Sabrient Select Opportunity Virtual Portfolio

October 18, 2010

55

Sabrient Select Opportunity Virtual Portfolio

October 18, 2010 – The Week Ahead

One thing you can count on with the stock market is that it likes to fool as many people as possible. In last week’s Week Ahead outlook, I noted that it seemed to be forming a very similar pattern to what we saw in the spring (which culminated in the April highs). But then the week ended with a bit of a thud as concerns about the Financial industry’s foreclosure processes put a damper on the party that Google was trying to throw for everyone.

Nevertheless, the bulls have managed to keep the bears at bay, as shown in the chart. Friday’s trading in the SPY produced what I interpret to be a bearish "hanging man" candlestick formation, which when occurring after a sustained advance usually signals a change in trend. Combine this with the likelihood for "mean reversion" (given how far above the moving averages price has become) and the observation that MACD is getting to be overdue for a cycle back down. We should see early this week if all of these bearish indicators are confirmed. I would expect at least a retest of resistance-turned-support at 115 (it closed Friday at 117.70).

Also, it is notable that we are starting to see some elevated volume (with the exception of the ultra-low volume day on last Monday’s Columbus Day bank holiday). Higher volumes make the market more difficult to manipulate.

Last week, the Fed reiterated that they stand ready to do whatever it takes to keep the economy moving forward, and that has been keeping the bulls blissfully optimistic. But it’s still not at all clear whether their intervention is only "bubblegum in the dam leak" that is merely setting us up for a Volcker-type of currency devaluation and hyper-inflation — or worse, stagflation — which would be the worst outcome of all.

Open Positions

Last week, I opened a new 1/2 short position in ATPG after what I considered to be a speculative gap up in the price, but then I closed it when the stock continued to rise.

Going into the new week, we still have one long position and four short positions.

LONGS:

We are long 1/3 of the a full position in Endo Pharmaceuticals (ENDP) from $28.62, after harvesting the first round of profits on 1/3 of the original position at the 17% profit mark ($33.40) when it gapped up nicely on September 28, and then another 1/3 at the 20% profit mark when it hit $34.37 on October 8. The stock closed Friday at $35.42. It is rated STRONGBUY in the Sabrient Ratings Algorithm, and carries a strong Outlook Score of 97, Growth Score of 88, and Momentum Score of 83. I am keeping my mental stop at a closing price below the breakeven entry price of $28.62.

SHORTS:

We are short 1/3 of a full position in First Horizon National (FHN) from $11.23 after harvesting the first round of profits on 1/3 of the original position at the 10% profit mark when it hit $10.10 on August 20, and then closing 1/3 of the original position for capital preservation when it gained strength and rose above my mental stop loss. The stock closed Friday at $10.03, and is down significantly from the prior week in the face of weakness in the Financial sector, and is back in a strongly profitable position for us. FHN is rated SELL by the Sabrient Ratings Algorithm and carries a woeful Company Outlook Score of 4 and a Value Score of 30. On Friday, I suggested that some subscribers might want to close it out on the substantial weakness, but I am holding it in anticipation of further weakness in the entire sector.

We are short 1/3 of a full position in Texas Industries (TXI) from $32.04 after harvesting the first round of profits on 1/3 of the original position at the 12% profit mark on August 24 when it hit $28.20 and then stopping out of another 1/3 position on September 2 when the stock closed above the entry price. The stock closed Friday at $33.99, which is well above my mental stop loss of the entry price of $32.04. However, other stocks from the building materials industry that are ranked low in our system (like USG and VMC) have been weak, so although TXI has outperformed lately and its technicals are mostly bullish, I want to hold on to the final 1/3 position in anticipation of renewed weakness in the sector bringing it down — particularly given its weak earnings report and outlook. It carries a STRONGSELL rating in the Sabrient Ratings Algorithm and a rock-bottom Company Outlook Score of 0, and a Growth Score of 23.

We are short a full position in Ciena (CIEN) from $15.05. The stock closed Friday at $14.50, which is back below my mental stop of $15.37. It has been showing relative weakness versus the overall market. CIEN is now rated BUY by the Sabrient Ratings Algorithm because of its Growth Score of 85 — despite its poor Company Outlook Score of 4 and Value Score of less than 1. Therefore, I will continue to monitor the short position closely for early exit on any sign of strength.

We are short a half position in ATP Oil & Gas (ATPG) from $12.20 after stopping out of 1/2 of the original position at $13.19 for capital preservation purposes. The stock closed Friday at $15.61, which is well beyond my mental stop of $12.71 and admittedly distressing. However, the stock has weakened substantially since its speculative run, so I have decided to give this final partial position some more room. ATPG is rated STRONGSELL by the Sabrient Ratings Algorithm and carries a dismal Company Outlook Score of 2 and a Value Score of 10. I will continue to monitor it closely.

Watch List

LONGS:

Some stocks that I have on my Buy watch list include the following: