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  • Rev Shark:

    Troubling Signs in Tuesday's Action
    11/30/2005 8:32 AM EST

    "Of all the thirty-six alternatives, running away is best."

    -- Chinese Proverb

    Despite the mild action in the indices yesterday, there were some troubling signs. The most notable was aggressive profit taking in some of the recent momentum favorites: Google, Apple, Chicago Mercantile Exchange and Yahoo! have been the leading big-cap momentum stocks recently and all have seen selling pressure over the past couple of days.

    It is extremely important to remember that momentum cuts both ways. Stocks that go up fast tend to come down fast, and momentum traders tend to run for safety at the first sign of trouble and ask questions later. They don't care about fundamentals or macro market predictions -- they are focused on protecting their capital and when gains start to slip they are out of there.

    The reason that weakness in big-cap momentum favorites is so worrisome is that it is probably our best measure of the level of speculation in the market. The appetite for risk is what determines if an extended market can become more extended. When speculative fervor is high it spills over and lifts a variety of other stocks and sectors. When the momentum investors start to become more cautious it quickly infects the broader market.

    First, the big-cap momentum stocks slow, then the smaller-caps falter as bids disappear, and then the more speculative sectors like biotechnology and Internet start to struggle.

    I don't mean to be overly bearish at this point but the weakness of momentum favorites is a warning sign and the prudent thing to do is increase caution levels. Sell down some of your extended positions, raise some cash and be more vigilant about managing your positions. This market may right itself and continue on its merry way to new highs, but think about preserving what you have rather than aggressively trying to acquire more in a market that has a few developing cracks.

    GDP is hitting in a moment and we have the Chicago PMI number later this morning. Gold has pulled back from the $500 level, oil is flat and overseas markets are looking a bit weak.

    Position: No positions in stocks mentioned

    Gary B. Smith:

  • UBS downgrades Yahoo (YHOO 40.19) to Neutral from Buy on valuation
    UBS downgrades Yahoo to Neutral from Buy based on valuation. The stock is near a 5-year high and the firm simply needs to see execution on some key initiatives before raising estimates. Initiatives include: 1) improved search monetization; 2) roll-out of YPN; and 3) Yahoo Hollywood. Firm raises target to $45 form $44, which implies 22x 2007 EV/EBITDA and 50x 2007 p/e.

    UBS downgrades Inco (N 44.76) to Neutral from Buy on valuation

    Goldman Sachs initiates QLogic (QLGC 32.92) with an In-Line, as they cite a short-term opportunity and longer-term, shares should remain in line with hardware

    Citigroup downgrades Infineon Tech (IFX 9.03) to Hold from Buy and cuts their tgt to $10 from $12, as they cite worsening memory pricing and a lower market valuation of the peer group

    Piper Jaffray downgrades Quality Systems (QSII 88.12) to Mkt Perform from Outperform, saying the stock is priced to perfection, tough comps are ahead, and competition may increase

    CSFB initiates Valueclick (VCLK 18.20) with an Outperform and $22 tgt, citing the co's extensive reach coupled with its proprietary adserving technology and leading affiliate marketing business.

    Citigroup raises its DecQ, FY06 and FY07 revenue and EPS ests for Apple (AAPL) to reflect stronger than expected demand for the new video iPod and a faster than expected transition to Intel architecture within the co's laptop product lines. Several sources within the supply chain suggest that Apple will ship at least 4M video iPods in DecQ vs. the firm's prior est of 1.5-2.0M. Other checks suggest that Apple will ship 35-40M nanos and video iPods combined during FY06. Firm is becoming more convinced that Apple will introduce its first Intel-based PowerBook at Macworld San Francisco in early Jan. This earlier than expected launch will minimize the risk of demand disruption related to the transition

    Goldman Sachs says it no longer prefers Nvidia (NVDA 35.48) over ATYT as NVDA's significant outperformance YTD has already captured the co's current product advantage. Based on recent checks, the firm is raising our CY06 estimates for both cos. Looking out through 2007, the firm expects ATYT's profit growth to significantly exceed that of Nvidia as ATI's margins expand from the 2005 trough, while the firm doubts Nvidia will be able to reach is goal for record gross margins of 45% in that time period.

    Majandusstatistika:

    GDP- Prelim +4.3% vs +4.0% consensus

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