Stockscom Report for Wednesday March 1, 2000

Exit short March SP Futures at the market right away.

The downside potential has gone out of it and we now see the possibility of a significant cyclical upturn developing after all, even though it may take time to come through.

New Buys, Assuming a Potential Cycle Low

In our last Bulletin, we recognized the possibility of being wrong about an imminent and more serious downturn in stocks. The alternative scenario now appears to be coming through with strong indications that the senior indexes may be making an important cyclical low and that stocks generally may therefore be heading for higher price levels after all.

We don't like being in and out of the market with chopping and changing. The last time we went to cash was in March last year. From early April we rode out the bull market through all its ups and downs, including some serious downs, until mid-February.

The weekly and daily stochastics for the Dow Industrials and for the SP 500 recently got down about as low as they normally get. Although the SP penetrated its uptrend line from the October 1998 low, it now appears to be stabilizing around that level. It is worth pointing out that markets often pivot at major support levels and you don't know until later whether they will follow through on the downside or whether support will hold and lead to a resumption of the bull market. Given the ultra-low stochastic readings and the strong perfomannce of some individual stocks charts, this could after all be a prime place to buy stocks, although the risk is much greater than it was before.

We have to say that our enthusiasm for buy stocks here is nowhere near as great as it has been at various times in the past year. Nevertheless, there are some wonderful charts for companies that may be at a relatively early stage of business development as well as stock price appreciation.

There are several notable stocks that have performed wonderfully in the past which we prefer to avoid now. They have either just become too mature and/or their chart patterns look overextended. We have long wanted to avoid Microsoft, and continue to stay away. Notably, co-founder Paul Allen has just filed to sell 10 million shares. There are also stocks in companies that we love that are simply too rich for our money at current prices however much we love them in principle. These include PMC Sierra and JDS Uniphase, as well as Cisco and Intel.

There are many senior and previously great stocks that have washed out very badly. Examples include Wal-Mart down from the $70 level to $45 in a space of a few weeks. Many banks and cyclical stocks have also washed out very severely and could be at bargain basement levels. We also see remarkably low stock prices for Sears and May Department Stores, both of which sell at low P/E multiples, have a record of growing profits and they pay dividends.

However, at almost all times the rule is to buy strong stocks, not weak ones. The only normal exception would only be when a formerly depressed stock is coming out of a long base and is developing pronounced upward momentum. We see no stocks in this general area that look attractive, although Merrrill Lynch fits that bill. We are not buiying that stock simply because we prefer the more agressive and nimble TD Waterhouse.

While it may seem perverse that we have so recently closed out all our stocks and are now re-entering the market, the pullback enables us to discard some newly lagging stocks that we previously loved and to re-enter both new and old selections where the charts are now particularly strong.

Among the stocks that no longer look nearly as appealing as they did are BCE, Nortel and Cisco, which are now showing signs of slowing down their upward momentum and which in any case are selling at such amazingly high valuations that it would seem normal for them to need to rest for some time, possibly for a long time.

Interest Rates

The interest rate environment has turned slightly more benign despite expectations of further rate increases by the Fed. The main thing is that bonds appear to be stabilizing. Long-term rates tend to have more impact on stock prices that short rates.

Sentiment

Market sentiment is still too bullish to feel complacent about owning stocks. When everyone is in the market, there can come a time when there everyone owns all they can buy and there is no one at the end of the line to pay the new higher price. In a sense many stock prices are living by the Greater Fool Theory, which states that you buy a stock going up in order to sell it in due course to a greater fool than yourself. Many dot.com stocks are priced on this basis.

On the other hand, as we were saying, there are some old economy stocks seemingly rpiced for impending disaster even as the likes of Cisco are priced for perfection to last into the hereafter. So the two-tier market continues. We are attempting to buy stocks that combine great technical charts with at least a reasonable business plan, and ideally profits as well as revenues.

In present market conditions, we want to emphasize that we regard it as essential to keep a big cash reserve. We envision even quite aggressive accounts investing no more than amount 50 percent of available funds in common stocks in the current environment. You have to consider two possibilities. The first is that there is a more serious decline and that we do not succeed in getting out of stocks in a timely fashion or at least not at a good price if stocks start sliding. The second possibility is simply that there are certain to be more attractive and/or new opportunities as time passes. It is very difficult to jump on a wonderful new opportunity if all your money is already tied up and especially if it is invested in stocks that are under water.

New Recommendations

Note that we have given up on petroleum and oil service stocks for now. There are bright spots but overall our attempts to make money in this sector has been fruitless despite soaring oil prices. The market simply doesn't want to believe in higher oil prices so why should we argue with the market, even if we think for now it's wrong?

Stocks marked # are eligible for Canadian RSP funds. Otherwise there is a 20pc restriction on foreign stocks held in these accounts.

American Power Conversion(APCC). $33.94. A great chart with a great business and reasonable
value.

Atmel Corp(ATML) $49.50. a great chart for a great semiconductor company. We wonder how long the semiconductor cycle can last but the stocks says nothing about impending problems.

Applied Micro Circuits(AMCC). Despite its amazing price, we come back to this stock and look for more of the same.

Biomira(BIOM) $13.56.#. A Canadian biotech that looks capable of another double.

Biovail Corp(BVF) #. #65.88. Like BIOM only that we are buying after a little dip in price.

Broadcom Corp(BRCM). $197.38. An apparently unstoppable chart for a company in the burgeoning broadband sector.

Broadvision(BVSN). $252.56. Much the same as BRCM.

Fusion Medical Tech(FSON) $1750. The most exciting health care stock we know and a superb replacement for AMGN, which seems to be running into squalls.

Ciena Corp(CIEN) $159.81. An apparently unstoppable high tech that appears to have plenty left in it.

Cognos(COGNF) $66.75.# This company seems to have its act together again. A leader in business data processing software, it is the market leader is some areas.

Corning (GLW) $188.00. Now one of those stocks that always seems expensive but it's in motion and appears to have a great act coming together in fiber optics. Much better value than JDSU and probably worth making the switch from that stock.

Genzyme Molecular(GZMO) $26.99. One of those biotech stocks that could keep on exploding.

Idec Pharmaceuticals(IDPH) $140.88. Said by some to be the premier bio-tech stock, it could just now be preparing to make another leg up, possibly for a double before too long.

LSI Logic(LSI). $64.25. Coming back to an old favorite that could keep on going like AMCC.

QLTI Phototeherapeutics. (QLTI) $60.38.# This stock has been quite volatile but now appears to have stabilized after setting back about 25 percent from its high. It has several potentially amazing drugs in the pipeline, including one for cancer.

Roger Group(RG) $34.06. #. We don't feel as comfortable with management as we should like to but they do seem to have a great operation as well as a great chart at a stage of development that a double could be in sight with acceptable risk.

Royal Phillips(PHG) $191.50. This company is a powerhouse like Sony that is priced remarkably compared with the likes of Nokia, a stock that we have loved but which gives us a nosebleed at current price levels.

Seagate(SEG) $50. We come back to this stock yet again with high hopes, hopes that have previously not been rewarded. The stock owns stock in Veritas(VRTS) as well as cash worth more than the current stock price. The core business in hard drives is not great but SEG is a market leader and making money. Also there is a stock buy-back program so the reward to risk is great. The risk is that Veritas might fall away though its chart is great, as well as its company business.

Sony (SNE) $314.00. # This was one of the stocks that made us nervous about the market generally when it started coming off. Now out to a new high, it could be a Nokia of the future. It has a powerhouse of innovation and clout as well as a very moderate price relative to sales. Curiously, this stock is eligible for Canadian RSPs because listed in Toronto.

TD Waterhouse (TWE) $18.30. #. This is likely the best online brokerage stock despite the fact that Merrill Lynch also now has a good chart. TWE have been doing a great job worldwide, everywhere in fact except in their home base in Canada. There they have been doing a despicable job compared with Charles Schwab, although otherwise they are the best of a very bad bunch that has been subjected to totally incompetent and protective regulation and not enough competitive pressure.

Stockscom