My Stock Winners

The term January Effect refers to a tendency for the stock market to dip sharply at the end of December, only to rebound significantly during the first weeks of January. Historically, smaller companies have shown much faster recovery than larger companies during this time period. Investment professionals refer to smaller company stocks as small-caps, and larger company stocks as mid-caps or large-caps. The January Effect applies mainly to small-cap or mid-cap stocks, because large-cap stocks are rarely sold off in December and generally more stable.

Stockholders regularly face special taxation called a capital gains tax. This tax is based largely on the stockholder’s financial state at the end of December. For this reason, many small-cap stockholders look for ways to avoid being taxed on non-profitable stocks. If stockholders can sell off these shares before the following year begins, their capital gains taxes should be lower. This has historically led to a massive selling binge during the last week of December.

In the 1980s, savvy investment brokers noticed this December sell-off trend and began to study its aftermath. They discovered that many stockholders were buying back their shares during the first weeks in January, creating a temporary but significant spike. If other investors bought available small-cap shares in December, they could also profit from this spike by the end of January. Thus the January Effect became a buzzword among investors. Smaller companies almost always outperformed larger companies during January, so buying low and selling high became much easier to predict.

There are those who believe the January Effect is now more of a historical anomaly rather than an ongoing profitable phenomenon. Small-cap stocks have not always outperformed large-cap stocks during January, and many stockholders can now protect themselves from capital gains taxes through retirement accounts. There is no longer the need to sell off stocks before tax season begins. The stock market itself has also adjusted for the January Effect, with fewer small cap stocks spiking noticeably in early January.

The January Effect has moved past the world of stocks and bonds. Companies may reduce inventory or the number of employees in December in order to reduce tax obligations, only to rehire and restock in early January. Retailers often experience a reversed January Effect, as sales dip significantly after the holiday shopping season.

Belief in the January Effect varies widely from broker to broker. Some still anticipate short term gains from judicious investment in volatile small-cap stocks, while other see the January Effect as a relic of the aggressive investment philosophy of the 1980s and 1990s.

———— Alberto-Culver Co. (NYSE: ACV) ————

Insider Name: William W. Wirtz
Insider Position: Director
Insider Action: 10,000 shrs on 11/6/2006
Insider Total Holding: 40,937 shrs

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Undervaluation Merits…

P/E Ratio = 23.09 (Industry Average 24.66)
P/S Ratio = 1.25 (Industry Average 2.64)
P/B Ratio = 2.68 (Industry Average 6.31)

Industry: Personal & Household Prods.

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Other Merits…

Dividend Yield = 1.0%
Exceeded Analysts’ Earnings Estimates for the Past
5 Quarters

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Other Drawbacks…

Recent Analyst Downgrades

———— Alberto-Culver Co. (NYSE: ACV) ————

* Insider’s Undervalued Candidate #1: Jefferies Group, Inc.
———- Jefferies Group, Inc. (NYSE: JEF) ———-

Insider Name: Richard B. Handler
Insider Position: Chairman
Insider Action: 130,300 shrs on 11/6/2006
Insider Total Holding: 10,327,698 shrs

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Undervaluation Merits…

P/E Ratio = 21.1 (Industry Average 29.2)
P/S Ratio = 1.80 (Industry Average 3.35)
P/CF Ratio = 18.90 (Industry Average 20.60)

Industry: Regional Investment Brokerage

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Other Merits…

Dividend Yield = 1.70%

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Other Drawbacks…

Missed Analysts’ Earnings Estimates for the Past
2 Quarters

———- Jefferies Group, Inc. (NYSE: JEF) ———-

Sector Technicals
Utilities (UTY)
Neutral Sector trading above its…
20-day Moving Average: YES
50-day Moving Average: YES
100-day Moving Average: YES

Sentiment:The Schaeffer’s put/call open interest ratio (SOIR) percentile rank for the Utilities HOLDRs (UTH – 128.16) remains near its lowest level of the past year (translation: optimistic). Fund flows into the utility sector have been strong, indicating that the general investing public is perhaps becoming too optimistic toward these stocks.

Outlook:Despite last week’s breakout, utilities have lagged the market for more than two months. Yet optimism remains strong. Last week’s break above a two-month trading range has raised our outlook. But we remain cautious in light of the growing optimism. Thus, we are moving to a neutral rating.

Sector Technicals
Chemicals (CEX)
Bullish 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 43 percent “buys” or higher, while the sector’s composite SOIR has pushed into pessimistic territory at a 54 percentile ranking. Short interest continues its huge unwinding. An overall bearish bias remains in the picture, a positive for the sector.

Outlook: The CBOE S&P Chemicals Index (CEX – 245.38) hit another 19-month high last week, overcoming (at least for the time being) potential double-top resistance at its May high. Expect that continued weakness in crude oil prices due to relaxing seasonal demand will help fuel CEX strength. With some pessimism evident among options players and fundamentals strengthening, we expect the sector to continue pushing higher.

On the technical front, short-term support levels that have been so important for the market’s health gave way to sellers, as the S&P 500 (SPX – 1,364.30) and other major indices broke below key moving averages for the first time since early September. On a closing basis, the SPX, Dow Jones Industrial Average (DJIA – 11,986.0), and Nasdaq Composite (COMP – 2,330.8) each closed out the week below their respective 20-day moving averages, which have defined short-term support since the rally began in mid-July.

One of two technical scenarios will likely play out over the next few trading sessions. One calls for the SPX and other major indices to break back above their respective 20-day trendlines, quickly initiating another wave of buyers entering the market and suggesting that the strong bull run still has legs. The other is that the majors begin to experience resistance from formerly supportive trendlines, in which case last week’s selling is likely the beginning of a profit-taking period that will extend beyond next week. Such a scenario will likely take the majors down to the next potential level of support at their respective 50-day moving averages.

For those keeping score at home, the majors’ 20-day and 50-day moving average are, respectively: SPX – 1,368 and 1,339; DJIA – 12,103 and 11,733; and COMP – 2,344 and 2,270.

Checking on sentiment in the market, I mentioned last week that there were growing signs of optimism that, when combined with some technical weakness, could bode poorly for stocks. This sentiment trend continued last week, as some of our option-based indicators (namely, the CBOE equity put/call ratio and the CBOE OEX Volatility Index [VXO – 10.67]) suggest more optimism in the market.

The 21-day moving average of the CBOE equity put/call ratio continued its decline last week, indicating that the trend is toward trading more calls relative to puts. This activity suggests more optimistic sentiment among options traders, as call buying is usually a bullish bet that the market or a stock will go up. While a decline in the ratio’s 21-day trend is often associated with bullish conditions, it is when the trend reverses and begins to move higher that the market normally expects short-term selling pressure. According to the current relationship between the ratio’s short-term and intermediate-term trendlines, the 21-day trendline will likely reverse into an uptrend within the next week. This suggests that short-term market conditions are becoming less reliable for the bulls.

The VXO (commonly known as a “fear indicator”) is also signaling potential weakness. Caught between a rock and a hard place, the VXO spent last week oscillating in a tight range between its annual lows and its declining 50-day moving average. The 50-day is key, as the market has rallied every time the VXO has touched this trendline. Now with the 50-day pressuring the VXO to its annual lows, it appears that something will have to give. Unfortunately, that something is more likely the 50-day, which would be the first break above this trendline since early July, just before the market encountered significant selling pressure. From a short-term perspective, the VXO adds to the argument that short-term market strength is tiring.

INTERVOICE (INTV) provides converged voice and data solutions for the network and enterprise markets worldwide.

Basic reasons:
-There are heavy and frequent insiders buying activities (60K of shares were bought)
-Money Mangers also bought 500k shares
-It updated Financial Results for Second Quarter of Fiscal 2007; Reiterates Q3 2007 Revenue Guidance
-10/12/06 INTV : Upgraded from Mkt Perform to Outperform by Morgan Keegan.

Technical shows:
-Up/Down volume pattern indicates that the stock is under Accumulation.
-The 50 day Moving Average is rising which is Bullish.
-Moving Average Convergence/Divergence (MACD) indicates a Bullish Trend.
-Chart pattern indicates a Possible Trend Reversal to the up side

Price Analysis:
-Yr. High 9.50
-Yr. Low 5.58
-MO Chg.(%) -5.9
-Resistance 6.75
-Support N/A
-SELL STOP 5.47
-Volatility(%) 4.1
-Position 40
-ADXR 24

P/E (ttm):
26.88
EPS (ttm):
0.234

Price Target:

$9.3 / share (50%)

========= Undervalued Stock #2 ==========

—————– KeyCorp (NYSE: KEY) —————–

Insider Name: Beth E. Mooney
Insider Position: Vice Chair
Insider Action: 10,000 shrs on 10/31/2006
Insider Total Holding: 17,981 shrs

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Undervaluation Merits…

P/E Ratio = 12.7 (Industry Average 13.4)
P/S Ratio = 2.95 (Industry Average 3.36)
P/B Ratio = 1.87 (Industry Average 2.04)
P/CF Ratio = 10.00 (Industry Average 11.30)

Industry: Money Center Banks

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Other Merits…

Dividend Yield = 3.70%
Exceeded or Met Analysts’ Earnings Estimates for the
Past 5 Quarters

————– Safeway Inc. (NYSE: SWY) ————–

Insider 1 Name: Paul Hazen
Insider 1 Position: Director
Insider 1 Action: 1,980 shrs on 11/1/2006
Insider 1 Total Holding: 281,980 shrs

Insider 2 Name: Janet Grove
Insider 2 Position: Director
Insider 2 Action: 2,000 shrs on 11/3/2006
Insider 2 Total Holding: 2,000 shrs

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Undervaluation Merits…

P/E Ratio = 17.5 (Industry Average 34.6)
P/S Ratio = 0.32 (Industry Average 0.77)
P/B Ratio = 2.29 (Industry Average 3.94)
P/CF Ratio = 7.50 (Industry Average 14.0)

Industry: Grocery Stores

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Other Merits…

Dividend Yield = 0.80%
Exceeded or Met Analysts’ Earnings Estimates for the
Past 5 Quarters

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Other Drawbacks…

Recent Analyst Downgrade

————– Safeway Inc. (NYSE: SWY) ————–

Psychologist, Dr. Daniel Kahneman (The Nobel prize in economics - the field of behavioral economics) basically shows that investors are irrational, but predictably irrational. They continue to make the same mistakes over and over. One of the biggest is a common inability to take a loss: taking a loss is so painful, it is simply avoided.

A trader’s most valuable commodity is trading capital. What is the most important rule for a trader? Preserve your capital. This is what keeps a trader in the game, and it is foolish to do anything that will jeopardize it. Subsequently, to preserve a trader’s capital, there are rules that help a trader, whether in short, intermediate or long term play.

The rules listed below are suggestions. Only the trader can decide which rule is important. However, when a trader decides on a set of rules, they should be used consistently. Rules make up a trader’s system and are enforced by discipline.

1. Never be willing to let a position go against you by more than 5 to 8%. Obviously, the amount will differ depending on if it is a short, intermediate or long term play. If it is a short-term play and you have not set a distinct stop/loss, then you might want to set a dollar amount based on your capital. For example: If your capital is $60,000, you might not want to lose more then 1% on a short term trade. This also depends on what is happening with the trade and the market at the time. However, you should ALWAYS have in mind where you WILL get out of a trade. Don’T fear cutting your losses. Just cut them and move on.

2. Always take at least some profit at 20 to 25%. This is an important concept. When in doubt, take some profit. When the stock comes down again you can always get back in. It is the trader’s decision to select a higher or lesser percentage. Of course it all depends on the market and the trade and how comfortable you are with the trade. Doesn’t it make sense to take something off the table in case the stock goes down? This technique is a good way to control greed. If you are disciplined enough to cut losses at 5 to 8% no matter what, and you are taking some profits at 20 to 25%, mathematically how can you lose money?

3. When your stock has demonstrated its ability to move in the desired direction, you should take further action by raising your stop/loss point to break even. At this point, allowing a winner to fall back into losing territory is just not smart, no matter what the reason. By raising your stop/loss to break even ALL of the risk is taken out of the trade. At this point you can literally relax and enjoy the trade. One cannot begin to tell how psychologically important this rule is. Once a trader realizes that money can no longer be lost, a tremendous calm and clarity begins to engulf his or her mind. A sense of control and power evolves as the trade moves on. You can move your stop/loss continually higher and you become more comfortable with the trade.

Profit Stop/Loss Method

4. Decide at what percentage you will take profits, etc. You might decide to protect 3% of your profits when the stock rises 10%. Once a stock rises 15% you might decide to protect 10% of your profits. When your stock rises to your target 20 to 25%, revert back to rule #2. You must decide what is comfortable in the profit department. The important thing is to make some decisions. Make those decisions a part of your system and govern your system with your discipline.

A personal note on profit taking: There is no question that if you are disciplined enough to follow a plan such as the one outlined, it will improve your results. However, most people will not follow rules. Why? Most people cannot stick to rule #1. Winners cut their losses short and move on to the next trade. Also they hold no grudges against any security. Losers hold on to falling stocks mostly because of psychological issues until making a rational decision has long since disappeared from their psyches. Only time will tell whether you have the inner strength to become a winner.

NCR (NYSE: NCR, $41.14)
NCR provides data warehousing and customer information software. Stock was first spotted back on October 16th. At that point in time, the shares were changing hands at $39.62. After the company reported earnings on Thursday, October 26th, NCR dipped as low as $38.06. However, the stock rallied back strongly on Friday, gaining nearly $2 per share despite weakness in the tech sector. Target is $44.39. Exit the trade if NCR falls back to $36.80, below a base formed near $37.

Foundry Networks (Nasdaq: FDRY, $12.57)
Foundry manufacturers routers and other switching devices used in Internet traffic management. The shares bottomed at $8.98 in late July, and then hit a peak of $14.00 near the end of September. FDRY has now broken an uptrend line in both price and relative strength. MACD, stochastics and CCI are all on sell signals. RSI has just broken below 50. Target is $11.05. Cover the short at $14.11, just above the stock’s September peak.

Chemicals (CEX)
Bullish

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 43 percent “buys” or higher, while the sector’s composite SOIR has pushed into pessimistic territory at a 54 percentile ranking. Short interest continues its huge unwinding. An overall bearish bias remains in the picture, a positive for the sector.

Outlook: The CBOE S&P Chemicals Index hit a 19-month high last week, overcoming (at least for the time being) potential double-top resistance at its May high. Expect that continued weakness in crude oil prices due to relaxing seasonal demand will help fuel CEX strength. With some pessimism evident among options players and fundamentals strengthening, we expect the sector to continue pushing higher.

Utilities (UTY): Neutral
It is trading above its…
20-day Moving Average: YES
50-day Moving Average: YES
100-day Moving Average: YES

Sentiment:Sentiment:The Schaeffer’s put/call open interest ratio (SOIR) percentile rank for the Utilities HOLDRs (UTH ?128.53) remains near its lowest level of the past year (translation: optimistic). Fund flows into the utility sector have been strong, indicating that the general investing public is perhaps becoming too optimistic toward these stocks.

Outlook:Despite last week’s breakout, utilities have lagged the market for more than two months. Yet optimism remains strong. Last week’s break above a two-month trading range has raised our outlook. But we remain cautious in light of the growing optimism. We thus move to a neutral rating.

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

Sentiment: As a result of October’s option expiration, the SOIR reading for the Networking sector has dropped significantly to a one-year percentile rank of four percent. Some optimism is also evident in the sector’s low short-interest ratio, which has declined in recent months. However, analyst rankings (at 49 percent “buys”) remain relatively low (given the recent price action), providing added hope for the bulls.

Outlook: The AMEX Networking Index has ridden its 20-day moving average to return more than 20 percent since the beginning of August. Furthermore, NWX remains above most of its daily and weekly moving averages. The sector’s sustained strength amid pessimistic sentiment continues our outlook as short-term bullish.

While market participants remain cautious toward the market, we’re seeing some signs of bullish sentiment that show the recent rally has likely entered a stage of acceptance. Such a stage normally signals that a long-term run for stocks may be growing tired. Why? The rationale is fairly simple, and is wrapped up in the commonly heard phrase, “stocks climb a wall of worry.” The wall appears to be getting shorter, as formerly fearful investors caught on the sidelines during the rally are trickling into the market. People are putting their “sideline money” to work, there is less and less of what the market needs (assets) to continue to climb.

Another sign of growing optimism comes from the past week of activity in the options market. The recent trend in the CBOE equity put/call ratio has dropped quickly ?the ratio’s one-month moving average is currently 0.63, down from 0.67 just two weeks ago. The ratio’s sudden drop indicates that options traders have been favoring calls (bullish bets) over puts (bearish bets) of late as money continues to flow back into the market. Falling in line with the VIX, this trend will continue to lure more call buyers into the market, but not without a cost. When the market begins to soften, these investors will begin to sell stocks and/or purchase more puts, causing the trend in stocks and the equity put/call ratio to reverse. When that happens, one must watch the market with a cautious eye.