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Weekly hotline Update #27 – 06-12-07

Last week was a rough one for the market as traders and investors suddenly had to alter their short-term interest rate expectations. It was the first big down week for the market since early March. What made last week so remarkable is that we simply have not seen the Dow move sharply lower as it did in so long. Unfortunately, it is easy to get comfortable with prices moving higher virtually every day. I think a lot of folks had settled into that comfortable zone thus making the correction, which was somewhat overdue, that much more noticeable. At the end of the week the market began to regain its composure and now it is a matter of patience as we wait for the correction to run its course.

We are seeing the market adjust its near-term interest rate expectations. While the process is somewhat uncomfortable, at the end of it all the important issues boil down to a) the Fed remains committed to fighting inflation and b) the US economy is likely stronger than folk were thinking / expecting. As long as these two lines of thinking remain solid, the market will maintain its overall health. We are seeing a near-term pullback but at this time it looks very much like a normal pullback, which was a bit overdue. 

Once the market moves past these near-term interest rate concerns and we approach the end of the second quarter the focus will return to earnings. If you recall, it was powerful first quarter earnings that ultimately drove the market higher over the course of April and into May. With the concern having shifted towards stronger US Economic growth the stage is begin set for another impressive earnings season late next month. 

Let’s get right to the new stocks. With the pullback we have a number of interesting issues being added to the Open Active list. However, some of them are clearly early like Jones Soda (JSDA) while we have several other issues that have been on the Open Active Table that are in a much stronger position and are ready to spring higher.

Note: I changed the label of this section from “New Entries” to “Stocks going onto the open active List.” This seems more appropriate since there are often times when new stocks should be given additional time to firm up before entering a position in them. That said, it should be known that the best long-term performers typically need very little consolidation time after reaching our entry criteria.

Stocks going onto the Open Active Table

Six stocks slid into our entry criteria window over the past week. They fall into two distinct groups, the good ones and the ones that need a little more time. JSDA (Jones Soda) RKT (Rock-Tenn Co) SBGI (Sinclair Broadcast Company) and STTS (Stats ChipPAC LTD) are all in distinct corrective moves and are likely to work a bit lower near-term. These four should be given some additional time to stabilize before taking action.

The second group looks substantially better. SIMO (Silicon Motion Technology) and ANAD (Anadigics Inc) have held up very well over the past week. ANAD is a buy going above $12.75. SIMO looks like a buy right here. Note: SIMO will record its entry price as of Tuesday’s close. We are adding both to the model portfolios.

ANAD (Anadigics Inc) provides semiconductor solutions to the broadband wireless and wire line communications markets. Their chips are used in handsets, WLAN systems, cable settop boxes and cable TV infrastructure. IBES earnings: 2006a $ -0.01; 2007e $0.40 2008e $0.64. ANAD has a respectable IBD EPS ranking of 75.

In April when ANAD reported earnings, beating by 2¢, the stock saw a “sell the news” reaction. Since then ANAD has come back and is challenging its clear down trend line, which is currently just below $13. ANAD is positioned to pop higher once the market climate shifts to a more favorable overall tone. Main support for ANAD is $11.50 and ideally the stock will hold above that level.

SIMO (Silicon Motion Technologies) is a fables chip company. That means they design the chips but have someone else make them. They primarily design nonvolatile memory systems on a chip, and controllers for digital mediate/mobile storage devices. IBES earnings: 2006a $0.93; 2007e $1.45; 2008e $1.68. SIMO has chart topping IBD EPS ranking of 99.

Like ANAD, SIMO beat earnings expectations by 2¢ when they reported in April. The stock initially jumped above $26 but was ultimately faced with a similar “Sell the news” reaction. Again we have a case where a company is doing everything right while its stock price is consolidating. SMSI has already broken a tight down trend line when it surged above $22 about two weeks ago. SMSO is now positioned to continue its current move higher as it challenges resistance at $24. We are adding SIMO to the Aggressive portfolio today.

Stocks Removed from the Open Active Table

Stocks with an * will record an exit price as of Tuesday’s close.

There are no surprises on the removal list. AMIE and ZOLL have been acting poorly for some time and were expected to be removed. BRCD reacted very poorly to their earnings report setting the stage for its removal. MIG has been a healthy performer, but it stalled out in early May and hasn’t been able to maintain its overall level of performance.

Open Actives of Interest

The table below shows the top section of the Open Active table, which currently has 121 stocks on it. (See May Monthly report for the full list.) Stocks shown in Green are within our entry criteria, plus the top seven open active positions.

Most opportunistic open Actives with buy points: GROW going above $25; CHINA going above $8.45; CVA going above $25; GIGM going above $15.25, and SRVY going above $16.

Open Actives that are on the move: MTW, SWHC, CBEY, RIMM, and ICE.

Stocks expected to drop from the Open Active table in the next one to three weeks: CRVL, CAL, PRFT, BWP, OMCL, OMNI, and LHCG.

We are also cautious on AKS, USAP, CRY, AZZ, and ATI. These stocks are all extended and vulnerable to a potential pullback.

Model Portfolios

We are closely watching MIG and PRFT in the conservative portfolio and may take gains over the next week or two. 

• Changes to the conservative Portfolio:
• SELL 800 BRLC @ 5.53
• SELL 700 MIG @ 10.70
• BUY 300 SIMO @ 23.59

  These changes bring the conservative portfolio to 92% invested.

Our second portfolio is a more aggressive portfolio, which will hold 35 to 45 positions once it is time to get really aggressive. It is based on a $500,000 initial account value and was launched on February 13, just two weeks before the market peaked.

• In the Aggressive Portfolio we are making several changes:
• BUY 1200 ANAD @ 12.34
• ADD 1000 CHINA @ 8.30
• SELL 1000 OMCL @ 19.15
• SELL 2000 BRLC @ 5.53

It has been an interesting four months for our aggressive portfolio. We initiated the portfolio in Mid February just before the market turned lower. We were slow to add new positions and while that helped as the market turned lower in late February / early March, we also missed out on a portion of the April – May advance. We have a comfortable level of exposure at 68% at present. This gives us plenty of cash to cushion any further market pullback what at the same time it allows us the flexibility to add new positions when needed. Several of our stocks reacted poorly to earnings reports while others continue “doing time” as they build base formations so support their next leg of advance.

The market’s attention is focused on interest rates which have continued a dramatic move higher over the past week. Over the next few days economic data points come out, particularly the PPI and CPI reports. With rates having already run significantly higher as we head into these reports the stage should be set for a “better than expected” reaction. In other words due to the size of the recent move, unless the numbers are “over the top” I expect the market will see something of a relief move. The big picture fact though is interest rates are moving higher because folks are realizing the economy is stronger than they thought it was. At the end of the day that is a good thing for the market.

You got to bend a little one way or the other
You got to leave your mind open to discover
Seems I’ve been fightin' it all along
You got to bend a little no matter which side you're on
Or soon you'll be gone

Jim Patterson