This week should be a slower week in the markets now that most of the company earnings are out of the way and there is little significant US economic data coming out this week. As well, the fed has indicated that aggressive interest rate cuts may be gone and we may see more moderate rate cuts or no rate cuts. If you look at the charts, the markets are still going higher. However, the risk is higher and the reward is much lower compared to early March. Oil prices are still skyrocketing and it looks like it is going to go higher but how much higher? Nothing goes up like a straight line and we can look for lower risk opps on the short side instead. Lastly, I had mentioned to all that the markets are starting to slow down a bit since we are entering a slowing period of activity in the stock market. Some of you may have heard of the Sell in May, Go Away theory. This theory states that the majority of the gains in the markets happen between Oct til April. May is a start of a slowing period til August where you may not see the volatility and volume compared to earlier this year. However, last year was a major exception given the subprime mess. However, stranger things have happened in the markets these days so who knows. Most importantly, there is still enough volatility on a daily or weekly basis to make money. Good trading!

This week should be interesting as we have the FOMC announcement on Wed at 11:15am PST and based on what I hear, the consensus is to cut by 25 basis points. Based on the economic data that has been coming out, it looks like the US economy is slowly recovering and the Fed doesnt need to be aggressive on the rate cuts. The key is to listen how the Fed interprets the US economy and whether there will be future rate cuts.  I dont think this FOMC announcement will be as wild an event as the previous few times earlier this year but any surprise could shoot the market up or down. Based on the past few weeks, it looks like the market has made a bottom and the charts are telling you that stocks are going up. After such a big rise from the bottom in March, it wouldn’t be surprising to see the market rest a bit. However, be careful out there as any new negative news could shoot the market back down.

The stock market is extremely ugly out there especially with the poor employment report that was released last Friday. The report essentially confirmed that the US economy is in very poor shape right now and there are no signs (at least right now) that the US economy will recover at any point. A lot of people have asked me lately whether this is a good time to buy especially since stocks have dropped a lot and I have told them “No Way”. We may at some point get a short covering rally up in the markets but I dont forsee it lasting long. This coming week, we should look to see what the US Retail Sales data shows us. If it is good then we may have a pop up in the markets. If not, we may go further down from here. Good Trading!!!

The market downward trend continues. We had a brief short covering rally that went up with little volume and now it looks like we are set to test the lows in Jan. I had hoped that we would go higher so we can short it all the way down again. The market is very weak out there and do not try to pick the bottom here. Gold and Oil stocks are doing very well as Gold went up $20 today and oil touched $100 again. If the overall market continues its downward trend, these 2 sectors will also get hit. Be careful out there.

What extreme volatility that we saw this week in the stock market!!! At the beginning of this week, it looked like the only direction the stock market could go was DOWN. Then the Fed came in and cut by 75 basis points and finally the market recovered somewhat and then there was profit taking on Friday after a nice recovery. This coming week is very important especially considering that there will be a FOMC meeting on Wednesday. From what I hear from the news, there is a lot of uncertainty what the the market is pricing in for the Fed rate cut. Some are saying that 25 basis points is already in the cards while there is some speculation that 50 basis points may be possible. Nobody really knows what Bernanke is gonna do but I can guarantee that it will be extremely volatile on Jan 30. If Bernanke doesnt cut or only cuts by 25 basis points then the markets will probably sell off on that. However, another point of view is if he cuts by 50 basis points or more then the market might feel that Bernanke must be extremely concerned about the US economy and this might lead to a market selloff. I dont want to speculate what Bernanke will do but the fact is we are in a US recession right now and people are very nervous out there and people will quickly sell if there are any negative news. As I mentioned, we will see a bottom in the markets if the market doesnt go down on negative news. I dont think we are close to any bottom right now. Just take a look at the charts and you will see that we have further downside to go. The best thing to do right now is to stay in cash or go short. However, dont get caught shorting at the bottom. Short when the market makes a peak and cant make a higher high. Good luck out there.

Based on the market’s reaction today, it looks like we are a short term bottom here and should be heading up higher for now. As I stated in my blog, the action in last Wednesday’s stock market was a potential reversal signal and today was the confirmation. The market was extremely oversold and since there wasnt any negative news then traders took this hint as an excuse to rally and cover their short positions. As well, IBM reported very good earnings today and that gave a lift to the tech stocks.  Lastly, there was some talk that there might be an immediate interest rate cut before the FOMC meeting if the poor economic conditions were to persist and the market took this as a positive. The next few days will be very important to the market. We have Retail Sales data tomorrow and PPI and CPI data on Wednesday. The Retail sales data will have a huge impact on the market and it will tell whether consumers who were the leading drivers of the economy, still have the purchasing power to keep the economy going. Any poor retail sales data will cause the market to go down. As well, PPI and CPI data will tell us if there is any inflationary concerns. If the data shows that inflation is becoming a concern, the Fed may be hesitant to be aggressive in cutting interest rates and the market will not like that. Based on the charts, it looks like we should get a bit of a relief rally since the huge decline that we saw at the start of the new year. Be careful out there as the risk to the downside is still there but enjoy the ride up because it wont be a long one.

So far, based on these past 2 trading days, it looks like we are in for a very bad stock market this year. This week was the first week for many professionals to get back to work and all they did was sell and sell based on recession and inflationary fears. We saw the price of gold and oil shoot up this week and this is very bad for the markets. It means that inflation may be a concern and it will not help the Fed in cutting interest rates. I think there are many ways to make money in a bear market that we are in. First, you should really look at the stocks that have gone up the most (ie. BIDU, AAPL, RIMM etc…). These are some prime candidates to short especially given their run up in the past year or so. Also, take a look at the mortgage stocks. Countrywide Financial (CFC) dropped as much as 25% today on bankruptcy fears as well as stocks like E*Trade as well. The best way to short these stocks is wait for them to reach a peak and can’t make higher highs. A lot of these stocks are now making lower highs and what you should do is draw a trendline connecting the highs together and it will give you an idea where to short them. As you may have seen these past 2 days, shorting is a lot of fun. (ie. BIDU has had $20 price swings today and yesterday as well as APPL and RIMM). Now, you should know why I love shorting. If you can master shorting then you are in for a very good year. However, be careful when shorting a stock that has already dropped a lot in value in a very short period of time. If any of the stocks have any good news, then they could rise up as fast as they fall. Happy shorting!!!

After a much needed holiday rest, I am really excited to be back trading and sharing my thoughts with all of you. I expect that we will probably see another volatile stock market this year and this bodes well for all of us active traders. I dont think this year’s market will outperform last year but we should definitely have some very profitable trading time periods. We had a BIG down day start to the new year which was due to the very weak manufacturing data that was reported this morning. But we may have a bit of upward rally in the new year if the January effect happens. The January effect is where stocks, especially small-cap stocks, have historically tended to rise markedly in price during the period starting on the last day of December and ending on the fifth trading day of January. We shall see if that happens. There is also another barometer that you can look at and it is called the January barometer. It is a theory stating that the movement of the S&P 500 during the month of January will set the stock market’s direction for the year. If we can go through January on a positive note, we may be in for a not so bad year. Also, we will need to look at how the financial stocks perform as they are the ones that have been the most affected by the sub-prime and credit concerns. Lastly, I want to give you an idea to look for. You should monitor the stock performance of Apple for the next two weeks. The event MacWorld conference is being held from jan 14-18. If you remember last year that the launch of the iPhone at MacWorld propelled the stock to rise sharply afterwards. I dont think there will be another revolutionary product like the iPhone but you never know. People may anticipate any new product that can add to the company’s bottom line. If the market can go higher during this period of time, I’m sure the Apple stock will do well.  Happy Trading!!!!

There is little point saying something has fallen so much its now a
great bargain… because even the perceived bottom fish are being
blown out of the water with dynamite ! The examples are countless and
the blood loss on the smallcaps and microcaps has been much worse
than most anticipated. I know many who are locking in tax losses
wherever possible and even insiders who are selling positions to
family members at low prices to do tax and estate planning. Its
created some pretty bizarre prices.

Don’t Poison the Punch Just Yet

One example is Western Prospector (WNP.V $0.98) which has political
risk in Mongolia - this past week it tested the low set when markets
collapsed in August. With approx. $33 million in the bank they are
trading marginally higher than cash value of $0.67/share. On the
books they show $62 million in resource assets which the market (at
current prices) is valuing at $15 million. Its bizarre. But even
then, it cannot attract buyers.

We’ve been through very rough markets in the past and August was the
first shoe to drop but the combination right now of tax planning with
the media flogging credit risk and recession to death… is taking a
dramatic toll on investor psychology. I like to think this is a
classic opportunity to buy at rock bottom lows while market
depression is at its peak… buts its tough catching a falling fridge !

Another example which we currently follow is High Arctic Energy
Services (HWO.T) which appeared a steal at $1.00 because they did the
$28 million in debentures last month with $1.60 conversion and the
Schlumberger joint venture - the stock hit $0.90 on small volume last
week and has few buyers. STP.V is still stuck $1.20’s after closing
their $60 million financing near $2. No rhyme or reasons. Just people
throwing in the towel, covering other losses, or paying bills !

This is the first year I remember where tax season has combined with
media doom and gloom to destroy investor confidence in one fell
swoop. If this is grossly overblown there is a very good chance we’ll
see a strong January or February rally in the small and microcaps.
However, if the media and the analysts are correct, then we better
move to Montana, buy guns, and start a Cult !  No doubt we have
problems to face in 2008… but I think its too soon to poison the punch !

Zarlink Semiconductor (ZL.T $0.65 or ZL/NYSE $0.65)

The only thing worse than watching a broad market selloff, is owning
a stock that issues a revenue warning in the midst of one ! Zarlink
collapsed from $1.20 to the $0.70’s last month when it forecast Q3
revenue ending Dec 28th would be approx. $50 million vs. $55 million.
The selloff was actually quite shocking given the fact the stock was
already beaten down to $1.20 after spending most of the year
substantially higher. However, in the past week Zarlink has hit
another new low at $0.64 and one has to wonder how low is too low.
Because of this beat-down we’ll follow the stock through Q1/08.
Insiders have been buying this stock throughout October & November in
the $1.20’s and a couple weeks ago two insiders bought 317,000 shares at $0.75.

What makes this an interesting speculation is the fact they have a
$95 million market cap at $0.75 yet generate almost $200 million in
revenue after being in business for 30 years (including the fact they
are listed on both the TSX and the NYSE). They have approx. $100
million in debt but its offset by strong assets including approx. $60
million in cash. As I’ve said before on techs we’ve had that were
bought out, it costs a tremendous amount of money to build new market
share and often the best strategy is to buy out a beaten down
competitor. Zarlink may fall into that category if it stays this low
through 2008.

“For over 30 years, Zarlink has delivered semiconductor solutions
that drive the capabilities of voice, enterprise, broadband and
wireless communications. Customers include Cisco, Alcatel- Lucent,
Nortel, Huawei, ZTE, Nokia Siemens Networks and Ericsson.

Financial highlights ending Sept 28/07

shares outstanding - 126 million
market cap at $0.75 - $95 million

Assets
cash - $48m
restricted cash - $15m
receivables - $36m
Total - $99m
inventory & fixed assets - $55m
goodwil & intangibles - $106m
Total - $160m

Liabilities
Accounts Payable - $15m
other current - $17m
Total $32m (offset by receivables)
long term debt & preferred shares - $94m
pension liability - $16m

Qtr Revenue - $50m (gross margin $22m)
loss of approx. $3m without 1 time costs

Forecast Q3 revenue (ending Dec 28) in the range of $50m

Please review their website for details on the business model, news
and financial filings.    www.zarlink.com

On the FOMC meeting on Dec 11, we had a massive selloff due to the Federal Reserve deciding to only cut the discount rate by 25 basis points instead of the anticipated 50 basis points. This surprised the market and the market sold off BIG TIME. I hope all of you were able to take advantage of this massive MOVE down and shorted after the news came out. As you now know, I love shorting stocks and you can see how easy money is made on the short side when suddenly no one wants to buy and everyone wants to sell. Due to the follow through on the downside yesterday and today’s market, it looks like we may have a downward momentum to the markets til the new year. What I would look for is to short stocks whenever there is any short term rally and once the upward momentum starts to wane then you pounce and short the stock. The sectors that I would look to short are the financial stocks such as Citigroup, Goldman Sachs and the mortgage stocks like Country Wide Financial and also the tech stocks that have run up a lot. Based on what is transpiring, dont look for much of a positive market next year. There might be a short term rally at the beginning of the year and then we may get a downward trend in the market. What you should be practicing is how to short stocks as there will be lots of opps next year. This is my last weekly commentary for the year and I look forward to seeing you back here in the new year. Happy Holidays.