9:35pm (EST)

1.  Market Summary

2.  Foster Wheeler Looks Like A Short-Term Bargain             

3.  Earnings

4.  Quantitative Easing Explained

5.  Week Ahead

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1. Market Summary

The bulls were in danger of going down for the third week in-a-row and Friday wasn’t looking good as the market spent much of the session in negative territory.  However, the bears were unable to break support after several strong attempts earlier in the week which kept the bulls within striking distance.

We were looking for the bulls to make a late afternoon run and they used the momentum from Thursday’s monster rally to push the market back above our short-term targets.  The eleventh-hour surge also propelled the market to a weekly gain and it is clear the bulls are looking for new highs again.

The talking heads were pushing the panic button but were betting on the bulls to crack as we felt the General Motors (GM, $24.26, up $0.07) IPO (initial public offering) would be a key catalyst for the bulls to build on going forward.

It was good to see an American icon reestablish itself as one of the world’s premier automobile makers and it was a shock to see its fall from grace.  Although the American taxpayers got the shaft, GM is doing well and is making over $3,000 for every vehicle it sells.  The company has made $4 billion so far this year, the government is unloading our stake, China got a little bit of the action…everybody is happy.  Right?

M&A activity also provided a floor of support as Caterpillar (CAT, $83.97, up $0.86) closed at fresh 52-week highs after acquiring Bucyrus (BUCY, $89.20, up $0.08) for $7.6 billion.  BUCY jumped from $69 to $89 on the bid.  Meanwhile, EMC (EMC, $21.82, up $0.31) had to have Isilon Systems (ISLN, $33.76, up $0.04) and paid $2.3 billion to get them.  Shares of ISLN surged from $26 to just under $34, or about a 30% premium, on the buyout offer. 

Against this backdrop, and the news that Ireland was closer to accepting a bailout package, provided some relief from the recent selling pressure and gave the bulls something to build on.

The Dow added 22 points, or 0.2%, to close at 11,203.  We were looking for a close above the 11,200 level and we knew going into the last half hour of trading there was a good chance we got there.  For the week, the index added 11 points, or 0.1%, and for the year the index is up 7.4%.  Short-term resistance will be at 11,400 while support remains at 11,000.

The S&P 500 added 3 points, or 0.3%, and finished at 1,199.73 but was stopped just shy of the 1,200 region.  For the week, the index gained a half-point and is up 7.6% YTD.  The push was close enough for government work and the bulls will target 1,220 next with support coming in at 1,170-1,175.     

The Nasdaq managed to tack on 4 points, or 0.2%, and settled at 2,518.  The index dipped to a low of 2,459 last Tuesday and we said to look for 2,450 to hold and it did.  Tech actually fell a tenth of a point for the week but is up 11% for 2010.

In October, the Nasdaq was the first index to close above our “bullish” targets for the market by clearing the 2,500 level in late October.  We mentioned the Nasdaq could run to 2,600-2,700 afterwards and it hit a high of 2,592 on November 9. 

The market pullback and hold was a good sign and these upper levels could be tested again as we still have a longer-term target of Nasdaq 3,000.  If the Dow can hold and clear 11,400 and then 11,600 then we could see 12,000.  For the S&P, a close above 1,220 would likely lead to a test of 1,250 with a run to 1,300 if cleared.

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2.  Foster Wheeler Looks Like A Short-Term Bargain       

Foster Wheeler (FWLT, $28.88, up $.28) is one of our favorite engineering and construction companies.  Many of the stocks in this sector seem to be benefitting from the worldwide boom in infrastructure.  Emerging market countries like China, India, and Brazil need power plants, roads, bridges, railway lines, and electricity grids. 

The company operates in two major segments, Global Engineering and Construction and Global Power and has a market cap of $3.6 billion.   With $3.9 billion in sales projected for 2010 and $4.4 billion in 2011, the company is making a turnaround from the recession.  Foster Wheeler is projected to have 2011 earnings of $2.10 so the forward P/E is a modest 14x.  When you combine all of these numbers with the secular run in the emerging market infrastructure, you can see why we like the stock.

Earlier this month, the company reported a profit of $0.41 a share, which was $0.10 below Wall Street’s estimates but shares jumped $2.11 the next day.  We go over this in more depth in our trading manual, How to Trade Options on Momentum Stocks, but when you see this type of activity, it’s worth a second look. 

From a trading perspective, the stock is powerful enough to play because it can make some really strong moves.  Its 52-week range is between $20.33 and $35.01 but the stock hit an all-time high of $168 in March, 2001.

Going forward, the company expects margins of roughly 20% and business is good with several large contract wins in Iraq, Vietnam, Europe, and the Middle East.  Their backlog of orders, a key metric in this sector, has increased over the last three quarters and they are expecting it to continue to do so.

Foster Wheeler also repurchased over 4 million shares in the third quarter, and they announced further share repurchases that could total $500 million.  That is a possible share count reduction of over 13% which is pretty significant.

Shares sport a “Beta” of 2, which simply means that the stock moves at a rate double the average stock.  The higher the Beta of any stock, the more the stock moves in price, generally.  We are watching for a break over $30 as confirmation for a run towards a fresh 52-week high.

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3.  Earnings    

Monday:  Brocade Communications Systems (BRCD, $5.75, up $0.03), Dole Food Company (DOLE, $10.37, up $0.53), Hewlett-Packard (HPQ, $42.49, up $0.80), Jack in the Box (JACK, $23.37, up $0.29), Kronos Worldwide (KRO, $42.24, down $0.51), La-Z-Boy (LZB, $8.02, down $0.09), Sycamore Networks (SCMR, $29.86, down $0.27), Tyson Foods (TSN, $15.64, up $0.06) and Valspar (VAL, $31.92, up $0.11).      

Tuesday:  Campbell Soup (CPB, $34.62, flat), Cracker Barrel Old Country Store (CBRL, $56.09, up $1.47), Hormel Foods (HRL, $47.64, up $0.74), J. Crew Group (JCG, $36.49, up $0.37), Medtronic (MDT, $34.60, flat) and TiVo (TIVO, $8.99, up $0.02).

Wednesday:  American Woodmark (AMWD, $20.38, down $0.27), Deere (DE, $77.98, up $0.70) and Tiffany (TIF, $58.03, up $1.16).     

Thursday:  Market Closed.   

Friday:  None worth mentioning.  

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4.  Quantitative Easing Explained

For those of you who may not understand QE or QE2, here is a video that breaks it down in layman’s terms.  Pretty amusing and more evidence Ben Bernanke is making big bets.  The video is also viewable on our website.


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5.  Week Ahead

This week, the market will digest reports on regional manufacturing activity and on Monday it will get an update from the Chicago Fed, followed by Tuesday’s announcement from the Richmond Fed and Wednesday from the Kansas City Fed.

On Tuesday, existing-home sales will be released along with the Case-Shiller home-price indexes.  Also, the Minutes from the latest Federal Reserve meeting are due out.

The Reuters/University of Michigan consumer sentiment index for November will come out on Wednesday as well as new-home sales.

The market will be closed for Thanksgiving and will be open for a half day on Black Friday. 

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We will be back Monday morning at 9am (EST) with all of the current trade updates and a fresh outlook.    

We are expecting a continuation from last week’s back-half upward momentum and we think there is a good chance the bulls push the market higher this week and back to prior resistant levels.