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Weekly Hotline Update 11-21-06 issue #3 

Happy Thanksgiving

Over the past week the invested portion of our model portfolio advanced 1.47% while the S&P 500 advanced about 1.1%. Nothing like getting off to a good start. However, at this time we have a scant 35% total exposure to the market. With that we have a total return of 0.51% on our total $100,000 portfolio. We are building the model Portfolio over a multi week period, similar to how I would expect a new subscriber to build a new portfolio of strong PRS System stocks.

The market: There is no denying the strong run that began several months ago remains in force. However, we are now getting to the point were the dilemma becomes, how high is high and or how extended is extended, or better yet, can it go higher? The best tool we have, which puts the current move into historical context, is our Proprietary PRS Time Plane. In the Monthly reports I go into greater detail regarding the PRS Time planes. In the November report I showed the three month and the twelve month PRS Time Planes and explained their meaning.

On a three month basis the market is moving higher at a steady clip. Fortunately, the rate of assent is not historically excessive, which is healthy. The good news is the market can sustain a solid 3-month growth rate for a prolonged period of time. On a 12-month basis there is also plenty of upside room to run. So today I am showing the Six Month PRS Time Plane.

The current run higher began during the July - August time frame. Six months from there points towards January to February. So, we should expect some healthy six month PRS peaks around that time frame. However, as we look at the current situation, it is clear that on a six month basis this move has plenty of room left to run. The area portion of the chart is just now at the neutral level. Once that segment reaches the 40% line we will begin exercising much greater caution but that is clearly not the case at this time. For now, the answer to the question, 'how high is high?' is 'higher than we are right now.'

That said: there is no denying that on a shorter-term basis the market has come a long way. So, if we see a "pause to refresh" develop over the next few weeks, it should not come as a surprise to anyone. The good news is if we see some sort of consolidation develop over the near-term then we should see some really strong stocks pull back into our entry window. So a consolidation should be greeted with a certain amount of relief as it should present us with opportunity.

Over the past week Seven Stocks reached our PRS Entry Criteria:

Three of the new entries I like:

MIG (Meadowbrook Insurance Group) made a very strong run higher pushing above $12, but it has since consolidated. It looks like it is pulling back to support around the $10 level, where it should hold. MIG looks very attractive here and we are adding it to the Model Portfolio today. With an IBD EPS rank of 81 we know we have a strong company. IBES earnings estimates: 2005a=0.60; 2006e 0.71; 2007 0.81; 2008 0.85. So we have a strong stock with solid earnings and solid earnings expectations that is pulling back on a near-term basis, which is exactly what we are looking for.

HL (Helcla Mining Company) Has an IBD EPS rank of 42, which is reflective of the complexities the mining industry can go through. However, with IBES numbers: 2005a -0.22; 2006e 0.14; 2007e 0.43; 2008e 0.74. HL has very bright prospects.
HL has traced out either a large six month cup, or a small three month cup, and it is now building a small handle like formation between $6 and $7. With a PRS3 of 37 HL is positioned to move higher. We are adding HL to the Model Portfolio today. 

The third stock of this week's entries I like is ALY (Allis-Chalmers Energy Inc.)  It has an IBD EPS rank of 96 so we know it is a solid company. Their IBES earnings estimates are solid with 2005a of 0.49 and a 2006e of 1.73 and 2007e of 2.12. It is an energy company. It has a pattern similar to HL. The prominent feature on the chart is the cup traced out over the past three months, with a small and very tight handle formation.

Every week some stocks get stronger while others weaken. Over the past week seven Open Active Position stocks saw their PRS12 fall below our exit criteria of 75. The average return for for all seven exits is a 10% gain with the bulk of the work done by ATLS. ATLS was an open active position for 18-months and during that time it advanced over 120%. SIFY was a strong stock that consolidated but it has taken too long to find new footing. ADM never came back. ANN looked good, but recent news hurt the stock. LIHR looks fine, but in the grand scheme of things, the stock isn't going anywhere right now. We had a gain in XPRSA, but it weakened quickly. ANN is the only exit that was Red Last week while XPRSA and CAS were actually shown as exits.

The Table below shows Current Open Actives that are Green, meaning they have once again reached our entry criteria window. The red stocks are Open Active Positions whose PRS12 has fallen below 80. Our exit criteria is below 75, so the red stocks are "under review" so to speak. They are in danger of being removed from the Open active list.

CVO, MDR, PEWI, and BTJ all look very attractive. We are adding ATML and PEWI to the Model Portfolio RNWK and EXPD are the only reds that look like they have a chance of hanging around for much longer.

This week we are also going to Introduce our First Model Portfolio.

Our Model Portfolio is based on a $100,000.00 initial Account size. I expect it will take several several weeks for the portfolio to become fully invested. This portfolio is being developed in a manner similar to the recommended method under the "Getting Started" page on the Website.

• To the Portfolio we will add the following stocks:
  • 700 shares of MIG @ 10.42
  • 1200 shares of HL @ 6.54
  • 200 shares of PWEI @ 35.65
  • 1000 shares of ATML @ 5.27
• That accounts for another ~$30,000 of our $100,000 portfolio. that brings us up to about 63% net market exposure. Below is the New Model Portfolio.

Enjoy the Holidays, &
Feel free to pass this report along to anyone you think may be interested in the Patterson Relative Strength Report.

Jim Patterson