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"A Vital Source for the CANSLIM Investor" 

Tuesday, November 30th, 2004 | 11:27 PM
December 2004
Volume 7, Issue 12
 

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November Rally Helped S&P 500 Clear 10 Months of Chart Resistance
November began with a bang! President Bush was reelected, the Fed raised interested rates, and October’s employment report was significantly higher than expected. Americans went to the polls on November 2nd and elected President Bush to a second term. There was a lot of uncertainty surrounding this presidential election, mainly due to the fact that 2000’s election was such as blunder, so up until Election Day the race was “too close to call”. The major indices had turned up from their October lows, but the market hadn't really shown great conviction while the country seemed uncertain as to who the next president of the United States would be. The markets often do better when uncertainty is removed, and thankfully the overall trading bias improved after this election was able to pass without any major complication.

Chart courtesy www.stockcharts.com

The S&P 500 finished November up +3.8%, scoring its biggest monthly gain of this year and its sixth monthly increase in seven. The Dow Jones Industrial average climbed +4.0% in the period, snapping a two-month losing streak, meanwhile the Nasdaq Composite set the strongest pace as it gained +6.2%.

On November 10th the Federal Reserve Board met and decided to raise rates by 25 basis points. The target interest rate set by the Fed, the federal funds rate, serves as a benchmark for all other rates. When this rate changes, the lending rate banks charge each other for overnight funds changes accordingly. The effects are felt directly by all other interest rates from Treasury bonds to mortgage loans. The level of interest rates affects the economy. Higher interest rates tend to slow economic activity; lower interest rates stimulate economic activity. Either way, interest rates influence the sales environment. In the consumer sector, demand decreases for new homes or cars when interest rates rise. Furthermore, interest rate costs are a significant factor for many businesses, particularly for companies with high debt loads or those which have to finance high inventory levels. This interest cost has a direct impact on corporate profits. Putting all of this in perspective, the bottom line is that higher interest rates have bearish implications for the stock market, while lower interest rates are bullish.

The third major event that occurred within the first ten days of November was October’s employment report. The employment data gives the most comprehensive report on how many people are looking for jobs, how many have them, what they are getting paid, and how many hours they are working for the month. These numbers are considered by many analysts and economists as the best way to measure the current state and future direction of the economy. They also provide clues on wage trends. Wage inflation is high on the list of adversaries for the Federal Reserve. Fed chairman Alan Greenspan talks about this data frequently and is constantly on the lookout for inflation. October’s report was reported 337,000 new jobs were created, blowing away the estimate of 160,000. The unemployment rate was reported as 5.5% slightly higher than the consensus of 5.4%.

Crude oil prices peaked on October 25th and they have steadily declined for most of November. High energy prices tend to also put a strain on economic growth. When consumers are forced to pay more of their hard earned dollars at the pump their disposable income decreases, resulting in lower consumer spending. Consumers are obviously a major element that fuels the economy.

The US dollar fell for most of November. The dollar continuously reached record lows against the euro. A weaker dollar helps the US “balance its trade.” The rationale is that foreigners will buy more US products (increase exports) because these products are now cheaper for them. Concurrently, US imports will likely drop because foreign products will become more expensive.

The ramifications of a weak dollar can be felt elsewhere. Many argue that gold has been the biggest benefactor of a weaker dollar. Gold, in US dollar terms, has been extremely strong over the past few months. Gold is viewed by many as a surrogate for being short the US dollar. Therefore, a large portion of gold’s strength is directly due to a weak dollar. To further illustrate this point, gold has actually been closer to flat relative to the Canadian dollar and the euro.

Historically, November through April is the best time to be long stocks. This does not mean that every stock will go up during this time frame. Always follow CANSLIM, and continuously use the tools provided to you at www.canslim.net for guidance.

The technicals have been mainly positive for most of this month. The major indices, and most notably the benchmark S&P 500 Index, broke out above prior resistance and moved significantly higher since the October lows. Advancers have steadily outpaced decliners and the new 52-week high list continues growing apace. Another positive note is the number of high-ranked companies from CANSLIM.net's Leaders List that made new 52-week highs and appeared on the CANSLIM.net BreakOuts Page, numbers which were steadily higher for most of the month.

- Kenneth J. Gruneisen

CANSLIM.net's most timely buy candidates are analyzed by our experts in great detail in the "Stocks to Watch in This New Market "section.

Notes:

• This is a list of the strongest groups based on the total number of new highs achieved in the group. For example, 1 stock making 10 new highs is the same as 10 stocks making 1 new high.
• If there were less than four stocks in the list of stocks making new highs then the top five stocks in that group were added to the list.
• Any stock that was more than 20% off its 52-week high was eliminated from the list regardless of any other characteristics.

• Links above (in 3rd column) refer to the original write-ups on previously featured stocks.

- CANSLIM.net News Staff

Think of it this way. Not depositing new funds in your IRA on the first business day of 2005 is like not running when they fire the starting gun at the beginning of a race. You need not be a gold medalist to clearly understand that how you start the race will most definitely impact how you finish. And in this particular case, the race is out of concern for your wellbeing during your retirement years.

I don’t want to discourage anyone, but one investor that I know well told me recently about how he had funded his IRA with $2,000 deposits each and every year for a period of 20 years. At the end of the 20 years his IRA was not worth $40,000 or more – it was worth only $28,000. It happens that the market crash of 1987 interfered with his results a fair bit, and you can bet that his average broker did not make matters any better. The good news is that this investor’s IRA account is now worth approximately $180,000, and since he is over 70½ years he is now required to take a mandatory distribution of over $5,000 before the year’s end. If he doesn’t take that money out, guess what the penalty is? The IRS will confiscate 50% of the required minimum distribution if it was not taken out.

"The good news is that this investor’s IRA account is now worth approximately $180,000..."

Another investor I know had an IRA account years ago, but financial trouble forced him to liquidate it and also pay additional penalties for early withdrawal. Later, when he got on his feet again, he didn’t get started right away. More years ticked by, and finally the fellow re-started funding his retirement nest egg. Rather than starting with a deposit on January 1st, he barely got his 2003 IRA deposit in on April 15th of 2004. These days you can contribute $3,000 per year. And a few weeks later, he added another $3,000 for his 2004 contribution. As I write this, his IRA is worth $11,823, up +97% in less than a full year’s time. Two big CANSLIM-based winners were responsible for his IRA account’s progress – Hansen Natural Corp (HANS) and Innovative Solutions and Support (ISSC). Both stocks were bought after they were featured in reports this year at www.CANSLIM.net.

These above stories help to illustrate how IRA accounts are the perfect place for investors to buy CANSLIM-based stocks. Taxes would have otherwise taken a big chunk of the profits in either of the above cases. Because of the tax deferral benefits of an IRA, both of the above investors will be able to keep on re-investing all of the earnings from profitable trades.

Taxes are certainly a big concern for active investors in non-qualified accounts. At this time of year I believe that many of you should be studying the realized gains and losses you’ve got for the current tax year. I have known many investors to hesitate taking losses when they don’t have enough offsetting gains in the current year. Rather than sell, they carried the losses for future years, but this was usually not the best tactic and they’d have been better off selling sooner and preserving more of their hard-earned capital. I have also seen investors hesitate selling and realizing more short-term capital gains at times when they felt they didn’t have enough offsetting losses in the current year.

One tactic I’ve talked about before that is worth revisiting now concerns going “short against the box”. I am not qualified to give tax advice, but if you have any questions about this tactic I would be happy to explain further. Consider this approach in a case where you might have a position you are holding with a big capital gain – a stock you would like to sell, or that you know you should sell - but one in which you wish to avoid taking additional gains in the present tax year. This scenario assumes you would rather push it back to the following tax year where you foresee yourself in a lower income tax bracket. Rather than sell your existing shares, you instruct your broker to sell that amount of shares “short against the box”. This neutralizes your position so that when or if the stock either rises or drops you don’t actually lose or gain. All you need to do is wait until you are ready (probably after January 1st) and then you can really sell that stock you owned and at the same time also be sure to place a buy order to cover that short sale.

Kenneth J. Gruneisen - A Registered Principal, Ken manages a Source Capital Group (Member NASD,SIPC) branch office and offers personalized assistance. Investors with a significant financial interest in equities may inquire about opening an account by calling the office locally at (954) 785-1990 or 1-888-237-8399 or emailing to kgruneisen@sourcegrp.com  Further information is always available upon request. Contact us if you know anyone that may have an interest in receiving this or any of our other reports. Comments contained in the body of this report are technical opinions only and are not necessarily those of Source Capital Group, Inc. The material herein has been obtained from sources believed to be reliable and accurate, however, its accuracy and completeness cannot be guaranteed. Our firm, employees, and customers may effect transactions, including transactions contrary to any recommendation herein, or have positions in the securities mentioned herein or options with respect thereto. Any recommendation contained in this report may not be suitable for all investors and it is not to be deemed an offer or solicitation on our part with respect to the purchase or sale of any securities. Source Capital Group, Inc. is a NASD/SIPC member firm.

Chart courtesy www.stockcharts.com

Financials | StockTalk | News | Chart | SEC | Zacks Reports

Profile: ValueClick Inc is a leading global provider of Internet advertising solutions for online advertisers and website publishers. As a pioneer of the performance-based advertising model, ValueClick provides the most comprehensive portfolio of online advertising solutions. The first letter in CANSLIM stands for current earnings. Value click has demonstrated a rather impressive earnings growth during the past year.  Sales revenues and earnings have been consistently improving over the past year and they were able to grow their earnings over 200% even during their weakest quarters.  The number of top-rated institutional owners has risen from 96 funds in Dec '03, to 124 funds as of Sept '04.  It is a high-ranked leader in the Internet-eCommerce group presently listed in the top 13% of IBD's 197 industry groups. These are the type of characteristics that have often led to explosive action going forward.    

What to Look For and Look Out For: Look for it to follow through on its latest big volume breakout gains and continue rising above its pivot point.  Another day of gains with conviction would be a reassuring indication of serious institutional buying demand. If the overall market pressures stocks lower, VCLK should find support above the $12.00 level. If it reverses back under $12.00 the technical breakout would have failed. A more serious violation of its 50-day moving average line (the blue line) on above average volume would definitively be considered a technical sell signal.

Technical Analysis: After gapping up on 9/8/04 the stock built and upward sloping base, then it gapped up again on 11/05/04 and has been working its way toward old highs ever since. On 11/30/04 it traded and closed above its February, April, and June '04 peaks, rallying to a new 52-week high on volume five times its average.

Chart courtesy www.stockcharts.com

Financials | StockTalk | News | Chart | SEC | Zacks Reports

Profile:  Asta Funding, Inc of Englewood Cliffs, NJ is a leading consumer receivable asset management company that generates revenues and earnings primarily through the purchase and collection of performing and non-performing consumer receivables that have typically been either charged-off by the credit grantors or not considered to be prime receivables. These receivables include MasterCard, Visa and other credit card accounts issued by banks and other consumer loans issued by credit grantors. Asta may also purchase bulk receivable portfolios that include both distressed and non-conforming loans.  Earnings and sales revenues show impressive increases over the past four quarters - fundamentals that have sent similar stocks blasting to new highs.  Management owns a 16% interest in the company's shares, keeping them motivated to look after shareholder value.  Its Up/Down Volume Ratio of 1.7 and other statistics indicate that it is being accumulated institutional owners. While the Finance - Consumer/Commercial Loans group has slipped in rank a bit toward mediocre in the past few months, there are still plenty of examples in the same financial sub-group that provide confirmation of leadership including Nicholas Financial (NICK) and SLM Corp (SLM). 

What to Look For and Look Out For: Look for it to possibly consolidate back toward the $20-21 area on lighter volume for perhaps a better chance to buy without chasing it up.  The maximum buy point 5% above its pivot is $22.15, so be careful not to chase the stock or you may get stopped out instead of being able to hold through a normal pull back.  The key discipline is for you to be sure to exit 7-8% below your buy point to prevent spiraling losses.  Smart buys make it easier to stay disciplined.  

Technical Analysis:  It met some resistance in recent weeks before breaking clear of its June highs, but ASFI has now cleared all overhead supply.  It has managed to close at new all-time highs for each of the past four sessions, three of which were marked by above average volume.  The stock's relative strength line (not shown) has also been blasting to new highs, an important characteristic in leading stocks.  

 Chart courtesy www.stockcharts.com

Financials | StockTalk | News | Chart | SEC | Zacks Reports

Profile:  CACI International Inc. provides IT and communications solutions by adapting emerging technologies and evolving legacy strengths in areas such as information assurance and security; reengineering, logistics and engineering support; automated debt management systems and services; litigation support systems and services; product data management; software development and reuse; voice, data and video communications; simulation and planning; financial and human resource systems, and geo-demographic and customer data analysis. It serves clients in the government and commercial markets throughout North America, the United Kingdom and worldwide.  Areas of expertise include: systems integration, managed network services, knowledge management and engineering services. Its last two earnings reports were stellar: each averaged a 11.9%  surprise and produced a bullish gap. Funds hold 37% of available shares, and although top performing funds reported as owners decreased from 180 to 155 over the Dec '03 to Sept '04 period, in the last reporting period 12 of these funds have added 96 million new shares (IBD 11/5/04). CAI is likely to benefit from improving group strength, as Computer - Tech Services is currently ranked in the top 12% of IBD's 197 Industry Groups and improving.  IBD (composite rank 98) and Zacks (2) fundamental rankings, and the next two year’s PEG ratios (0.64 & 1.30) are indicative of superior fundamentals while value is still compelling at this price. Finally, over the past 90 days, analysts’ have raised this year’s estimates 5.8%  from 2.59 to 2.74.  

What to Look For and Look Out For: The risk/reward looks favorable for buyers upon any substantial volume increase and breakout over the pivot point from what has been a month long period of consolidation.   That assumes that the company's ongoing fundamental and technical performance remain positive, but any close back below the chart support (the green line) which also coincides nicely with its 50 DMA would be a concern, especially if occurring on increased volume. It could be an early warning of possible trouble if the support of its upward trend line (blue line) is violated. Be watching for a large volume breakout above the pivot, but do not be surprised to see price continue to build a longer base before making an attempt at new highs.  

Technical Analysis:  Since reporting good earnings in mid-August and gapping up, CAI has been on a bullish tear.  Following a two month bullish run (see the gap at beginning of the fat blue line) its earnings report again prompted it to gap up on 10/21/04. The price has generally been consolidating for the past month, once testing near its 50-day moving average. 

L= Leader  |  ET = Extended  |  BO = Break Out (new)  |  BV = Big Volume
NC = No Comment  |  F = Fundamentals
C = Current Quarterly Earnings Per Share |  A = Annual Earnings Per Share
S = Shares Outstanding | I = Institutional Ownership

I’ve written before about the statistical significance of two important market cycles, the six-month and the four-year Presidential cycles (CANSLIM.net News, 11/03). Here, I want to consider the decennial cycle because of the ramifications for next year, the fifth year of the decade. Since the 1880’s, each decade’s fifth year has produced a positive return (12 of 12 times, averaging +30.7% for the Dow). Other authors have recently written about the importance of this cycle: Yale and Jeffrey A. Hirsch in "Stock Trader’s Almanac 2005" and Larry Williams in "The Right Stock at the Right Time."

The importance of this cycle is evident by the following: from 1900 through 2002, if one were out of the market at the beginning of the “0” year, entered the S&P 500 on 6/30 of the “2” year, then were out from August through October of the “7” year, and finally re-entered until the end of the “9” year, the value of $1 invested in 1900 would be worth $6,660.86 in 2002 versus just $148.41 were you instead fully invested over the entire period of time. An awareness of the 10-year cycle would have produced 44.9 times the return. It occurs because the advances and economic booms in the latter half of most decades tend to be followed by consolidations of these gains in the early years of the next decade, which are sometimes referred to as the “Decade Hangover Cycle.”

The accompanying bar chart shows the average Dow 30 returns by year within the decade for 1880 through 2003 and for a more modern 1950 through 2003. Clearly, year “5” has outperformed, while year’s “8” and “9” have also been quite positive. On the other hand, year’s “7” and “10” have underperformed. The table provides return data for the shorter period and additionally shows where each year lies with regard to the Presidential cycle. Remember, the pre-election and election years outperform the other two in this 4-year cycle.

Clearly, year “5” of the decade outperforms. Over these five decades, the fifth year has averaged a 26.24% return, and years “8” and “9” nearly half that. Further, this decennial cycle seems to be impacted, though not controlled, by the Presidential cycle. That is, the fifth year had three bullish pre-election years but so did years “1” and “9.” In any event, 2005 looks promising. As a statistician, my first question is whether this fifth year tendency is statistically significant.

I approached the problem with a statistical technique called “Resampling.” Essentially, one assumes there is no preference and any of the annual returns in a decade might have occurred in any particular year. After randomly shuffling the annual returns within each decade, one recalculates the average return by year from 1951 through 2003 and then compares the maximum return (whatever the year) to 26.24%. One wants to assess whether the latter is truly a rare event. Following this approach 100,000 times indeed shows that 26.24% or better occurs only 3.1% of the time. Therefore, the real “5” year out performance is a true statistically significant event and is indeed special.

The Above Article Was Prepared by Dr. Richard Miller, Founder of...

GET HIS FREE DAILY STOCK REPORTS CLICK HERE TO LEARN MORE

Refurbish Your Investment Portfolio! A Year's End Resolution
Soraya Nasrallah, Registered Representative, Source Capital Group, Inc. Members NASD/SIPC 

It is that time of the year again where investors like you are thinking about New Year’s resolutions – all those changes you want to make in your life such as breaking bad habit or adding new décor in your home. One item on your resolution list should be “refurbishing” your investment portfolio.

You most likely have spent many hours shopping and thinking about the different ways to decorate your home. Unfortunately, the majority of individuals spend more time refurbishing their home than “refurbishing” their investment portfolio - if they even have a portfolio!

This may seem obvious, but it is very important. Your brighter financial future can happily coexist with your home’s new Zen décor if you follow these steps for your personal financial refurbishing.

1. Contact your financial advisor and set up an appointment. At the very least, arrange a phone appointment where there will be no interruptions on either side. Make sure you have a set of questions you may want to ask and also your most recent brokerage account statement. This will facilitate the process of determining the changes that need to be made based on your current financial situation.
   
   Also, don’t forget to let your advisor know about your short-term (one year or less) and long-term goals (more than one year). Make sure you have a pad to write on so that you can make your own notes. Finally, ask your advisor for a personalized plan with a time frame so that you both have an idea as to what needs to be done in order to achieve your goals.
    
2. If you have not yet established a financial plan for your short-term and long-term goals you need to start one right now! “Where do I start?” you may ask. If your current employer offers a 401(k) plan, then you should start participating and make it your goal to contribute up to the maximum amount they may match your contribution. If not, get a brokerage account by contacting a brokerage firm, discount broker, or a mutual fund company and open an IRA, Roth IRA , One-Person 401(k), retail account, or some other type of investment account that suits your needs. Then, according to your situation, objectives and financial position, you should regularly invest a portion of your income. It is preferable that this be inside a tax-deferred account so that tax on any gains may be deferred for a later date.
   
   Remember that it is not necessary to invest all your dollars into individual stocks with the hopes of any of them moving up substantially. Some of the easiest yet quite effective ways to invest in the market are by investing in mutual funds, exchange traded funds, iShares, and index funds. These are all great options that your advisor can carefully review with you in order to create a tasty investment pie for your financial needs.
    
3. Refurbishing your investment portfolio does not mean that you have to sell what you currently own and immediately go on a stock market shopping spree. Sure, some of your holdings may be kept and others may be sold (based in part on whether you need the gain or loss for tax purposes in a taxable account), but most important is to look at where you want to be in “X” amount of years.
   
   If you are nearing retirement, it is imperative that your investment allocation is in proper tune with your retirement needs. You or your advisor may find out that your current position may not yield enough income for you to comfortably live on and that you may have to seek other ways to obtain income if you wish to retire at a particular age. Remember, it is not wise to count on Social Security checks that may not even be around for many of us whose retirement is still years away.

The month of December is an ideal time for investors to re-evaluate their portfolios and refurbish accordingly. This is also the time for soon-to-be investors to commence a plan of action that will place them on the right path for financial freedom.

Happy Holidays!

Soraya Nasrallah, obtained her Series 7 license in 1992, and has served in the capacity of Sales Assistant, Head of Operations Department, and Stockbroker.  Contact Soraya Nasrallah via email at snasrallah@sourcegrp.com or by phone at (954)785-1990 for assistance you with your portfolio. She will be pleased to offer ideas that suit your investment needs, and she can help you achieve the gains you have been searching for.  Miss Nasrallah has just introduced a new educational program called InvestorWiz! specifically created for teenagers and novice investors, incorporating stock market basics with CANSLIM in a colorful and picturesque format. It is the perfect gift for those who just don’t know much about the world of stocks and investing! Comments contained in the body of this report are technical opinions only and are not necessarily those of Source Capital Group, Inc. The material herein has been obtained from sources believed to be reliable and accurate, however, its accuracy and completeness cannot be guaranteed. Our firm, employees, and customers may effect transactions, including transactions contrary to any recommendation herein, or have positions in the securities mentioned herein or options with respect thereto. Any recommendation contained in this report may not be suitable for all investors and it is not to be deemed an offer or solicitation on our part with respect to the purchase or sale of any securities. Source Capital Group, Inc. is a NASD/SIPC member firm.

We sincerely invite such communication from subscribers and potential subscribers because this gives us the opportunity to continue to improve our website and related services. Every question and every comment is taken very seriously here. The testimonials are indeed flattering, but the occasional criticism is just as valuable to us. We actually keep every testimonial we receive on our testimonials page, here.

The balance between enough information and too much information is often delicate. An additional challenge is to provide the appropriate information to an audience with a diverse range of investing and trading styles. If you feel that there is something vital that we are missing and we are not meeting your information needs it is very important to let us know how we can improve. With thousands of subscribers, an information challenge with just one subscriber is something that we realize is likely to also be an issue with many others. We do our best to avoid deluging CANSLIM.net StockNews subscribers with too much information but not enough truly action-worthy ideas. The only way we can know is if our subscribers tell us. You can send an email directly to me, here.

We are planning many new improvements for CANSLIM.net in 2005, and with the help of several new contributors on our team, there is plenty of good stuff on the horizon for everyone to stay excited about. Our aim is to increase the number of timely reports – Stock Bulletins, in particular – that we deliver to our subscribers. The most perfect buy candidates are by no means scheduled to coincide with the release of this monthly newsletter, thus the ad hoc reports are an extremely important way for CANSLIM.net to deliver the most timely buy candidates to paying subscribers. Be sure to check your email regularly.

Best holiday wishes to all of our subscribers and their families.

Andrew C. Hansen
Editor, CANSLIM.net
editor@canslim.net

CAN SLIM (written here as "CANSLIM" or "Canslim:) is a registered trademark of William O'Neil + Co. CANSLIM.net is not owned nor affiliated with William O'Neil + Co. or any of their subsidiaries including The Investor's Business Daily newspaper.