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Our nerve was tested a little Thursday as the market sold off, something we alluded to might happen, if the S&P failed to get past the 1205 resistance level and our well aired concern that the S&P still had the appearance of a bearish consolidation that still needed to be negated and that any breakdown in prices would tend to exacerbate this bearishness and that is essentially what happened on Thursday, as throughout the day the market became increasingly nervous over outcomes of possible indictments anticipated Friday.

Even though the markets sold off rather sharply, we did warn to be prepared for excessive volatility, much as what occurred back at the April 2005 lows and we also warned to be on alert for a potential bear trap, again such as happened in April, when the market retested its low-range lows rather sharply, before re-bounding for real and ultimately rallying 100 points higher. With somewhat of an amazing reserve of stealth momentum, the market powered higher through Friday on better than expected GDP numbers of 3.8% growth and relief over the limited indictments. So are we out of the woods on the back of a 172 point surge in the Dow Industrials?

Not completely and given the uncertain nature of all markets, the intensity of Thursday's plunge followed by Friday's surge, means we must be forever vigilant to the possibility that something unexpected can always occur out of the blue and that means that in spite of Friday's stunning 172 point surge in the Dow and 19.51 point gain in the S&P 500, should these gains be negated, then the outlook could again look grim. On the positive side however, things are shaping up a lot better, especially with the Transportation Index looking so strong with the appearance of basing out near the highs, ahead of an upside breakout and by the way, such a breakout to those new highs would become new all time record highs and could put the DJ Transportation Index within striking range of 4,000, a very big deal indeed and an extremely bullish Dow Theory Buy Signal at that. The only caveat being evidence of an outside month in the DJTI, ie a higher high than last month and a lower low than last month was registered, which can indicate a major turning point...

The transportation industry has been leading the economy, growing in leaps an bounds over the past few years, in keeping with the just announced 3.8% growth in GDP and the DJ Transportation Index has essentially been building increasing value at higher levels for the whole of 2005 and to be at the high end of the range at the end of the first month of the 4th quarter says a whole lot about how strong the transport economy is, especially with the absence of participation by several major airlines now in bankruptcy. Still with American Airlines AMR, Continental CAL and Southwest Airlines exhibiting varying degrees of strength, the potential for a fast comeback in aviation remains promising, on the back of a possible easing of jet fuel prices, suggests that those extremely oversold bankruptcy issues of Delta Airlines DARLQ, United Airlines UALAQ and Northwest Airlines NWACQ may well provide above average returns, as some previous bankruptcy issues have over recent years, just as Refco Inc., RFXCQ capped off 100% returns last week.

Naturally, any company in bankruptcy has to be treated with extreme caution, but much above average risks, can offer huge returns.

Meanwhile ATSI Communications ATSX surged 60% on record revenues, before easing back on profit-taking, but now again, just as a week ago, offers the opportunity to buy at a 60% discount to an upwardly revised book value, that based on the company's high rate of growth, appears an equally compelling prospect. Level 3 Communications LVLT has also moved nicely higher since our call...

Trade Well
From the Desk of Savant

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