Market Stumbles to -2.2% Loss!

In our last newsletter we issued near term warnings that the market could stumble. We may have seen the beginning of that stumble as the market fell -2.2%, the first losing week in the last five. Cisco, the technology titan, issued downward guidance next year and that caused their stock to plunge 17%. The nervousness over the Cisco outlook, along with fears that China may raise interest rates, encouraged investors to sell stocks and commodities driving prices lower. Reports on jobless claims and hiring trends were more encouraging, but failed to measurably soften the selling pressure. Long term we remain very bullish on stocks as recent corporate performance has been overwhelmingly good. In addition, we have a FED that is determined to lift this economy and stocks higher. However the market has seen an incredible two month run of double digit gains and we know the trend is never straight up. In that light, a small stumble is not a bad thing. Next week should be telli ng in terms of direction, but do not be surprised if we lose another 3% over the next two weeks given the already strong advance. As we mentioned last week, we would like to see the market consolidate and take a pause from its recent run. Use these pullbacks and consolidation periods as great buying opportunities. Volatility spiked a little bit last week, but remains below average for this time of year. Option premiums will rise somewhat with volatility, but now is still a good time to buy protection through long puts or put spread positions. We may sell a stock or two next week and if we do will sit on that cash as another way to manage the near term risk. In a longer view, all of our portfolios continue to perform very well over time. The best performance measure is the return since inception with the target to beat the market over that same period. We have not only beaten the market averages, but have done so by extremely large margins. As an example, one stock fu nd has achieved a 148% return since January 2006 versus a -4% market loss over that same time period!

Momentum And Value (MAV Screen): Breakout Stocks To Buy!

What Stock Tips do we have? For this week, we added one new stock to our watch list after having dropped InterDigital and EBIX due to recent purchases. Of course, InterDigital is also a stock to consider buying particularly after the pullback last week. The nine stocks on our buy list are Dorman Products (DORM, Auto Parts), Clearwater Paper (CLW, Paper Products), TRW Automotive (TRW, Auto Parts), Erie Insurance (ERIE, Insurance), Sapient Corp (SAPE, Software), TPC Group (TPCG, Chemical Manufacturing), and our new addition LJ Intl (JADE, Jewelry). Most stocks declined last week, not surprising given the market selloff. All of our buy list stocks have shown strong price momentum over the past three months (that is why they are on our list in the first place), and they often take greater hits when the market stumbles. That is normal and most will also recover faster than the overall market. We wrote about TRW last week, a stock that has had a strong run and continues to t rend higher. We like TRW but at these levels would only buy on a pullback. DORM is in the same industry as TRW and has rocketed to a 22% gain in just two weeks. DORM is another stock to buy on a pullback or longer consolidation period. One of our favorites is Erie Insurance as the stock continues to march steadily higher. We added LJ Intl (JADE), a company that designs and distributes fine jewelry through its retail channels in China and through US wholesalers. This is a low priced riskier stock and represents an aggressive play towards price appreciation. It trades at only $5 and triple digit gains are possible if the stock really takes off, but do not ignore the risk. Jewelry sales are growing in China and the long term trend is up as standards of living rise. The stock trades at a PE of only twelve despite exceptional earnings growth and potential. We like the story on JADE and the favorable risk reward tradeoff. Overall, given the recent market stumble, now is the time to be cautious and patient. Sit on your cash a little longer and buy only on pullbacks over the next week or so until the recent market stumble runs its course.

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