PRS Weekly Update Jan 15, 2008

By: Jim Patterson | Tue, Jan 15, 2008
Print Email

Weekly hotline Update #50 - 01-15-08
1/15/2008 8:40:50 AM

Going into the end of the year we were looking for a rally. The rally stalled out on the 24th. Since Christmas day the NASD has closed down nine out of twelve trading days. Other indices have faired a little better in terms of days up vs. down, but all of them have fallen precipitously. To make matters worse, from a seasonal stand point, the end of December through the first week of January is one of the most consistently positive times of the year.

Of the 112 years of the Dow's existence, as of the 13th, 2008 is the fourth worst start for the Dow ever. The only years that were down more as of Jan 13 are 1978, 1939, and 1991. The good news is those three years cover the entire spectrum of the past century. Note that two of them were late in a decade, 78 and 39, as we currently are. In 1991 the price action was heavily influenced by the first Gulf war and was followed by a very rapid recovery. Unfortunately, current circumstances are similar to 78 and 39 rather than the anomalous 1991.

Typically when a year starts off as weak as this one has, the recovery process develops very slowly. To illustrate and emphasize the point, look at the chart below. It shows the Dow's performance for the worst 25 starts ever, based on the Dow's Percent change as of January 13.

Looking at the spectrum of outcomes above, it is clear that historically, when the market gets off to a bad start, the negative mood tends to linger. The two positive exceptions are 1991, discussed above, and 1998. After those two, the next best return as of mid-March is +1.6%, which was in 1902.

This quick historical review shows us how difficult it is for the market to recover after failing to perform well during the end of year - first of year time frame, one of its seasonally strongest periods. Also note: The Dow finished the year higher only 7 of the 25 years shown above, 28% of the time. In the other 87 years the Dow finished the year higher 74% of the time. There is some validity to the famed January Barometer.

The problems the market faces at present relate to the consumer and the consumers willingness to spend. At the end of the day, fuel and energy costs in conjunction with ever rising medical and food costs, plus persistently rising taxes (outside of income tax, think property taxes and the like) continue to squeeze consumers. Rising mortgage rates proved to be the proverbial straw that finally broke the consumers back. As I once said, you can't sell houses the way Best Buy sells big screen TVs with no money down and no interest until 20##. They did, 20## has arrived, and no one can pay the bill, the end.

How will the situation be resolved? Well, don't expect a "quick fix" as so many politicians would like you to believe. In time the issues (read: debt issues) will be re-absorbed back into the US economic/ financial machine. The politician that is on duty at the time will get the credit for the recovery, but most likely it will be a case of being in the right position at the right time and nothing more.

So, what is a trader or investor to do when the economic climate is expected to remain somewhat hostile towards the market? Well, for starters, caution is advised. If you have new cash that you are itching to put to work at bargain prices, be patient. Things that look cheap now could get a lot cheaper very quickly.

That said, I remain respectful of the message coming from the 3-Month PRS Time Plane.

The green areas on the chart represent the best buying opportunities over the past 12 years, and the 3-Month PRS Time Plane Buy signal light is on. The overall message is that from a general market stand point, the market's near-term downside potential should at worst be somewhat limited. On a 3-month basis, overall returns should improve over the balance of January.

While we will be looking for some improve stock market action over the balance of the month, the unfortunate aspect of the rapidly deteriorating macro economic backdrop will weigh on the US markets like a wet blanket. In keeping with historical precedents, we are unlikely to see the indices recoup the year's losses until early spring.

New Entries for January: In January we have seen a number of stocks come into our entry criteria. FCX, BHP, and OII are the only ones I find particularly favorable at this time.

FCX (Freeport McMoran Corp) produces copper, gold, and silver through Freeport Indonesia and PT IRJA eastern minerals in Papua, Indonesia. This is a huge precious metal mining company with over 2,813,089 metrics tons of proven probable recoverable ore reserves.

IBES earnings: 2006a $6.83; 2007e $9.43; 2008e $10.71. This is a straight up play on Gold. If the price of gold continues its run higher, FCX will continue to profit and the stock should continue its current out performance. In December 07, FCX raised their dividend to $1.75 per share.

FCX is in the PRS buy zone with its 3-month PRS having fallen into the buy zone while its 6-month and 12-month PRS ranks remain remarkably high. Its 6-month PRS rank is 85 meaning it is up more than 85% of all stocks over the past six months.

The following stocks have been removed from the Open Active Table: ASIA, HLIT, BKX, TSO, RS, SPEC, NVTL, PCR, MTRX, CYPB, OIIM, TPX, and LFL.

Stocks, which if weaken further, may be removed from the open active table: KCI, and GSOL

The Table below lists fifteen of our favorite Open Active Recommendations:

Portfolio Update:

In Portfolio #1 we are closing CBEY, and SPEC. SPEC reported bad earnings and the stock suffered. CBEY was hit hard on January 8th, but there is no material news to account for the price action.

Portfolio #2: We are closing ININ, SIGM, ANAD, TPX, and SPEC.

With the heart of earnings season dead ahead, the greatest concern is not whether a company will meet earnings expectations, it is how confident the CEO will be when it comes to discussing forward looking guidance. With well known US economic troubles as front page news, the idea of under promising on forward guidance seems extremely attractive such that we may be in for a highly disappointing earnings season. The upside is that reduced expectations should set the stage for some impressive reports later in the year.

"We would accomplish many more things if we did not think of them as impossible." - C. Malesherbez



Jim Patterson

Author: Jim Patterson

Jim Patterson
Patterson Relative Strength Stock Report

We hope that you enjoyed the sneak peek at the Patterson Relative Strength Stock Report. Take advantage of our 4-week no cost trial to the Patterson Relative Strength Stock Report by clicking here. Simply press the proceed to checkout button, enter in your billing information then enter the code COMP1217 in the message and comments or discount code field.

Important Disclosure

Futures, Options, Mutual Fund, ETF and Equity trading have large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in these markets. Don't trade with money you can't afford to lose. This is neither a solicitation nor an offer to buy/sell Futures, Options, Mutual Funds or Equities. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on this Web site. The past performance of any trading system or methodology is not necessarily indicative of future results.

Performance results are hypothetical. Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not actually been executed, the results may have under- or over-compensated for the impact, if any, of certain market factors, such as a lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown.

Investment Research Group and all individuals affiliated with Investment Research Group assume no responsibilities for your trading and investment results.

Investment Research Group (IRG), as a publisher of a financial newsletter of general and regular circulation, cannot tender individual investment advice. Only a registered broker or investment adviser may advise you individually on the suitability and performance of your portfolio or specific investments.

In making any investment decision, you will rely solely on your own review and examination of the fact and records relating to such investments. Past performance of our recommendations is not an indication of future performance. The publisher shall have no liability of whatever nature in respect of any claims, damages, loss, or expense arising out of or in connection with the reliance by you on the contents of our Web site, any promotion, published material, alert, or update.

For a complete understanding of the risks associated with trading, see our Risk Disclosure.

Copyright © 2007-2008 Jim Patterson

All Images, XHTML Renderings, and Source Code Copyright ©