Extreme Networks, Inc. (EXTR) provides network infrastructure equipment for corporate, government, education and health care enterprises, and metropolitan telecommunications service providers. On August 3rd, Barron’s Eric Savitz wrote that EXTR looks “crazy” cheap and we agree that it’s a solid small cap value play.

The networking company recently reported earnings and sales that were better than Wall Street expected. For its 4th quarter, EXTR posted revenues of $98.3 million versus an expected $85.3 million. Extreme earned 3 cents a share, a penny more than the consensus of 2 cents.

The stock currently trades at just 12x next year’s expected earnings. That’s less than half of its projected bottom line growth rate of 27%. EXTR is valued at just 1.1 times sales with a cash position of $225.7 million, 58% of the company’s market cap of $389 million.

Management must see the value in their share price as they plan on using some of that cash to repurchase $100 million of its stock through a modified Dutch auction tender offer. EXTR is offering to buy the shares from stockholders between $3.30 and $3.70 per share. At the current price, that represents about 25% of the shares outstanding.

With no debt and a lot of cash relative to its market value, Extreme can be a possible takeover target. An acquisition would basically be self-financed using EXTR’s cash. In our opinion, that’s probably one of the reasons management decided to buy back shares, a defensive move to make it more expensive to purchase.

If we have made The Correct Call and management continues to execute, we believe EXTR could return more than 50% to investors in the next 6-to-12 months.

Suggested Stop: $2.93

Housing market optimists claim that we are near or even at the bottom in terms of housing prices. We are not willing to go there yet. This morning, the Mortgage Bankers Association said that mortgage applications fell last week their lowest levels in eight years. This isn’t the kind of news you get at or near a bottom. Refinancings have also fallen off a cliff.

Specifically, the application index dropped to 419.3 during the week ended Aug. 15, its lowest level since the index hit 298.3 in December 2000. Application volume is down 61% from its 2008 peak in February. No single bit of data tells the full story, but evidence like this suggests that the housing bottom is still over the horizon.

Crude oil inventories soared 9.4 million barrels in the EIA’s weekly inventory report. That halted the nascent rebound for crude over the past two days. Analysts were only forecasting a build of 1.7 million barrels. This is the biggest bulge in inventories in quite some time.

However, the news was not all good. The EIA also said that gasoline inventories declined by 6.2 million barrels, which was about twice the expected amount. Overall it was a good report, but the big drawdown in gasoline inventories leaves room for a potential short-term rally in gas prices.

During this week’s technical analysis of more than 500 sector and ETF charts, The Correct Call has possibly identified a couple of emerging trends. In all likelihood, the one that will fetch the most headlines and the boldest print is what looks like an impending rally in oil. We see a short term rise in oil prices as highly probable due to oil’s rapid decline and a recent technical buy signal.

Traders looking to initiate a diversified position might consider investing a few dollars in PowerShares DB Oil Fund (DBO) and for double the fun ProShares Ultra Oil & Gas (DIG).

Another sector’s chart that passed out technical analysis test is Aerospace. Investors can possibly profit from owning iShares Dow Jones Aerospace & Defense Index ETF (ITA). Hopefully this bodes well for our readers who took advantage of our Goodrich (GR) buy recommendation.

Style wise, value is still in; now large cap value has been joined by its cousins small and mid cap value stocks. Two ETFs appear poised to move higher for value investors: iShares Small Value Index (JKL) and iShares Mid Value Index (JKI).

We have identified one Oil Stock and one Trading Earning idea for our subscribers in today’s Investment Calendar. If you are not a subscriber, you can download the research reports here.

This past week we saw some new sectors moving to the top as Alternative Energy stocks take over the top position while Wholesale Food & Drug and Leisure Services remain in the top 10%. The reset of the top performers are:

With the exception of Integrated Oil and Gold/Silver Stocks, the bottom feeders are all new.

The bulls got slaughtered today, but they can take solace in the fact that volume was much below normal. We are officially in the “dog days” of summer, and many traders are frequenting their establishments in the Hamptons. Volume does not historically return back to normal until after Labor Day, so plenty of large point moves can be expected until then. It is important not to read too much into today’s action because it can easily be reversed due to the low volume. Of course a loss is a loss and your brokerage accounts are probably lighter now than they were yesterday.

We have been saying to steer clear of the Fannie/Freddie duo for quite some time now. It’s good to see that Barrons seconds our thoughts as they put out a pretty hard-hitting piece in their weekly issue over the weekend. A bounce in those stocks was inevitable, but it appears that it was short-lived and it’s finished.

This little blurb from Barrons says it all and underscores our bearish views on the companies:

The balance sheets of both companies have been destroyed. On a fair-value basis, in which the value of assets and liabilities is marked to immediate-liquidation value, Freddie would have had a negative net worth of $5.6 billion as of June 30, while Fannie’s equity eroded to $12.5 billion from a fair value of $36 billion at the end of last year. That $12.5 billion isn’t much of a cushion for a $2.8 trillion book of owned or guaranteed mortgage assets.

Playing with these stocks now is akin to musical chairs. You might get a rally here and there if you are extremely nimble, but when the music stops and you are without a chair, you will be in huge trouble and your whole investment will vanish. Why risk it?

All of our market indicators are currently yielding buy signals. Despite the bullishness, we are a little cautious heading into this week as every index had its momentum and volume decline last week.

Technical analysis of S&P 500, NASDAQ, Dow and NYSE.

The S&P 500 is bumping its head against resistance levels at 1300. On the positive side, the recent move up has been marked by a series of higher highs and higher lows, usually a good sign. On the negative side, as we mentioned before, we are looking for more volume and for momentum in increase.

The NASDAQ, much like the S&P, is testing the top edge of its trading range at 2450. The NASDAQ has been leading the way and moved up more aggressively than its counterparts. 2450 is a major point of resistance and in all likelihood the index will need some catalyst to move it higher.

The Dow has traded in a similar fashion as the S&P; a series of higher highs and higher lows leading the index to resistance at 11,750. The falling volume and waning momentum have us a bit concerned heading into trading this week.

The NYSE has been the laggard of all the indexes. It has traded in a narrow range for the month and looks to be coming to a head. A close below 8275 would be worrisome.

We wouldn’t be at all surprised to see the indexes cede some ground early in the week. Perhaps a continuation in the fall of oil prices and some stronger than expected economic news from this week’s batch of numbers can help prove us wrong.

The recent powerful rally in the greenback has been welcome news for investors. Oil has been dropping and the recent horror show of inflationary data could be on the decline. However, nothing is absolute or inherently good. What we mean is that a strongly rallying dollar also has a few downsides. Our big multinational companies have been loving the weak dollar as it has meant booming overseas sales and profits. This has saved the stock prices of many companies.

For example, IBM has forecasted 15% annual earnings growth until 2010, which is a lofty goal for such a big company. This is part of a campaign to re-label the stock as a “growth” play. Despite all of the great things the company is doing including buying back stock and taking advantage emerging markets growth, we don’t see this target being reached if the dollar enjoys a sustained rally that wipes out a lot of the losses over the past few years. The same goes for other big companies such as McDonalds.

Similarly, our exports have boomed over the past few years, which has almost single-handedly saved our economy from recession. A stronger dollar will make our exports less competitive with other countries, and hurt our manufacturing sector.

The point is that there are two sides to every story, and certain parties get helped and other get hurt when there is a sustained move in one direction with the dollar. But, it is definitely a good thing overall for now that the dollar is rallying because it went down way too far, which has stoked inflationary fires and a boom in commodities. So enjoy it, but also remember the other side.

The Gymboree Corporation (GYMB) is set to report earnings after the market closes on Wednesday, August 20th. The Gymboree Corporation, a specialty retailer, offers apparel and accessories for children under GYMBOREE, GYMBOREE OUTLET, JANIE AND JACK, and Crazy 8 brands, as well as play programs for children under the GYMBOREE PLAY & MUSIC brand.

Gymboree is expected to earn a profit 24 cents per share for its 2nd quarter. We expect GYMB to announce earnings that will beat investors’ and analysts’ expectations as the kid’s clothes retailer has recently increased guidance for the quarter.

Seven of the 9 analysts following GYMB have raised their estimates for the company within the last 7 days and the consensus estimate for the quarter has grown by 3 cents. Four have increased their outlook for 2009’s bottom line .

Gymboree’s fundamental analysis

Valuation wise, the company is on solid ground. GYMB is expected to grow by nearly 20% for the year and trades at a P/E of just 13. The Correct Call loves stocks with P/Es less than the company’s growth rate. GYMB trades at just 1.16 times sales and with a PEG ratio of just 1.16; again, two metrics that please us. GYMB also boasts a return on equity of 36.22%, well above the minimum 14% we like to see.

Typically Gymboree’s shares have performed well following earnings announcements. After its last report report, GYMB’s shares increased almost 10% in just 5 days.

Suggested Stop: $35.79