Stocks Rally on Views of Soft Landing

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INVESTMENT HOUSE.COMTM

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Weekend Newsletter for

July 30, 2006

Table Of Contents 1) MARKET SUMMARY 2) PRE-SPLIT PLAY 3) TECHNICAL PLAY 4) COVERED CALL PLAY

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1) MARKET SUMMARY > >From “The Daily” at InvestmentHouse.com
Look, up in the sky, it’s the Fed ending its rate hikes.

– Stocks rally on views of a pause and soft landing, but volume continues to lag.
– Q2 GDP helps spark a market rally, but the numbers are not that pleasant.
– Showing momentum ahead of Fed pause, but thus far lacking strong buying heading into another week heavy on earnings, economic data.

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Market Summary (continued)
Certainly that was the idea Friday with Q2 GDP coming in at 2.5%, much less than expected. More to the point, there were many statements that a soft landing was taking place. Bonds had rallied all week, pushing the yields closer and closer to 5%. The GDP data basically sealed the deal Friday with the 2 year closing at 4.97% and the 10 year at 4.99%. The curve reverted to positive by a hair, a good sign, but as noted Thursday, rates are overall very low when compared to a 5.25% Fed Funds rate. That is telling you two things. First, the Fed is indeed done as the Fed Funds futures contract estimates less than a 30% chance of a rate hike on August 8. Second, its telling you that money is too tight given the deteriorating economic conditions and some economic slowing is ahead if the current pace holds. If the Fed backs off perhaps some confidence is restored and the economic investment can continue and thus a resumption in growth.
That is what bulls were talking about Friday with their ‘soft landing’ predictions. At 2.5% they figured if the Fed halted its hikes then things should pick back up a la 1995 and everyone is happy at Christmas. To that end stocks started higher on the bell. A good early surge was followed by a test as the leading DJ30 and SP500 climbed near the July highs and started to waffle. Volume was running lower and that looked as if it could be a problem for a continued move. Stocks caught their second wind, however, rallying into the afternoon with SP500 and DJ30 closing right at the July highs. Even NASDAQ and SOX helped out, moving through near resistance for the first time in two months. After earnings guidance failed to spark a rally and indeed led to selling, it took the idea the Fed would stop rate hikes to get the market back into recovery mode.
To keep it going, however, economic growth will need to pick up. As noted, earnings guidance has been tepid despite 14.5% earnings growth year/year and 70% beating estimates. The market is not being kind to companies in the current economic environment either; if you guide lower you are slaughtered. IBD reports that 39 $10+ stocks suffered a 20+% one day loss the past three weeks. Seventy-six fell 15%, and 185 dropped 10% in one day. That is brutal. In addition, stocks have sold off, bonds have rallied to ridiculous levels versus the Fed Funds rate, and transports, always a leading indicator, have been clocked. They just managed to recover the 200 day SMA on the Friday rally. As if that were not enough, inflation is still showing signs of life with a jumping PCE, and business investment is lower.

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Here’s a trade from “The Daily” and insights into our trading strategy:

Chart by http://www.stockcharts.com”>StockCharts.com
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NGA”>
NGA (North American Galvanizing & Coatings Inc.)
http://finance.yahoo.com/q/pr?s=nga”>Company Profile
Even when the market is under distress if you know what to look for you can find the gems within the chaos. Despite the slowing economy, there are still areas enjoying continued growth and very good technical patterns as well. That is always a solid combination.
We saw this with NGA, a basic industrial stock dealing with galvanizing metals. Hardly sexy unless you look at the pattern: a nice breakout from a base formed in May and June and then a test of that breakout in early July. It tested the 50 day EMA on the breakout test and jumped right back up, always a good sign of money moving right back in when it got the opportunity. When we see these first tests of breakouts from strong patterns, we always take interest. We put NGA on the report and waited for the bounce. That came and we moved in on 7-20 at $7.33, picking up positions as it tested an early gap higher and rebounded. It softened a bit that day and tested lower the next, but it easily held support in its uptrend and the test was on very low volume. With this kind of pattern we just let it work for us.
It did just that bouncing $0.86 the next session, then $0.49 and $0.46. That took NGA to our target at $8.80 where we locked in some 20% gain in less than five trading sessions. It then tested again, and Friday held the 10 day EMA. Considering moving in again for another run after another nice test of near support held.

http://www.investmenthouse.com/1daily1.htm”>Learn more about “The Daily” with Stock Picks! – Issued 5 Times Per Week

2) Stock Splits Playing stock splits can be very profitable, but it takes know-how. Our stock split service focuses on three main types of plays: 1) pre-announcement (where we forecast an upcoming split prior to the company making the announcement); 2) pre-split (these plays are made in the days leading up to the actual split day); and 3) post-split plays (plays made after the actual stock split where the stock is showing continued or renewed strength).
We play pre-split plays as short-term plays. We get in when the technical indicators show us things look right, grab as much as we can, and get out, always being conscious of resistance and support. These stocks are highly volatile at this time, and can turn on you quickly. Don’t let good profits disappear. Watch for turns, especially when a stock trades in a wide range and finishes off its high. That is a sign these stocks often give you that they are running out of steam. We usually get out and ask questions later. We can always get back in. We like to play in the money calls, preferably two strike prices in the money as this usually gives us a greater delta (the percent an option will mover versus the stock’s movement). We prefer deltas of 75 or better. This means if the stock moves 1 point, the option should move three-fourths of that point. That means up or down.
Remember, wait to see the stock start to move up. Don’t just blindly make a play and don’t try to guess tops and bottoms. We can look at indicators to give us a clue as to what will happen, but we need the stock to confirm it for us.
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Listen to Stock Split Report Editor Jon Johnson’sstock split interview on CNBC-TV [ http://www.investmenthouse2.com/cntdir.asp?name=JonJohnson-B” target=”_new”>Broadband | http://www.investmenthouse2.com/cntdir.asp?name=JonJohnson-D” target=”_new”>Dial-up ]
Here’s a pre-split play to watch and our current analysis.

Learn more about our Stock Split Report and how we have made gains of 321% with our powerful stock split plays!
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4) COVERED CALL PLAYhttp://investmenthouse.com/indexq.php?smbl=
IIIN”>
IIIN – Insteel Industries Inc. is currently trading at $20.49. The August $20 Calls (IQFHD) are trading at $1.35. That provides a return of about 4% if IIIN is above $20 on expiration Friday in August.

http://finance.yahoo.com/q/pr?s=iiin”>Company Profile
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* * * SCOTTRADE * * *
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The foregoing is commentary for informational purposes only. All statements and expressions are the opinions of Online Investment Services, LP., or Split Ventures, Ltd. This information is not meant to be a solicitation or recommendation to buy, sell, or hold securities. We are not licensed or registered in the securities industry. The information presented herein and on the related web site has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. The security portfolios of writers for this issue may, in some instances, include securities mentioned herein and on the related web site. Estimates, assumptions and other forward-looking information are subject to the limits of forecasting. Actual future developments may differ materially due to many factors. No one associated herewith receives compensation in any manner from any of the companies that are discussed in this newsletter or on the related websites.

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Stocks Rally on Views of Soft Landing