Weekly Update

By: Jim Patterson | Tue, Jan 29, 2008
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1/29/2008 11:08:17 AM

Weekly hotline Update #52 - 01-29-08

At last, some relief. Last Wednesday the market finally found a bottom with the Dow holding more or less at 12,000. Yes, it traded much lower, but the bulls finally dug in and made a stand. The good news is we are seeing some relief from the relentless waves of selling. President Bush made a good State of the Union Speech Monday night, and everyone is looking forward to an FOMC rate cut at the end of the second day of their meeting, specifically Wednesday at 2:15 PM. The Futures are currently giving a 74% chance of another ½ point rate cut on Wednesday. That would make a total of one and a quarter points of Fed Rate Cuts this month, the most in one month since 1984.

The rapid decline of the Fed Funds Target Rate is an indication of exactly how concerned the Fed is at this time. Historically, rapid declines in the Fed Funds Target Rate have not been good for the market. As excited as folks tend to get surrounding Rate Cuts, history shows that on a year over year basis, the market tends to perform better when rates are rising rather than falling.

The chart above shows the one year change in the Fed Funds Target rate with the one year change in the S&P 500. Once the Fed Funds rate stops falling, that is when prices tend to stabilize and turn higher. From a big picture point of view, the chart above suggests we will enjoy a more difficult market for some time.

On a near-term basis we can turn to the PRS time Plane. All 3 time frames, 3-months, 6-months, and 12-months, bottomed in line with their lowest levels of the past 12 years. Even the 99th percentile at 3-Months has reached its worst level in 12 years. You have to remember that we went through a tremendous bear market meaning the current slide is truly monumental.

The last chart shows the 99th percentile at 3-months. When the return of the 99th percentile falls to 65% or lower, three months later the return of the 50th percentile is about 5% or better. This has only happened four times in the past 12-years.

While the macro economic picture is bleak, it is clear the market has discounted a tremendous about of negativity on a very short-term basis. We have some early indications that a short-term low is in place and it may turn out to be a more important intermediate-term low. However, at this point we can not rule out a final thrust lower to "test" the recent lows. The conclusion is that on a very short-term basis some risk remains. Looking forward three months the S&P 500 should be at least about 5% above current levels, if not more.

New Entries for January: This is where things start to get interesting. 18 stocks came into our entry criteria zone. They all sport very strong IDB EPS rankings. Most are 90 or higher. Almost all of them trade solid daily volume. ISRG, AAPL, and AMZN are three of our favorites.

The following stocks have been removed from the Open Active Table: CY.

There are no stocks "in the Red" so to speak, meaning there are no stocks that are close to being removed from the Open Active Recommended Table.

The Table below lists 20 of our top Open Active Recommendations: I am listing a few more than normal because quite honestly, there are a lot of really good looking stocks on the list.

Portfolio Update: While the general market conditions continue to improve, we have not see enough short-term convincing evidence that a near-term low has been reached. We will maintain our current under-invested position until after the FOMC meeting and subsequent reaction.

Portfolio #1:
Portfolio #2:

The market rebounded from an extreme downside extension last week. On a price basis our metrics are congruent with a developing important low. However, we still have some short comings with a few of our internal market metrics, namely the lack of Rare Buy signals discussed last week. With the character of the rebound retaining a "bounce within an unfinished down trend" type character, we remain a bit cautious. Our caution is enhanced due to the aggressive expectations relative to the Pending FOMC rate cut on the 30th.

On a near-term basis, the character of the rebound may change; however, for now the potential for a very emotional re-test of the recent lows remains a significant concern. Seeing a key upside follow through day develop over the balance of the week will go a long way towards eliminating our near-term downside concerns. Should one develop we will be quick to add new stocks to our model portfolio.

"Happiness is to be found along the way, not at the end of the road, for then the journey is over and it is too late." - Robert T. Updegraff

 


 

Jim Patterson

Author: Jim Patterson

Jim Patterson
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