks and other financial institutions, apparently, conditions changed. Treasury Secretary, Henry Paulson, announced that the bailout’s dollars would no longer be used to buy distressed mortgage assets as this strategy was deemed not to be the most effective method of using taxpayers’ money. In its place a program will be implemented that targets not mortgage assets, but rather consumer credit such as credit cards and car and student loans.

The sudden change in focus understandably creates confusion and lowers the confidence level of analysts vis-à-vis the Treasury Department. While the Treasury Department insists it has a plan, it is looking more and more like a group without not only a plan, but also without a vision of the future. The initial plan gave money to banks, which hoarded the money (to rebuild their own balance sheets) despite the government’s intention that it be lent out. Now the plan’s goal is to put the money into the hands of companies in the insurance and auto financing sectors as their needs have greatly expanded recently as credit conditions tightened. By easing their pain, the hope is that they ease conditions for struggling consumers. Paulson will probably enjoy the same level of success that he did with the first version of the bailout.

Technically Speaking

The major stock indices continued to trek lower over the course of the week with tech sector stocks comparatively weaker than the broader markets. The Dow Jones Industrials led the majors with the smallest loss, being just under 5%. The Nasdaq twins experienced losses of greater than 7% with the Nasdaq Composite losing nearly 8% for the week.

Nonetheless what matters most was Thursday’s key reversal. Bottoming intraday near multi-year lows, markets rallied hard into the close reversing that loss with a large outsized gain on heavy volume. Given that daily stochastics were at extremely oversold levels not seen since October 10 (the date of the previous market intraday low for the year), it was barely surprising that a rebound could be so powerful. The question now for investors is how to quantify the short covering portion of the move. On Friday, investors tentatively bought shares but nervousness took hold and the last hour saw a complete evaporation of most of the previous day’s gain. Trading volume was high though much lower than Thursday’s and stochastics have eased from their oversold level.

Broadening the view to the weekly charts, we have the impression that markets could break lower as stochastics are not at extreme oversold levels allowing for some declining or at the least, some sideways movements. Resistance remains at the most recent highs namely, 1475 for the ND-100, 1900 for the Nasdaq Composite, 9800 for the DJ-30 and 1050 for the S&P 500. This potential downward move is also suggested by the break in pennant formations that we’ve seen develop on the charts since the lows initiated in October. All of the these markets with the exception of the DJ-30 dropped to new intraday lows on Thursday and consequently, broke through the bottoms of their respective pennants signaling a new move lower. The coming week should give us a stronger indication of the effect that Thursday’s move had on the overall character of stocks.

New Buy Recommendations (in order of preference):

None.

New Short Sales

None.

Stock Positions to Sell/Exit:

None.

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