My Stock Winners

Most investors by nature will “go long” when they buy stocks. Few investors naturally will short stocks (or bet on their decline) because they really don’t know what to look for. Some investors see the shorting process as somewhat counter-intuitive to the traditional investing process since many stocks do appreciate over time. That said, there is a lot of money to be made by shorting, and in this article, we’ll give you a list of signs that show when a stock might be ripe for a fall.

Technical Trends
Look at a chart of the stock you are thinking about shorting. What is the general trend? Is the stock under accumulation or distribution?

It is not uncommon to see a stock that has been in a downtrend continue to trade in that same pattern for an extended period of time. Many traders will use various technical indicators to confirm the move lower, but drawing a simple trendline may be all that is needed to give a trader a better idea of where their investment is headed.

As you can see from the chart below, the declining trend will make it difficult for an investor to gain on a move higher because the position will need to fight against the major underlying trend, which in this case is downward

Insider Selling
There are plenty of reasons why an insider might sell his or her stock. This may include buying a home, or simply a desire to book some profits. However, if a number of insiders are selling the stock in large quantities, it may be a wise move to view this as a harbinger of things to come. Keep in mind that execs have extraordinary insight into their companies. Use this information to your advantage and time your short sales accordingly.

Amazon’s insiders sold over 1 millions of shares in just the past few months.

Fundamentals Deteriorating
You don’t need to find a company that is on the verge of bankruptcy to successfully short its stock. On the contrary, you need to see only a mild deterioration in a company’s overall fundamentals for big holders of the stock, such as mutual funds, to get fed up and dump the shares.

Overvalue
Amazon is currently trading at a PE ratio of 120, forward earning of around 60 makes it a clear short sell candidate.

Sluggishness in the semiconductor and Internet sectors, however, forced the Nasdaq Composite (COMP – 2,558.4) into a bit of underperformance; the tech-rich index edged 0.1% lower for the week. And the Russell 2000 Index (RUT – 823.66) of small-cap issues gave back 0.7% last week.

A relative-strength picture of the RUT versus the SPX is frankly not pretty. The market’s rally from its March bottom has been large-cap dominated. In fact, over the past couple of weeks, there have been definitive swings to negative breadth among the small caps, despite a relatively strong market. The blue-chip ride, on the other hand, has been much smoother. On a more positive note, this small-cap under performance has been incorporated into the “wall of worry,” as “weak breadth” is often cited by the bears as a reason to be cautious.

Part of the RUT’s recent struggle, as I pointed out last week, has been the heavy wall of overhead calls in the April and May series. I feel these out-of-the-money positions have capped rallies, but so far the June series is looking like a clearer path. How the June open-interest configuration develops over the course of the next week or so will be key to the small-caps’ short-term development, in my opinion.

As for the broader market, I told readers on Friday that my song remains largely the same. I’m still confident in some major upside from this point, at least over the intermediate term. Momentum remains solid, but we’ve seen muted fanfare despite positive earnings surprises, new record highs, buyback announcements, merger deals, and economic data that have been stronger than expected.

Skepticism (or, at the very least, a lack of enthusiasm) is still at a slow boil, as suggested by the latest from the world of the CBOE Market Volatility Index (VIX). The “fear barometer” continues to hang around the 13 level, several steps away from single-digit territory and more than 30% above the index’s mid-February low. I continue to be amazed (and encouraged) that the VIX is refusing to pull back amid our uptrending market.

The VIX’s inertia is a plus for the bulls for two major reasons. First, those who use the VIX to time the market won’t come out of the woodwork as sellers, because there hasn’t been a decline to warrant any selling action. Secondly, index put buyers are less apt to scoop up “cheap” portfolio insurance, which acts to cap the market as those selling the puts hedge via selling short futures. This routine will often cap market rallies as the VIX drifts to low relative levels. Note though that the VIX closed at 12.76 on Friday and is approaching the 12.50 level that has capped market rallies in recent weeks.

An article in this past week’s Wall Street Journal attempted to reason why the VIX is staying so stubbornly high. The speculative crowd may be to blame, the article reasoned, noting that “traders buying the November 18 [VIX] calls expect the VIX to rise by the fall … the traders sold put options on the VIX to effectively lower the cost of buying the calls…”

This is consistent with the mentality I perceive of those trading options on stocks and equity indices – they either sell covered calls or buy married puts. In other words, they purchase crash protection while limiting their upside. When it comes to options on volatility, however, the trend has been to buy VIX calls and sell VIX puts - with the same theme of limited upside potential for the market (since VIX put sellers are not expecting a huge decline in the VIX) and the urgent need for crash protection (which would cause a sharp spike in volatility, thus the potential for huge profits on VIX calls). I view the action on VIX options as a confirmation of the huge caution among stock investors amid the market’s rally. Such positioning continues to suggest that any pullbacks that might occur should be relatively muted, as those playing this market are hedged for a steep pullback and thus are less likely to panic sell.

On the equity-options front, while we are nowhere near the euphoric stage, which to me would be a sign to look toward the exits, we are seeing a bit more bullish positioning. Data from the ISEE reveal that those buying calls to open have begun to notably outweigh those buying puts. The trend is definitely moving toward the call direction, as evidenced by the data below and may be a precursor to some short-term market weakness:

With all of these factors in mind, this week could be a critical one for the SPX. At 1,522.75, it is five points away from its all-time closing high of 1,527.46, hit on March 24, 2000. This psychologically significant threshold could present a minor “speed bump” for the broader-market index, at least over the very short term. Structural support and a lack of euphoria should allow the index to muscle through this threshold soon, but it may face a bit of a road block in the very short term. This week, we have a number of earnings reports to keep market-watchers busy, particularly out of the retail sector. Durable goods orders for April will be revealed on Thursday, and we’ll get another look into the housing market Thursday as well, with the release of new-home sales.

========= Undervalued Stock #1 ==========

——— Chesapeake Energy Corp. (NYSE: CHK) ———

Insider Name: Aubrey K. McClendon
Insider Position: Chairman & CEO
Insider Action: 100,000 shrs on 5/10/2007
Insider Total Holding: 27,420,798 shrs

——————————————————-
Undervaluation Merits…

P/E Ratio = 10.2 (Industry Average 18.4)
P/S Ratio = 2.31 (Industry Average 6.27)
P/B Ratio = 1.76 (Industry Average 3.02)
P/CF Ratio = 5.2 (Industry Average 10.3)

Industry: Independent Oil & Gas

——————————————————-
Other Merits…

Dividend Yield = 0.70%
Exceeded or Met Analysts’ Estimates for Past 5 Quarters

——— Chesapeake Energy Corp. (NYSE: CHK) ———

The weekly chart above, Fig. 2, shows the entire rally from the euro’s late 2000 lows at .8245 up through the latter part of July 2006. I have outlined the euro’s first three major corrections; the first labeled b-c, retraced 38.2%, the second (d-e) retraced 50%, and the third (f-g) resulted in a 61.8% correction. This illustrates the Fibonacci symmetry that is often seen in a major rally or decline. The major Fibonacci support levels of the rally from .8245 to 1.3687 were calculated as follows: 23.6%-1.2402, 38.2%-1.1608, 50%-1.0966, and 61.8%-1.032. The euro, after attempting to rally from the daily 50% support level (Fig. 1), again turned lower, breaking back below the daily 50% support (1.2716) at point 2, and then the 61.8% (1.2486) support level. You will note on the weekly chart above (Fig. 2) that the major 23.6% support at 1.2402 was also broken. The euro did attempt another rally in the middle of 2005, but then turned lower late in the year declining to a low of 1.1661 and holding just above the weekly 38.2% support level at 1.1608 (point 3). The euro formed a classical falling wedge formation in 2005, lines B and C, which was resolved on January 7, 2006 at point 4. This indicated that the euro would move higher in 2006, which we will see when we look at the rebound in terms of Fibonacci ratios.

========= Undervalued Candidate #1 ==========

———– Parker-Hannifin Corp (NYSE: PH) ———–

Insider 1 Name: Donald E. Washkewicz
Insider 1 Position: Chairman
Insider 1 Action: 3,400 shrs on 4/27/2007
Insider 1 Total Holding: 141,724 shrs

Insider 2 Name: Linda S. Harty
Insider 2 Position: Director
Insider 2 Action: 5,000 shrs on 4/25/2007
Insider 2 Total Holding: 5,000 shrs

——————————————————-
Undervaluation Merits…

P/E Ratio = 13.5 (Industry Average 18.0)
P/S Ratio = 1.00 (Industry Average 1.12)
P/B Ratio = 2.31 (Industry Average 2.56)
P/CF Ratio = 9.60 (Industry Average 13.60)

Industry: Industrial Equipment & Components

——————————————————-
Other Merits…

Dividend Yield = 1.20%
Exceeded Analysts’ Estimates for Past 5 Quarters
Analyst Expectations On Rising Trend

———– Parker-Hannifin Corp (NYSE: PH) ———–

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

Sentiment: Pessimism dominates the sentiment backdrop of the telecommunications sector despite its impressive technical uptrend. In fact, Wall Street has turned its back on the components of this sector. Of the 160 analysts ratings on the components of the Telecommunications HOLDRS Trust (TTH ?39.40), less than 29 percent come in at a “buy,” while an impressive 11 percent rate them a “sell.” This bearish configuration leaves ample room for potential upgrades. What’s more, the number of the exchange-traded fund’s (ETF’s) shares sold short jumped sharply in April, pushing its short-interest ratio even higher. This growing short interest underscores the pessimism that continues to surround the sector.

Outlook: Technically speaking, the ETF is currently resting on support at the 39 level as it consolidates its recent gains, moving into support at its ascending 20-day moving average. The trust remains in a long-term uptrend, rising along the support of its ascending 10-week and 20-week moving averages. As pessimism toward telecommunications stocks unwinds, it should add more buying pressure, keeping the group aloft.

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

Sentiment: Skepticism is extremely heavy in the sentiment backdrop of the utilities sector. Wall Street has placed some heavy bets against the group as only 27 percent of the 183 analyst ranking on the components of the utilities sector come in at a “buy.” Any upgrades from this dour group could help to add more lift to this sector. Despite the fact that the number of Utilities HOLDRS Trust (UTH ?149.71) shares sold short dropped by 12 percent in April, the ETF still has a hefty short-interest ratio, pointing to high levels of pessimism among short sellers.

Outlook: The shares of UTH have moved sideways recently, consolidating into support at their rising 20-day moving average. A bounce of this short-term trendline should help to boost the equity through the 150 level once again. In addition, an unwinding of the existing pessimism toward the sector should help to fuel further gains in the sector.

Airlines (XAL)
Bearish
Sector trading above its…
20-day Moving Average: NO
50-day Moving Average: NO
100-day Moving Average: NO

Sentiment: Optimism permeates the sentiment backdrop of the airline sector despite its weak technical performance. Wall Street is enamored of the group, as roughly 52.5 percent of the analysts ratings on the components of the sector come in at “buy.” Any downgrades from this optimistic pack could fuel additional losses in this group. Options players have yet to levy heavy bearish bets against the group as the composite Schaeffer’s put/call open interest ratio sits lower than roughly 60 percent of the readings taken during the past year. This complacency against the sector’s weak technical backdrop has bearish implications from a contrarian perspective.

Outlook: The AMEX Airlines Index (XAL ?50.99) is facing staunch resistance in the form of its descending 20-day moving average. This short-term trendline has ushered the index lower since late January. In addition, the XAL’s 50-day moving average is also descending into the region and could add another layer of resistance, keeping the group moving lower during the near term. A rejection at either of these trendlines could result in further downside as the remaining optimism unravels in the form of increased selling pressure.

Standard and Poor’s rating is at a “Sell” as well….

We all know Amazon (AMZN) reasonably well and have tried its services; it is clearly one of the e-commerce success stories. The recent earnings announcement pushed the stock up to $63. But is this stock worth a $24 bn market cap?

Amazon started by selling books online. Great brand, broad catalogue and efficient business model. But after reaching a very high penetration rate in North America and the Rest of the World it is getting harder and harder to find new ways to maintain the high growth rates expected by the market. Amazon Prime is a very good initiative in order to maintain and even grow its market share; however it comes to a price in terms of reduced profitability. And we are talking about a company whose operating margin in 2007 will be in the mid single digit.

Competitors are catching up. When it first entered the market Amazon was offering products at a huge discount to its competitors. And it became a benchmark. It took them a lot to react, but, in order to survive, they had to cut prices and gain efficiency. The gap between Amazon and all the other players is reducing and the trend cannot be but in one direction.

Given the difficulties in its core business, Amazon diversified over time and became a retailer of a larger range of items. Most of these new revenues come from consumer electronics, audio & video, cell phones, etc which are not exactly the easiest products to deal with (they have low margins and become obsolete very soon).

Working capital is a source of cash for Amazon: it receives the money from the client before it has to pay the suppliers. This is a very good situation while the business is growing at 20% p.a. BUT will become an issue (declining cash flows) in the near future when growth rates will gradually slow down.

The company gradually improved its ROIC from 2001 (-20%) to 2004 (+44%); but the environment worsened in 2005 (ROIC of 35%) and in 2007 (32% in the IQ). Couldn’t this be a sign that the competitive landscape is getting tougher for Amazon?

Think about the different phases in the low cost airlines industry: 1) only traditional airlines and high fares, 2) introduction of a different business model (low cost and low fares), 3) low cost airlines increase market share while traditional airlines are looking for ways to catch up, 4) traditional airlines adopt a segmentation strategy and gain back price sensitive customers. Are we far away from seeing something similar happening to e-commerce?

Now, all these issues could be “business as usual� for a value company. The problem here is that we are talking about a company whose market cap is $24bn and with a consensus GAAP P/E ratio of over 50 for the year 2007.

We do not consider the high multiples at which the company is trading sustainable over the medium- to long-term.

Therefore we are shorting the stock. If implied volatility goes up from the current levels (30%) it could be possible to sell out of the money put options in an equal or lower proportion. In this way one can benefit from a decline in the stock price (up to the strike price of the option) while limiting the losses in case the stock goes up a little bit more.

Taret Price is $35 by the end of the Summer.

A mixed slate of economic reports and earnings news failed to halt the broad-market rally last week, though stocks did pull back sharply on Thursday. At the close of the week, the Dow Jones Industrial Average (DJIA) finished with a gain of 0.46% while the S&P 500 Index (SPX) edged 0.02% higher. Furthermore, since the start of 2007, the Dow has racked up 6.9% in gains and the SPX has added 6.2%. And yet, pessimism reigns from a sentiment perspective despite this strong rally.

As we head into another options expiration, we have seen a steady rise in put positions on the various broad-market exchange-traded funds (ETF). During the same time frame, call open interest has increased by fewer than 370,000 contracts. As a result, the ETF’s Schaeffer’s put/call open interest ratio (SOIR) has risen to 2.21, its highest level since April option expiration.
Meanwhile, put open interest on the Standard & Poor’s Depositary Receipts remains at robust levels.
This building of put open interest is not only significant because its underscores the continued caution from institutional investors toward the market’s uptrend, as investors remain heavily hedged against a pullback, but also this wealth of put positions has accumulated as we approach expiration this week. In the past, we have seen an upside bias in expiration weeks due to the unwinding of heavy out-of-the-money puts that accelerates during that week. Since January 2006, the SPY finished only five expiration weeks in negative territory, while the average return during the week comes in at a gain of 0.55 percent.

One immediate obstacle that will need to be hurdled on the road to the all-time high I expect in the S&P 500 Index (SPX) this year is round-number resistance at the 1,500 level. The SPX has been dancing around 1,500 for about a week now, which is not surprising since this level had great significance as the SPX traced its major top in the first 9 months of 2000.

Checking in on the latest Commitment of Trader (CoT) report, it appears that large speculators in S&P e-minis haven’t quite finished covering their huge short position that we highlighted a few weeks ago in this space, as the net short position comes off its biggest level in five years and is now at levels consistent with the bottom of 2006 correction. Meanwhile, small traders of SPX futures are maintaining a short position that is hovering near 5-year highs.

This week has a number of key economic reports on tap, which could steal the spotlight. Inflation concerns will take center stage on Tuesday with the release of the Consumer Price Index (CPI). Last Friday saw a tame core Producer Price Index hit the Street, which helped to soothe fears. A benign CPI report could add some lift to the market. Meanwhile, Wednesday sees the release of industrial production and capacity utilization numbers, which will help the Street gauge the health of the economy. After the release of disappointing April retail sales and a larger-than-expected increase in the trade gap, expectations are relatively low on the Street regarding the economy. Any reports than come in better than the consensus estimate could result in a sharp rally in the market. Meanwhile, in the event of more disappointments on the economic front, declines should be modest, as heavy ETF put activity makes investors less apt to panic selling.

Trading Tips – Introduction to Fibonacci – Part 2
In the previous article, I introduced how the Fibonacci ratios of 0.236, 0.382, 0.500, and 0.618 could be used in a strongly rising market to determine good levels of support where new positions could be considered. These are noted in the charts that follow as percent levels: 23.6%, 38.2%, 50%, and 61.8%. In this article, I will continue the discussion of the Euro FX Composite through July 2006 and then look at some examples of how the Fibonacci analysis can be applied to stocks and to intra-day data.

Previously, we looked at the euro from the lows in 2001-2002 up through the correction, which ended in April-May of 2004. The Euro FX, after rallying from the lows at point g, moved sideways for the next five months with support at 1.1944 and resistance at 1.2449. The resistance was overcome on October 15, 2004 (point 1) and the euro quickly surpassed the previous highs, reaching the 1.3687 level on December 30, 2004 (point h) The initial correction from these highs was quite sharp as the 23.6% support level was broken, which was followed four weeks later by the 38.2% support at 1.2930. The euro was finally able to reach the 50% support level on February 2, 2005 (point 2) and then turned higher. At this point it was important to look at the long-term Fibonacci support levels as well…

To be continued..

ESOL INTERNATIONAL (ESIT:PK)
Web Site: www.esolinternational.com
Current Estimated Market Capitalization: $368,999,000
Approximate Shares Outstanding: 45,000,000
Authorized Shares: 200,000,000
Estimated Float: 2,757,761
(Source: Pinksheets.com as of 5-3-2007)

CORPORATE OVERVIEW

Esol International, Inc. (ESIT) incorporated in Nevada in 2002, is now the parent company of two wholly-owned subsidiaries. The first is J.G. Capital Inc. (JGC) and the other wholly-owned subsidiary is International Country Club Corp. (ICCC) which has developed a Membership Program for people seeking an affordable international country club experience.

Together, the two subsidiary companies have created and developed an incredible international resort investment opportunity for stock and real estate investors alike. What we’ll focus on is the opportunity available to stock investors through the ESIT shares.

ESIT divisions will thrive off of each other in a very symbiotic way. Dynamic growth will be achieved by the ICCC Membership Division, and also through ICCC’s resort real estate development and sales, as well as financing and investment activities through J.G. Capital. Though Esol is the parent company, J.G. Capital is the financial arm of the triumvirate, and has provided the capital necessary to acquire the 4,500 acre property now being developed by ICCC as the Monarch Cancun Resort.

MARKET OPPORTUNITY

ICCC operates two of the three business divisions parented by Esol International focused on achieving explosive growth. The first is the International Country Club Membership Program, a “first of its kind” service that provides more privileges and benefits than one could ever get from joining a single country club, for far less money. For an initiation fee of $2,500 and only $175 per month, the ICCC Membership Program provides each member with full benefits and privileges in their own prestigious private country club in Cancun, Mexico under the Monarch brand name - The Monarch Cancun Resort. The Membership Program also provides access to over 3,500 private country clubs around the world through its reciprocation agreements with these clubs. The club privileges aren’t limited to golf, but also include racquet and tennis clubs, yachting, equestrian, and world class spas around the world.

ICCC has targeted and developed the Program to be affordable worldwide for people averaging $60,000 in income per year or more. ICCC believes this price point to be particularly important to attract “baby boomers” and retirees as well as any one else looking for luxury and relaxation at an affordable price. ICCC’s goal is to attract 1,000,000 international members over the next five years, a number that would generate over $1 billion in sales to the Company.

In the U.S. market alone, the 70,000,000+ “baby boomer” generation is now starting to hit their retirement years. For the majority of these people, joining an expensive country club doesn’t make sense. Many exclusive private clubs cost tens of thousands of dollars in upfront fees in addition to expensive monthly dues. These folks are literally priced out of the market, although ICCC research has shown that many would still like to enjoy the country club lifestyle from time to time. That’s what makes the ICCC Membership Program so attractive. It’s all about affordable luxury.

That leads us directly into the second segment of ICCC’s business, the real estate development division. The Monarch Cancun Resort is in the center of the 4,500 acre property that has been subdivided into an 8,000 residential lot destination community. The Monarch Cancun Resort Community is an affordable gated and secured luxury, second home, retirement or investment opportunity that is becoming available to millions of people in the U.S. and internationally.

ICCC has set the price for the pre-sell lots at $99,900, which is about 30-40% below market comparables in the area. Once the first phase is sold out, the price of each lot will be raised to a minimum of $115,000.

ICCC has created a plan whereby a home buyer can purchase a three bedroom hacienda for a total cost under $200,000. This property is only about twenty minutes from the heart of Cancun, the international airport, and the private Monarch Beach Club. The pricing at Monarch Resort is around $600,000 less than most of the homes in Cancun and is a mere fraction of the cost of prime Cancun beachfront property, yet just minutes away.

ICCC plans to establish the Monarch brand as the affordable resort alternative and as a result, many influential international real estate investors have keen eyes focused on the project. As sales of the affordable Monarch Cancun project begin to roll out, ICCC has plans to establish Monarch Resorts and Communities in other similar destination location spots around the globe.

INVESTMENT CONSIDERATIONS

While ICCC builds out its Membership Program towards a goal of achieving $1 billion in sales over the next five years, JGC is also poised to benefit by providing financing and assistance to private Mexican companies looking to go public on an international exchange. In ESIT’s real estate division a sell out of the 8,000 lots in the Monarch Cancun Project would project over $500,000,000 in profits alone. The profits from new homes built on the 8,000 lots, combined with the potential for other new Monarch Communities, lends to a bright future for ESIT shareholders.

ESIT plans to achieve significant growth from the vast, virtually untapped, affordable, high destination, resort community market. This opportunity was recognized by one of the world’s largest real estate firms, RE/MAX, who will market the opportunity through 6,600 offices and 120,000 sales professionals worldwide.

There are currently under 50,000,000 shares of stock outstanding in ESIT, according to their recent un-audited financial statement. The Company had nearly $90,000,000 in assets, about $3,700,000 in short term notes, and no long term debt. We will be the first to tell you that this is extremely rare for a company trading in the U.S. on the Pink Sheets. But that is also the real opportunity for early investors. Stocks in good companies have a tendency to go up and that’s exactly what ESIT has done.

A year ago, ESIT moved from about $4 per share to the $6 level where it held for the past six months. On the basis of the RE/MAX agreement and other news, ESIT broke out of a six month base and spurted to a recent high of $8.20. On a fully-diluted basis, an $8 share price translates into a $400,000,000 market capitalization.

The future looks extremely bright both for the Company and for those who decide to enter the stock here. The ICCC Membership Program has the potential to generate upwards of $1 billion in revenue alone in the next few years, while its real estate division could also chip in close to $1 billion in revenue. On the back end, JGC has the opportunity to provide hundreds of millions of dollars of profits by assisting private companies in going public.

As the company continues to execute its growth plan and its vision of creating an affordable luxury resort community is achieved, the market capitalization of the company should expand. Much will depend on the rate at which the company gains sales traction with both the Membership Program and sales of the Monarch Cancun Community development. Successful near term results could easily enable Esol International’s market cap to double from current levels.

It should be pointed out that ESIT is making plans and believes it is qualified financially for listing on a U. S. national exchange. According to management, there are estimated to be less than 2,800,000 shares in the trading float. With a strong balance sheet and as news about the company spreads, long-term investors should feel comfortable tucking away shares at current levels.

CONCLUSION

Esol International Inc. represents an excellent buying opportunity for investors to participate in the significant growth potential of international destination real estate. Successful execution of their business plan could easily transform the company into a multi-billion dollar international real estate and investment conglomerate.

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

Sentiment: Pessimism dominates the sentiment backdrop of the telecommunications sector despite its impressive technical uptrend. In fact, Wall Street has turned its back on the components of this sector. Of the 160 analysts ratings on the components of the Telecommunications HOLDRS Trust , less than 31 percent come in at a “buy,” while an impressive 10 percent rate them a “sell.” This bearish configuration leaves ample room for potential upgrades. What’s more, the number of the exchange-traded fund’s (ETF’s) shares sold short jumped sharply in April, pushing its short-interest ratio even higher. This growing short interest underscores the pessimism that continues to surround the sector.

Outlook: Technically speaking, the ETF quickly rebounded last week, scrambling back above support at its rising 20-day moving average to tag a fresh five-year high. The sector remains in a long-term uptrend, rising along the support of its ascending 10-week and 20-week moving averages. As pessimism toward telecommunications stocks unwinds, it should add more buying pressure, keeping the group aloft.

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

Sentiment: Skepticism is extremely heavy in the sentiment backdrop of the utilities sector. Wall Street has placed some heavy bets against the group as only 27 percent of the 181 analyst ranking on the components of the utilities sector come in at a “buy.” Any upgrades from this dour group could help to add more lift to this sector. Despite the fact that the number of Utilities HOLDRS Trust shares sold short dropped by 12 percent in April, the ETF still has a hefty short-interest ratio, pointing to high levels of pessimism among short sellers.

Outlook: After recently hitting a new all-time high, the ETF pulled back to support at its rising 20-week moving average and is currently resting on support at its ascending 10-day moving average. This short-term trendline should help to carry the trust through the 150 level once again. In addition, an unwinding of the existing pessimism toward the sector should help to fuel further gains in the sector.

Airlines (XAL)
Bearish
Sector trading above its…
20-day Moving Average: NO
50-day Moving Average: NO
100-day Moving Average: NO

Sentiment: Optimism permeates the sentiment backdrop of the airline sector despite its weak technical performance. Wall Street is enamored of the group, as roughly 52.5 percent of the analysts ratings on the components of the sector come in at “buy.” Any downgrades from this optimistic pack could fuel additional losses in this group. Options players have yet to levy heavy bearish bets against the group as the composite Schaeffer’s put/call open interest ratio sits lower than roughly 60 percent of the readings taken during the past year. This complacency against the sector’s weak technical backdrop has bearish implications from a contrarian perspective.

Outlook: The AMEX Airlines Index bounced back last week, climbing above the 50 level. However, it is currently contending with resistance at its 10-day and 20-day moving averages. Furthermore, the rebound in the index failed to carry it back above its 100-week moving average. A rejection at this trendline could result in further downside as the remaining optimism unravels in the form of increased selling pressure.

The broad market refuses to be de-railed. The S&P 500 Index (SPX) tacked on 0.78 percent during the week, and even managed to close above the 1,500 level. The Dow Jones Industrial Average (DJIA) has finished four of the past five sessions higher, or eight of the past 10, or 23 of the past 26 trading days were gainers. In fact, the Dow jumped more than one percent last week and continues to hit successive record highs to the grumbling of Wall Street analysts. Technicians are worried about the streak and what this could be foretelling, as other technicians fret about the “sell in May and go away” seasonality that has not come about. Others are worried about market’s disconnect with slowing economy, gas prices above $3, and earnings quality (earnings in large-cap companies being driven by weak dollar and strong overseas growth).

What has many analysts ruffled is that this uptrend has beaten the odds and expectations. We entered the earnings season with expectations for growth of approximately 3.7 percent, but currently, SPX component earnings are coming in above seven-percent growth.

Furthermore, economic reports have been a somewhat mixed bag recently. While the latest Institute of Supply Management reports for the both the manufacturing and services sectors came in stronger than expected, the preliminary first-quarter Gross Domestic Product (GDP) came in at a measly 1.3 percent, which marked the slowest growth since the first quarter of 2003. Even April’s nonfarm payrolls were nothing to shout about, increasing by just 88,000 ?the slowest pace in more than two years.

Meanwhile, investment advisors can hardly be classified as being overly bullish. The latest Investors Intelligence poll showed that the percentage of bullish advisors increased slightly to 51.7 percent. However, the biggest jump showed up last week among those who believe the market is due for a correction, increasing to 23.6 percent.

Additionally, we have begun to once again see a steady uptick in odd-lot shorting activity. As I’ve mentioned in previous editions of this column, short interest on both the New York Stock Exchange and Nasdaq has risen sharply during the past couple of months. This buildup of bearish positions leaves the market with ample sideline money available that can still come in and push the market higher. In fact, the current behavior of the short players in this market is looking very similar to their behavior at the tail-end of the correction in May-June 2006 and the recent February-March correction. In other words, even as the market grinds to new highs, the shorts are displaying fear that is consistent with corrective phases in the market that have ultimately marked bottoms.

Furthermore, the CBOE Market Volatility Index (VIX) continues to hold firm in the 13 area and this has very bullish implications. With the VIX still around 13, the market now has more upside potential before encountering the “single-digit VIX” headwinds we have seen in the past. Perhaps this elevated VIX level can be explained in terms of the uncertainties still associated with earnings reporting season, or by the fact that investors have “learned their lesson” from the 2/27 market plunge and are no longer going to accept a single-digit VIX in these “riskier times.” But in the end, I believe any such explanation only supports my position that complacency has by no means set in, and this has very bullish implications for the staying power of this rally.

This week’s big news will likely prove to be the conclusion of the Federal Open Market Committee meeting on Tuesday. The Fed is widely expected to keep rates unchanged at 5.25 percent, considering that the latest economic reports showed a slight moderation in inflation levels (though inflation is still above the Fed’s comfort zone of one to two percent) and mixed economic strength. With the Fed content to maintain its wait-and-see attitude, the market is free to continue its ascent.

========= Undervalued Candidate #1 ==========

———– Parker-Hannifin Corp (NYSE: PH) ———–

Insider 1 Name: Donald E. Washkewicz
Insider 1 Position: Chairman
Insider 1 Action: 3,400 shrs on 4/27/2007
Insider 1 Total Holding: 141,724 shrs

Insider 2 Name: Linda S. Harty
Insider 2 Position: Director
Insider 2 Action: 5,000 shrs on 4/25/2007
Insider 2 Total Holding: 5,000 shrs

——————————————————-
Undervaluation Merits…

P/E Ratio = 13.5 (Industry Average 18.0)
P/S Ratio = 1.00 (Industry Average 1.12)
P/B Ratio = 2.31 (Industry Average 2.56)
P/CF Ratio = 9.60 (Industry Average 13.60)

Industry: Industrial Equipment & Components

——————————————————-
Other Merits…

Dividend Yield = 1.20%
Exceeded Analysts’ Estimates for Past 5 Quarters
Analyst Expectations On Rising Trend

———– Parker-Hannifin Corp (NYSE: PH) ———–

Upside Trade
TARGET 1 Price: 21.92 Profit: 4.4% , for a typical rally.
Stop Limit/Trailing Stop Limit: 20.68 Loss: 1.5%
Profit/Loss Ratio: 2.9 : 1 - Good

TARGET 1 POTENTIAL Excellent, there are 0 resistance areas on the way to Target 1.
Stocks may quickly rise to Targets when there are not many resistance areas blocking the way.

TARGET 2 Price: 22.16 Profit: 5.5% , Profit/Loss Ratio: 3.7 : 1 - Good
for an extreme rally.

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

Sentiment: Pessimism dominates the sentiment backdrop of the telecommunications sector despite its impressive technical uptrend. In fact, Wall Street has turned its back on the components of this sector. Of the 161 analysts ratings on the components of the Telecommunications HOLDRS Trust (TTH – 37.83), less than 31 percent come in at a “buy,” while an impressive 10.6 percent rate them a “sell.” This bearish configuration leaves ample room for potential upgrades. What’s more, the number of the exchange-traded fund’s (ETF’s) shares sold short jumped sharply in April, pushing its short-interest ratio even higher. This growing short interest underscores the pessimism that continues to surround the sector.

Outlook: Technically speaking, the ETF pulled back slightly last week, breaking through support at its rising 20-day moving average as investors took some profits off the table. However, the trust has support in the form of its 50-day trendline rising into the region, which should help to buoy the shares in the near term.

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

Sentiment: Skepticism is extremely heavy in the sentiment backdrop of the utilities sector. Wall Street has placed some heavy bets against the group as only 27 percent of the 181 analyst ranking on the components of the utilities sector come in at a “buy.” Any upgrades from this dour group could help to add more lift to this sector. Despite the fact that the number of Utilities HOLDRS Trust (UTH – 148.70) shares sold short dropped by 12 percent in April, the ETF still has a hefty short-interest ratio, pointing to high levels of pessimism among short sellers.

Outlook: During trading last week, the ETF hit yet another all-time high, breaking through the 150 level before pulling back slightly on Friday to digest some of its gains. The trust is trekking higher along the steadfast support of its ascending 10-day and 20-day moving averages An unwinding of the existing pessimism toward the sector should help to fuel additional gains.

Airlines (XAL)
Bearish
Sector trading above its…
20-day Moving Average: NO
50-day Moving Average: NO
100-day Moving Average: NO

Sentiment: Optimism permeates the sentiment backdrop of the airline sector despite its weak technical performance. Wall Street is enamored of the group, as roughly 62 percent of the analysts ratings on the components of the sector come in at “buy.” Any downgrades from this optimistic pack could fuel additional losses in this group. Options players have yet to levy heavy bearish bets against the group as the composite Schaeffer’s put/call open interest ratio sits lower than roughly 60 percent of the readings taken during the past year. This complacency against the sector’s weak technical backdrop has bearish implications from a contrarian perspective.

Outlook: After being rejected by resistance at the 56 level and its declining 50-day moving average, the AMEX Airlines Index (XAL – 50.11) dropped sharply, breaking through former support at the 52 level. In fact, the index is now trading at its lowest level since October 10. In the index is also below its 100-week moving average, leaving it vulnerable to additional downside as the remaining optimism unravels in the form of increased selling pressure.