My Stock Winners

Bearish
Sector trading above its…
20-day Moving Average: YES
50-day Moving Average: NO
100-day Moving Average: NO

Sentiment:Analyst rankings on the sector indicate that roughly 50 percent are “buys” or higher. Short interest on the sector is among the lowest 20 percent of readings during the past two years, indicating that there is some optimism in the current trading landscape.

Outlook: The Morgan Stanley Healthcare Payors Index (HMO – 1,733.1) continues to struggle with long-term resistance in the 1,780 region, while it currently tests support at its 50-week moving average. The added signs of optimism mentioned above suggest that selling may be prolonged due to the “crowd” having been bullish toward these stocks.

Bullish
Sector trading above its…
20-day Moving Average: YES
50-day Moving Average: YES
100-day Moving Average: YES

Sentiment:Pessimism has been on the rise toward the retailing sector. Of the 447 analyst ratings offered up on the components of the retail sector, Zacks reports that only 38 percent come in at a “buy.” What’s more, options players have loaded up on bearish bets toward the sector. The Schaeffer’s put/call open interest ratio for the Retail HOLDERS Trust (RTH – 98.55) has steadily climbed from its near-term low of 1.31 on November 13 to its current perch of 2.65 in the 77th percentile. This lofty reading indicates that speculators have added puts at a faster rate than calls among near-term options.

Outlook: Traders will be closely watching for preliminary sales results from the first official holiday shopping weekend. Early reports show that retail sales on Black Friday were six percent higher than the same period a year ago. However, Wal-Mart Stores (WMT) could put a potential dampener on this parade as is announced weak November sales.

Bullish
Sector trading above its…
20-day Moving Average: NO
50-day Moving Average: NO
100-day Moving Average: YES

Sentiment:Wall Street continues to remain skeptical of the telecommunications sector despite its long-term uptend. Zacks reports that of the 196 analyst ratings offered up on the components of the telecommunications sector, roughly 56 percent come in at a “hold” or worse. This bearish skew in rankings leaves the door open for potential upgrades, which could give the sector a nice boost.

Outlook:The Telecommunications HOLDRS Trust (TTH – 33.31) recently broke through support at its 50-day moving average, but support in the form of the exchange-traded fund’s ascending 80-day and 100-day trendlines are moving into the area to help carry the security higher.

Following the holiday-shortened week, which was plagued with light trading volume and a touch of volatility, the S&P 500 Index (SPX) closed Friday at pretty much where it started the week, notching only a fractional loss. The index’s recent rally remains intact, as it continues to climb along the support of its ascending 10-week moving average. In fact, the broad-market barometer is trading at levels not seen since November 2000 and is now just 152 points, or less than 11 percent, from its all-time high reached in March 2000.

The index continues to hover close to the 1,400 level as it appears to be digesting its recent gains. What’s more, the Standard & Poor’s Depositary Receipts (SPY: sentiment, chart, options) have broken through peak front-month call open interest at the 139 level and speculative traders have yet to turn their focus to the out-of-the-money strikes in anticipation of additional gains for the market. Not only is this a sign of strength for the broad market, but it also indicates that expectations for a continued rally are low among speculators.

We find this interesting as debate centers around a low CBOE Market Volatility Index (VXO), even as index options not included in VXO calculation indicate market participants playing a “market meltdown” compared to a “market melt-up” scenario. This skew in put implieds versus call implieds is not indicative of complacency that would lead to a market top, as feared by many strategists.

With pessimism still lingering in the sentiment backdrop of the market, we should continue to see a rally in the broad market through the rest of 2006 as these bears steadily shuffle from the sidelines and jump on the bullish bandwagon.
Another couple items on the docket that could shake up traders will be the release of the preliminary third-quarter Gross Domestic Product (GDP) on Wednesday and the Institute of Supply Management’s manufacturing index for November on Friday. Economists are currently expecting the GDP to be revised higher to 1.8 percent from its previous reading of 1.6 percent. These two indicators will be closely watched for both signs of inflation and potential slowdown within the economy.

A general increase in stock prices during the month of January. This rally is generally attributed to investors buying stocks that have dropped in price following a sell-off at the end of December by investors seeking to create tax losses to offset any capital gains.

The January effect is said to affect small-caps more than mid/large caps.

The following 4 are our picks for this year:

-HLS
-IMOS
-INTV
-ANSV

—- Helix Energy Solutions Group, Inc. (NYSE: HLX) —-

Insider Name: Owen E. Kratz
Insider Position: Executive Chairman
Insider Action: 70,000 shrs on 11/17/2006
Insider Total Holding: 5,090,979 shrs

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Undervaluation Merits…

P/E Ratio = 11.58 (Industry Average 19.12)
P/S Ratio = 2.43 (Industry Average 3.59)
P/B Ratio = 2.10 (Industry Average 4.56)
P/CF Ratio = 7.57 (Industry Average 13.24)

Industry: Oil Well Services & Equipment

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Other Drawbacks…

Missed Analyst Earnings Estimate Last Quarter

—- Helix Energy Solutions Group, Inc. (NYSE: HLX) —-

———- Dominion Resources, Inc. (NYSE: D) ———

Insider Name: Mark J. Kington
Insider Position: Director
Insider Action: 2,000 shrs on 11/22/2006
Insider Total Holding: 11,677 shrs

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Undervaluation Merits…

P/E Ratio = 17.6 (Industry Average 21.9)
P/S Ratio = 1.63 (Industry Average 1.67)
P/B Ratio = 2.12 (Industry Average 2.91)
P/CF Ratio = 9.10 (Industry Average 10.50)

Industry: Electric Utilities

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Other Merits…

Dividend Yield = 3.40%

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Other Drawbacks…

Recent Analyst Downgrade

———- Dominion Resources, Inc. (NYSE: D) ———

Of course, combining the weekly and daily data can often allow the trader to further fine tune their entries and exits. The daily chart shows the completion of the triangle formation and the quick rally to the $17 area, line A. For the next ten trading days, LYO consolidated as it frequently dropped to the S1 support, (dashed line), and occasionally the S2 level, (solid red line). With the close above the previous highs, (line A), at point 1, it was a good time to raise the stop from $15.19 to $16.43. The LYO quickly ran up to the $19 area and two days later, on July 22nd, (point 2), was the only time the S1 and S2 levels were violated. Despite this strong drop, the stop was never in danger, and once the resistance at $19, (line C), was overcome at point 3, the stop could have been raised to $16.93, or just above break-even. The daily OBV was also positive during the July-September period as it continued to make higher highs, confirming the price action.

In conclusion, I hope you have started to see how the pivot points might be integrated into your trading. Also, I hope that any time you consider a trade that you will calculate the reward/risk ratio on each trade you place. If you only take trades where the reward/risk ratio is over 3, you will be better able to protect your trading capital. In the next part of this series, I will further explore pivot point analysis and show how it can be used to exit trades and to scale out of positions.

Often times, traders cannot resist the urge to buy or sell at these extremes, only to have the position quickly go against them and stop them out. Invariably, the market will then resume its original direction, leaving the trader without a position and very frustrated. By noting the relationship of prices to the STARC bands, one can gauge the risk on both the long or short side.

For the first chart (Fig.1) I have selected one of the most volatile markets, crude oil. During the period from April through late May, crude had several wide swings which illustrates the usefulness of the STARC bands. During early April, the upper STARC+ band was tested, indicating that this was a high-risk time to buy and prices quickly reversed, testing the lower STARC- band just seven days later. The drop to the lower STARC- band on 4/13/05 was conversely a high-risk time to sell and a therefore a low-risk time to buy. Just six days later crude rallied from a low of $49.60 to a high of $56, as once again the upper STARC+ band was tested. Just three days later the lower band was again tested as crude had dropped over $6 per barrel. Obviously, focusing on these swings was appropriate for only the very short-term traders. A more useful example for most traders is when the downtrend (line A) was broken on June 1st at point 1.

There were some other valuable technical reasons, in addition to the trendline break, that suggested crude oil had resumed its uptrend. For example the OBV, which we discussed in earlier articles, had been acting very positive before the trendline break. Even though prices were making lower lows in April and May (line B) the OBV was making higher lows (line D). This was confirmed when the OBV moved above its resistance (line C) four days before the price resistance (line A) was broken.

One mistake that many novice traders make is that they fail to manage the risk involved in their trades. In the previous articles I’ve discussed some of the technical tools that I have found valuable in determining whether a stock, commodity, or index is going to move higher or lower. But the performance of any system or method can be dramatically enhanced by adding risk management components. These components can range from stop loss placement to entry techniques to having a tool that will help tell you whether the entry point is high-or low-risk.

My favorites from this last category are the STARC bands (Stoller Average Range Channels), developed by Manning Stoller in the late 1980s, which are based on the true range. The true range is calculated by taking the largest absolute value of the following three calculations: H-L, H-C, or L-C. Then a 15-day average is taken of the true range, which is referred to as the ATR. To determine the STARC+, also known as the upper STARC band, you add 2xATR to a six-period simple moving average (6SMA), and for the STARC- (or lower STARC band), you would subtract 2xATR from the (6SMA). Approximately 90% of the time prices will stay within the bands. If 3xATR is used instead of 2xATR, then almost 100% of the price action is contained between the upper and lower bands. Unlike other trading bands based on percentages around a moving average, the same formula and same parameters are used for any market and any time frame. Therefore, they do not have to be adjusted or optimized for a particular market.

There are a variety of uses for STARC bands, but the most basic is to determine high- and low-risk buying or selling opportunities. If prices are near or at the upper bands (STARC+), then it is a high-risk time to buy (establish a long position), and when prices are at or near the lower bands (STARC-), it is a high-risk time to sell (establish a short position). This does not mean that the market will automatically reverse direction once the bands are reached, but it increases the odds that the market will either move in the opposite direction or at least move sideways for several periods. This can be very important, especially when a market is moving sharply either up or down, and has been doing so for three or four bars, as the impulse to chase the market becomes unbearable.

Bearish
Sector trading above its…
20-day Moving Average: NO
50-day Moving Average: NO
100-day Moving Average: NO

Sentiment:Analyst rankings on the sector indicate 51 percent “buys” or higher, while the sector’s composite SOIR has been pushing higher. Short interest on the sector is among the lowest 20 percent of readings over the past two years, indicating that there is some optimism in the current trading landscape.

Outlook: The Morgan Stanley Healthcare Payors Index (HMO – 1,730.1) has been trading with increased volatility over the past few weeks as traders adjust to the potential impact the newly elected Congress may have on this group. Technically, HMO has been trading through significant support, which adds to the uncertainty surrounding the sector. The added signs of optimism mentioned above suggest that selling may be prolonged due to the “crowd” having been bullish toward these stocks.

Bullish Sector trading above its…
20-day Moving Average: YES
50-day Moving Average: YES
100-day Moving Average: YES

Sentiment:The networking sector’s sentiment is showing some signs of increased pessimism in the wake of Cisco’s (CSCO – 26.93) quarterly earnings announcement. The sector’s SOIR percentile rank increased to 39 percent last week, indicating that bearish put option activity has grown significantly. Analyst recommendations on the sector remain well below 50 percent “buys,” adding to the bearish sentiment read.

Outlook: Driven higher by CSCO’s blow-out earnings results, the AMEX Networking Index (NWX – 252.47) is sitting near a six-month high. Due to the strong price activity and negative sentiment, we remain bullish on the sector.

Bullish Sector trading above its…
20-day Moving Average: NO
50-day Moving Average: YES
100-day Moving Average: YES

Sentiment:The Schaeffer’s put/call open interest ratio (SOIR) percentile rank for the Telecom HOLDRs (TTH – 33.51) is hitting a relative extreme that is now within the top one percent of all readings taken over the past year. Fund flows into the Telecom sector have recently been strong, which indicates that the sector is finally starting to attract some attention.

Outlook:Last week, TTH broke below its 50-day moving average as speculation swirled about the approval of the AT&T/SBC merger given the newly elected Democratic Congress. The sector bounced off technical strength at its 80-day trendline and managed to retake the well-watched 50-day by week’s end. The sector should gain ground thanks to this technical support and once a clearer outlook on the future of this merger emerges over the next few weeks.

As so many fear during expiration week, the markets experienced increased volatility last week as November option expiration approached. Fortunately, this increase in volatility was to the upside, as the major indices swung higher (the S&P 500 [SPX – 1,401.20] gained 1.5 percent) with investors continuing to move money into the market. But will the expiration run come with a cost, as stocks are now encroaching into overbought territory? For now it appears that the trend will continue to be our friend, though there are some cautionary signs appearing in this market landscape.

Option activity on the Chicago Board Options Exchange (CBOE) saw another surge of call volume through last week, pushing single-day readings of the CBOE equity put/call ratio lower. The trend in the ratio’s one-month moving average, which is often seen as a market timing indicator, is once again pointed lower, indicating that investors are increasing the number of traded calls relative to puts. As we have discussed in the past, this is often a sign that “sideline money” is flowing into the market, which of course drives stock prices higher. The market should continue to accommodate bullish investors as long as the downward trend in this put/call ratio continues.

Wrapping it up, this holiday-shortened week will likely produce some excess volatility as trading volume takes a rest. There should be some post-expiration selling after many stocks stuck their necks out reaching for last week’s new highs. The overbought market should add some pressure to stocks, but given the strong seasonality and fundamental strength driving this market, we are likely to see only a pause rather than a broad-based sell-off. On a cautionary note, the number of individual factors (i.e., the optimistic sentiment indicators discussed above) that can apply selling pressure to the market appears to be building. While this is not enough to cause our outlook to shift from short-term bullish to bearish, it is something to keep in mind should the trend stop being our friend.

It was an outstanding week for stocks. The Dow Jones Industrial Average closed higher for the sixth straight session, finishing the week at 12,343. It was the 18th record close for the bellwether index since October 1st. Last week’s 1.5% gain put the Dow up 15% on the year. The S&P 500 also added 1.5% last week closing at a six-year high of 1401, up 12% year to date.

On the OTC Market, the NASDAQ composite gained 56 points on the week to close at 2446, up 11% on the year despite a nominal loss on Friday. Small company stocks have done the best so far this year as the Russell 2000 hit a record high Wednesday then settled back a bit. The small company barometer gained 2.5% on the week and added 19 points to close at 788, up 17% this year.

Last week, we noted that Friday’s release of October housing starts could dampen investor’s enthusiasm and that’s just about what happened. All the major indexes were up substantially until it was revealed that the numbers were worse than any of Wall Street’s best and brightest had predicted. Needless to say, this did cause what could have been a big up day to end up as just a decent day for bulls.

Lately stocks have enjoyed support in part aided by the ongoing drop in oil prices. Crude oil closed the week down 6.3% to $55.81 a barrel. Consumer prices dropped in October for the second straight month largely as a result of falling gas prices. Inflation numbers came in at the slowest increase in eight months, removing fear that the Fed might continue to raise interest rates. Good news for bulls, at least for now.

While housing related issues continue to slide out of favor, it is interesting to note that retail stocks have continued to perform well. Clearly, bullish sentiment in the stock market is not reflecting too much concern that the consumer may start to pull back. Housing prices have never had a year over year downturn since 1933 but the new housing index futures on the Chicago Mercantile Exchange are currently pricing in a 5-8% drop this year.

Real estate’s big move was part of the reason the U.S. savings rate dropped from 3-4% to minus 1.5% over the past few years. In an environment where housing prices are falling, it appears likely a mild recession could be in store by next summer. As we approach year end, we wonder not if, but when will the bulls start jumping off the bandwagon.

Monday at 10 am EST, the Conference Board releases a composite of ten leading economic indicators. On Tuesday, the Redbook retail sales report is released at 8:55 am, and on Wednesday at 8:30 am jobless claim numbers are released. Seasonal factors point to a good week for stocks heading into the Thanksgiving holiday; however the recent rally is beginning to look a little tired.