My Stock Winners

What is January Effect ?
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 still our picks for Jan 2007:

-HLS
-IMOS
-INTV
-ANSV

Oil Services Sector (OSX)
Bearish
Sector trading above its…
20-day Moving Average: NO
50-day Moving Average: YES
100-day Moving Average: YES

Sentiment:Analyst rankings on the sector indicate that roughly 75 percent are “buys” or higher. Furthermore, the composite Schaeffer’s put/call open interest ratio for the sector stands in the middle of its annual range at 0.71, indicating complacency among options traders.

Outlook:The PHLX Oil Services Sector (OSX – 201.92) dropped below the support of its ascending 20-day moving average last week. In fact, the recent weakness in the index has left its 10-day and 20-day trendlines poised to form a bearish cross. What’s more, the index is testing the support of its ascending 10-week trendline. A breach of this intermediate-term support level could spell trouble for the sector.

Housing (RUF)
Bullish 20-day Moving Average: NO
50-day Moving Average: YES
100-day Moving Average: YES

Sentiment:Pessimism remains strong against the housing sector. Of the 158 analyst ratings offered up on the components of the housing sector, Zacks reports that 42 percent come in at a “buy.” What’s more, options players have loaded up on bearish bets toward the sector.

Outlook: Technically speaking, the index is currently pulling back into support at its rising 50-day moving average as it struggles to overcome resistance at its overhead 50-week trendline. The index is also resting on support at its 10-month moving average.

Telecommunications (TTH)
Bullish
Sector trading above its…
20-day Moving Average: YES
50-day Moving Average: YES
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 181 analyst ratings offered up on the components of the telecommunications sector, roughly 55 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 – 34.63) has pulled back from its new multi-year high and is consolidating into support at its ascending 10-week and 20-week moving averages. Additional support in the form of its rising 10-month moving average is rising into the region and could provide the ETF a springboard from which to launch the next stage of its uptrend.

The final days of 2006 have come, dwindling to just a slim four trading sessions. Before the open today, the year-to-date stats for the major market indices stand at a gain of almost nine percent for the Nasdaq Composite (COMP), a 13-percent increase for the S&P 500 Index (SPX), a 15-percent jump in the Dow Jones Industrial Average (DJIA), and a nearly 16-percent increase for the small-cap Russell 2000 Index (RUT).

Of course, last week’s broad-market performance gave investors nothing to cheer about. The SPX closed the week with a loss of 1.1 percent on extremely weak volume. In fact, Friday’s trading volume on the New York Stock Exchange came in at roughly 991 million shares, which was the second weakest volume of the fourth quarter, falling behind trading volume of 520 million shares on the holiday-shortened November 24th (the Friday following Thanksgiving).

Meanwhile, the lackluster broad-market performance sent many traders scrambling to add put positions to the portfolio. The SPX saw particularly heavy put trading on Friday, as open interest at the 1,400 strike continues to build. On Friday, nearly 17,700 contracts changed hands at this out-of-the-money strike. This burst in put activity combines with the extremely light stock volume to increase the influence of option activity, which in this case is a drag on the market due to put-generated shorting.

Yet, while the previous week proved to be negative due to the light trading volume and increase in hedge-related shorts, it could have a positive influence during expiration week. Should many of these puts remain safely out of the money when expiration rolls around, these hedges will be unwound, providing the market with a fresh round of buying power.

Looking ahead, the S&P Depositary Receipts (SPY: sentiment, chart, options) have another potential trick up their sleeve. The exchange-traded fund (ETF) is looking at a dual layer of support in the 139.50-140 region. The trust’s 50-day moving average has climbed to the 139.50 level and could help to buoy the shares during the near term. Furthermore, the 140 strike is the site of peak put open interest in the front-month series, with nearly 29,000 contracts. This duo could work to contain any further pullbacks in the broad market.

Now, as we close the year, a number of traders are banking on another “Santa Clause rally” to finish 2006 on a high note. And history is on their side. According to the Stock Trader’s Almanac, U.S. equities have gained an average of 1.6 percent during the final week of the year since 1969. Of course, the “Santa Claus rally” has now become a well-known phenomenon in trading community so that it is now touted on every financial media show and in every publication. It begs the question, “has this indicator become a little too crowded?” At the very least, it warrants a little caution as we prepare to enter a week plagued with extremely weak volume and light economic news.

I would like to present a couple notes of caution as we enter the final trading week of the year. The RUT continues to struggle with the round-number 800 level. This region has capped the index since the start of the month, sending the RUT back down to support at its 50-day moving average.

Furthermore, bullishness among options players have become a little more muted, but we are not seeing any aggressive bears at this point.

Healthcare (HMO)
Bearish

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

Sentiment:Analyst rankings on the sector indicate that roughly 50 percent are “buys” or higher. Short sellers continue to avoid the group. The average short-interest ratio for the components of HMO sits at 1.4, leaving the sector without any short-covering support.

Outlook: The Morgan Stanley Healthcare Payors Index (HMO – 1,798.6) is facing long-term resistance at the 1,800 level, which the index has logged only one weekly close above since the start of the year. A rejection at this level could result in a sharp decline as the last of the bulls are shaken out of their positions.

Technicals
Housing (RUF)
Bullish Sector trading above its…
20-day Moving Average: YES
50-day Moving Average: YES
100-day Moving Average: YES

Sentiment:Pessimism remains strong against the housing sector. Of the 159 analyst ratings offered up on the components of the housing sector, Zacks reports that 41 percent come in at a “buy.” What’s more, options players have loaded up on bearish bets toward the sector. Short sellers have yet to abandon this group as well. The average short-interest ratio for the components of the sector comes in at 5.6 days to cover, while the average percent of the float sold short sits at a lofty 11 percent. There is more than enough fuel for a short-covering rally.

Outlook: Technically speaking, the index is currently consolidating its recent gains, as it moves sideways along support at the 31 level. The index’s 20-day moving average is climbing into the region and it could use this trendline as a springboard to launch it on the next leg of its uptrend.

Telecommunications (TTH)
Bullish
Sector trading above its…
20-day Moving Average: YES
50-day Moving Average: YES
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 180 analyst ratings offered up on the components of the telecommunications sector, roughly 53 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 – 35.00) tagged a new four-year high last week as it continues to rally higher along the support of its 10-week and 20-week moving averages. What’s more, the recent gains in the ETF have taken the shares above former resistance in the 35 region.

The S&P 500 Index (SPX) locked in another positive week, as it gained roughly 1.2 percent from the previous Friday’s close. What’s more, it was another expiration week that enjoyed gains. As I mentioned in last week’s Monday Morning Outlook, nine out of the past 11 expiration weeks had seen gains. This positive uptrend was most likely helped by the unwinding of hedges against out-of-the-money put positions on the broad-market exchange-traded funds (ETF) such as the S&P Depositary Receipts (SPY).

In fact, it appears that this trend could continue as option trading grows more popular. In reviewing some of the data provided by the Options Industry Council (OIC), it looks like we’re operating in an environment where option open interest is about 50 percent higher than the levels of two years ago. It would seem that the influence of option activity on the stock market has grown substantially.

Furthermore, it is interesting that the put/call open interest ratio is exactly flat from beginning point to end point (this information is updated daily). What seems to be of greatest interest in the put/call data is the bottoming of the ratio in mid-2006 and the rise since then as the market has been rallying sharply. This is the only period encompassed by the attached data in which the market was clearly trending.

Meanwhile, as the OIC put/call open interest ratio has been on the rise during this market rally, indicating a growing preference for puts over calls, many market watchers have been quick to point out the ascent in the percentage of bullish advisors in the Investors Intelligence survey. Last week’s report revealed that the percentage of bullish advisors slipped slightly to 59.6 percent after hitting a high of 59.8 the prior week. The highest level before that was 60.4, which was reached in December 2005. Those polled are displaying healthy optimism in the market and in the economy, thanks to a successful earnings season that has been put to bed, reduced energy prices, and an election turnout that leaves the country under bipartisan rule.

While extremes in optimistic sentiment often mark tops in the broad market, there are a couple things a contrarian needs to keep in mind. The first being that optimism in a bull market is to be expected and, thus, is a far weaker contrarian signal than optimism in a bear market.

One other interesting fact that Joseph Sunderman, head of our Quantitative Analysis Department, pointed out last week, is that pullbacks following highs in bullish sentiment according to the Investors Intelligence survey have been far weaker in a bull market than pullbacks in a bear market.

Another indicator that has sent many market watchers into a froth has been the descent in the CBOE Market Volatility Index (VIX). Last week, the index dipped back below the 10 level and tagged a fresh 14-year low of 9.34. While this is a potential sign of complacency, anecdotal evidence points out that many are interpreting this indicator bearishly.

When the VIX closed two consecutive sessions below the 10 level (on November 20 and 21), the SPX pulled back following the Thanksgiving holiday roughly 1.4 percent before putting in a bottom. However, from that bottom, the broad-market index has rallied nearly three percent during the past three weeks. Not exactly the weakness expected by analysts who have expressed negative views about the VIX in the media. In fact, the steady ascent in the SPX has resulted in a general reduction in volatility, creating a low VIX.

While there are signs of optimism in the market (such as the high Investors Intelligence survey), there is a guarded quality to this optimism, as the financial media is filled with bearish comments and headlines regarding the low VIX and slowing economy. This wary atmosphere is very much unlike the exuberance that filled the air in 2000 just before the bubble burst. Such caution leaves the door open for additional gains as more of the skeptics leave the sidelines.

From a technical perspective, we have a pair of round-number levels drawing interest. The Russell 2000 Index (RUT) continues to struggle with the 800 level. The small-cap index briefly popped above the round-number level on December 5 when it tagged a high of 801.01, but has since moved sideways, hammering against this level. This barrier needs to be taken out soon if the market is going to make much progress by year-end.

Meanwhile, the London FTSE 100 has found support at the 6,000 level. The index pulled back to and bounced off support at both the round-number level and its 80-day moving average at the beginning of the month. The recent rally in the index has carried it near a six-year high.

Healthcare (HMO)
Bearish
Sector trading above its…
20-day Moving Average: YES
50-day Moving Average: YES
100-day Moving Average: YES

Sentiment:Analyst rankings on the sector indicate that roughly 50 percent are “buys” or higher. Short sellers continue to avoid the group. The average short-interest ratio for the components of HMO sits at 1.4, leaving the sector without any short-covering support.

Outlook: The Morgan Stanley Healthcare Payors Index (HMO – 1,797.1) is facing long-term resistance at the 1,800 level, which the index has logged only one weekly close above since the start of the year. A rejection at this level could result in a sharp decline as the last of the bulls are shaken out of their positions.

Housing (RUF)
Bullish

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

Sentiment:Pessimism remains strong against the housing sector. Of the 159 analyst ratings offered up on the components of the housing sector, Zacks reports that less than 42 percent come in at a “buy.” What’s more, options players have loaded up on bearish bets toward the sector. Short sellers have yet to abandon this group as well. The average short-interest ratio for the components of the sector comes in at 5.6 days to cover, while the average percent of the float sold short sits at a lofty 11 percent. There is more than enough fuel for a short-covering rally.

Outlook: Technically speaking, RUF finished November above its declining 10-month moving average, marking its first monthly close above this trendline since September 2005. The index’s recent pullback has left it sitting near support at its ascending 10-day moving average, which it could use as a springboard to launch it on the next leg of its uptrend.

Telecommunications (TTH)
Bullish
Sector trading above its…
20-day Moving Average: YES
50-day Moving Average: YES
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 180 analyst ratings offered up on the components of the telecommunications sector, roughly 53 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 – 34.21) has resumed its uptrend after bouncing off support near its 100-day moving average and climbing back above its 50-day trendline. What’s more, this recent show of strength has pulled the ETF’s 10-day and 20-day moving averages into a bullish cross, indicating that the sector may continue to see additional short-term upside.

The broad market resumed its rally last week, with the S&P 500 Index (SPX) not only closing with a gain of nearly one percent from the previous Friday’s finish, but the index notched a new six-year high in the process. A mid-week pullback and some concerns surrounding the release of November’s nonfarm payrolls caused the CBOE Market Volatility Index (VIX) to pop briefly higher, but the index continues to be capped by its 80-week moving average. Since mid-August, the VIX has locked in only one weekly close above this intermediate-term trendline.

Looking ahead, we find ourselves facing the final option expiration week of 2006 and this could be a good week for the Street. We have found that the SPX tends to rally during expiration week. If fact, during the past 11 months, the Standard & Poor’s Depositary Receipts (SPY: sentiment, chart, options) have suffered a weekly loss during the week of expiration only three times and the average return during this time period is a gain of 0.64 percent.

Jan.: -2.1 percent
Feb.: +1.7 percent
March: +1.6 percent
April: +1.9 percent
May: -1.7 percent
June: -0.5 percent
July: +0.3 percent
Aug.: +2.9 percent
Sep.: +1.3 percent
Oct.: +0.1 percent
Nov.: +1.5 percent

I think one potential reason for the upside bias in expiration weeks is the unwinding of heavy out-of-the-money puts that accelerates during that week. As these out-of-the-money puts are bought back to capture what little time value is left, those who took the other half of the trade and sold the puts are able to buy back the SPY shares they sold as a hedge against the short put position. This unwinding action in turn helps to add buying pressure to the SPY during this week.

As we head into this final week of trading for December options, the SPY has a solid accumulation of puts at the 135-139 strikes, totaling nearly 225,000 contracts.

Of course, the S&P 100 Index (OEX) isn’t without its own supply of puts, which could be unwound this week. The December 630 -650 puts have a total of more than 56,000 contracts in place at the moment.

Shifting to a more technical perspective, we enter this week with the SPX facing the 1,400 level as support versus its prior role as resistance. Furthermore, since the market put in a bottom during July, all corrections so far have occurred in non-expiration weeks.

Changing gears to check in on small caps, we find that the Russell 2000 Index (RUT) is back to leading the market on a year-to-date basis (though by a smaller margin that we saw earlier in the year). The index is currently up more than 17 percent since the start of 2006, compared to the SPX’s return of nearly 10 percent and the Dow Jones Industrial Average’s (DJIA) gain of almost 15 percent. The RUT is currently struggling to overcome round-number resistance at the 800 level. Last week, the index was soundly rejected by this level on more than one occasion.

The one wild card that investors have to keep an eye on this week is the Fed. The Federal Open Market Committee is set to meet on Tuesday and will release its comments on the economy (along with its decision on any change in the interest rate) at 2:15 p.m. Eastern time. Economists are currently expecting the Fed to keep rates unchanged at 5.25 percent. Comments from Bernanke will be closely watched for any indication as to which way the Fed is leaning. A recent weak manufacturing report paired with a strong-than-expected employment report have left many traders scratching their heads.

Healthcare (HMO)
Neutral
Sector trading above its…
20-day Moving Average: YES
50-day Moving Average: YES
100-day Moving Average: YES

Sentiment:Analyst rankings on the sector indicate that roughly 50 percent are “buys” or higher. Short interest on the sector is among the lowest 12 percent of readings during the past year, indicating that there is some optimism in the current trading landscape.

Outlook: The Morgan Stanley Healthcare Payors Index (HMO – 1,772.7) 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. However, the index’s 80-week moving average is moving into the region and could help to boost HMO through overhead resistance. The index has been supported by trendline on more than one occasion during the couple of years.

Housing (RUF)
Bullish
Sector trading above its…
20-day Moving Average: YES
50-day Moving Average: YES
100-day Moving Average: YES

Sentiment:Pessimism remains strong against the housing sector. Of the 159 analyst ratings offered up on the components of the housing sector, Zacks reports that less than 41 percent come in at a “buy.” What’s more, options players have loaded up on bearish bets toward the sector. Short sellers have yet to abandon this group as well. The average short-interest ratio for the components of the sector comes in at 5.6 days to cover, while the average percent of the float sold short sits at a lofty 11 percent. There is more than enough fuel for a short-covering rally.

Outlook: Technically speaking, RUF finished November above its declining 10-month moving average, marking its first monthly close above this trendline since September 2005. This week, at least two home builders are slated to release their earnings report. With expectations resting at such lows, a stronger-than-expected report from either company could result in a nice bounce for the sector.