Stockscom Report for Sunday May June 4, 2000

New Buy Signals for the Mid-Cap, Russell and New York Composite

The intermediate, small cap, high tech and financially weighted indexes are all looking great as a result of the latest upturn. On balance we are inclined to believe that stocks have put in a major low. We do not expect a continuation of last week's market action for long without a significant retracement, or at least a pause, but many stocks individual stocks look like a screaming buy. What is not looking great is the mighty Dow. It comprises many stocks that look somewhere between dull and ugly, although there are some beauties among them too.

Right now it looks very much as if our expectation is coming through that the NASDAQ index would hold its important support levels without negating the big picture of its long-term bull market. The ND 100 nicked through the uptrend line from the 1998 low by about 60 points on the day of the low and then turned up. It did so, moreover, at a level that also coincided with the 50 percent retracement level, the half way mark between the October 1998 low and the all-time high.

Many individual stocks came back to a level at or near their 200-day moving averages and have also turned. The fact that the ND indexes have been quite as weak as they have been is largely attributable to the trashing of Microsoft stock. Once it started sliding on news of the way its brawl with the Justice department was going, as well as a small but perceptible slowing in its growth rate, then sellers simply began dumping stock. There will have been many owners of the stock that were happy to bank profits after making so much over the past decade. There will have been many others owning stock bought on margin who had to sell as the price declined whether they wanted to or not. That's how a bear market works, feeding on itself on the way down. Note that we use the words Bear Market, but we don't really believe that the reality of what happened to MSFT stock amounts to any more than a huge correction in an ongoing hull market. If you look at the monthly chart, you can see that it broke a major support level around the $80 level, but there is new support in the low 50s. The 40-month moving average shows no sign of faltering despite the big decline. Its rate of climb from 1996 or so, when the stock was about $15 remains solidly entrenched.

While there are many wonderful stock charts, there are many more that look terrible, including many Dow stocks. It is hard to envision making worthwhile money in the foreseeable future from owning stocks like International Paper or Dupont. So it has become a stockpicker's market, where there are likely to be huge benefits from owning the right stocks, but little or none from owning the wrong ones, and possibly a lot of grief.

Although we became far too bullish far too early in March, it looks as if we shall come through well overall, and indeed we expect to do well for the rest of the year. That is not to say that gains are likely to come fast or easily but we expect our approach to pay off on balance, when we come to tally up the results from our winners and our losers. Considering that we look for stocks that have the potential to double, triple or more, it is not too serious in the long run to have to live through a halving in the price of some stocks on the way. You try to avoid it happening and indeed we should not have gotten back in the market so soon, as is all to easy now to see in hindsight. But look at the long-term monthly chart for a stock like Microsoft and you see a long-term major uptrend. The same goes for most of our stocks.

Short-term the market is a bit overbought after the huge surge last week ahead of the monthly employment report, and then more after it. However, the strength of this surge suggests that there is likely more buying power where this came from, and that selling pressure has gone out of the market. It is still entirely possible that there could be a test all the way back to the May low and possibly a little beyond it. However, we rate it unlikely that any new retracement will go anywhere near that low. So, we now rate it a good time again to own stocks, and to buy more. You just cannot expect though that the returns from a basket of the best stocks will do advance more than perhaps 20 or 30 percent by the end of the year.

We want to emphasize the point strongly that we expect to find the biggest winners among the stocks that have already been doing well. We do not subscribe to the view that automakers or steels, for example, are likely to become superstocks in the near future, if ever. Nor are the dot-com hype stocks likely to keep going up on hype and hot air. On the contrary, we envision many of them continuing to decline, with many of them going to zero. Conspicuous among the latter is the dreaded Amazon, which is close to being our least favorite stock on the board. Were it not for the fact that we prefer the buy side in current market conditions, we could see selling that stock short with just that expectation, of it going down to nothing or at least close to zero. For us, from a technical standpoint it truly has its back broken.

Within the general area of high tech within which we expect to find great stocks we are looking at the general area of broadband and wireless technology. For all that it has been beaten up so severely, we continue to be raging bulls on biotech. We not only stay with all our previously recommended stocks, but we can see buying more of them here. Idec is particularly worth mentioning as perhaps the stock in the company with the strongest and best financed research facilities.

It looks too as if many financial stocks could take another substantial leg up. The consolidation of the past many months has permitted earnings to catch up with price. These companies represented by these stocks continue to be prime beneficiaries of technology without having the risks associated with developing the technology. The stocks have been under pressure because of rising interest rates. As a general rule they turn up well before the peak in interest rates which may indeed be what their upturn is currently foreseeing. Even if interest rates are set to go quite a bit higher, it seems unlikely the economy is going to turn down hard. It may be cooking in the US, but it certainly is not in many other parts of the world.

Although oil stocks paused last week, we rate this as a great area to invest. We simply don't see it that petroleum prices are likely to reverse their major uptrend or to settle back very far. If Crude Oil went back down to $20, which we rate as something approaching a worst case, that would still be twice what it was at the bear market low. Most likely in our view is that oil will trade in a range between about $25 and 30. At those prices, oil companies coin money, and they can also be expected to spend it with the oil service companies. Apart from our investment in petroleum generally, we have attempted to seek companies that are particularly strong in natural gas like Alberta Energy and Apache and, of course, the oil service companies benefit from gas as much as from oil. As far as we can tell, there could be a serious natural gas shortage looking in North America. In that case, the prospects for price may far exceed what anyone now thinks likely.

Stocks to Sell

Sony. We are throwing in the towel on this stock. It has been a disaster, a real market accident for us. We had the erroneous impression that this mighty company was something approaching a no-brainer to own. We love its technology and we love its products. We love it as a powerhouse of innovation. Despite the immensity of its decline from the high, the big picture essentially shows a major uptrend. Having advanced so steadily, it takes a lot to suggest that it's Game Over for this stock. More to the point though is that we think the capital can be invested better elsewhere.

We continue to own one more stock that's been trashed, a technical basket case, and that's Novell. It appear to be rounding out and a 50 percent advance in this stock could come just as easily as with a stock that has a chart already performing well. Our understanding is that this company has a niche technology for the Internet that has only to be presented well to a market that needs it.

New Recommendations

We have a surprisingly long list of new stocks that are timely to buy now for the long term. The good thing about the big decline across the board is that it has done a lot of separating sheep from goats. Many of the stocks that have resisted the decline are now strong buys. On the other hand, some of the stocks that declined most have been unreasonably trashed in our view and for that reason are strong buys. Notable amongst these are Broadcom and Broadvision, both of which we love.

ADC Telecommunications (ADCT) $75.25. making a new high with an immensely powerful breakout.
Alcatel (ALA)# $61.44. A powerful chart. The merger with Newbridge could be a marriage made in heaven, all that the wretched Compaq/Digital Equipment merger has so far failed to be.

Bank of Montreal(BMO)# $42.75. A new 52-week high and a great chart. BMO owns the great Harris Bank of Chicago. There are rumblings of a possible bid. Even without one, you get a strongly growing profit, a PE of 11 and, yes, a dividend of 5 percent!

Bank of New York(BK) $48.63. Said by some to be the best bank stock in the country, even better than Citigroup and JP Morgan, both of which we also love.

Four Seasons(FS)# $62.25. We have done well with this stock and inadvertently let it go out at a lower price when the market was looking dangerous in the first quarter. This is the world's best run hotel group in our view.

Paine Webber(PWJ) $49.19. The best value for money in brokerage stocks, a great PE at 11.5 which is much below the PE for many other companies in the industry, and the possibility of a bid.

PMC Sierra(PMCS) $188.25. We made a ton of money in this stock before and we expect to again. This company has niche products that sell to all the major computer makers on its own terms.

SDL Inc.(SDLI) $260.38. One powerful stock, with a split almost a certainty any time.

List of Current Stock Recommendations:

Note that there are several of our current recommendations which might seem to warrant selling on account of the fact that they have fallen hard. Our experience over the past year has been that it generally pays to give a great stock more room to move than many people suggest. We particularly believe that Idec and Sony are outstanding buys on what we believe to have been temporary weakness. Several biotech stocks have come under extreme pressure. Nevertheless, we don't see them going out of business. What we do see is a dynamic sector that has come through a severe thunderstorm, but which is very unlikely to be ending its bull market, let alone starting a bear market.

Action Ratings

The following is the legend for designating immediate action for our stock recommendations. The first is B, meaning the stock is timely to buy but the case for doing so right here is not overwhelming. Either the stock may have got ahead of itself and may be vulnerable to a retracement or else the stock has been performing disappointingly but may simply be regrouping. B+ and B++ indicate stocks for which there is a technical case to buy now, with plusses adding weight according to how many there are, up to a maximum of five. Stocks rated H are ones to hold, awaiting confirmation to buy more or to sell. SELL, of course, means what it says. It seldom pays to override this designation.

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

First bought Entry Last

5/15/00 Alberta Energy(AOG) 38.63 38.63 B
5/15/00 Apache Corp.(APA) 59.88 56.00 B
3/2/00 Applied Micro Circuits(AMCC) 136.75 128.81 B++
4/3/00 Beckman Coulter(BEC) 63.75 59.63 B
3/2/00 Biomira(BIOM) 17.75 9.25 B++
3/2/00 Biovail(BVF) 67.56 49.44 B++
3/2/00 Broadcom(BRCM) 208.50 164.44 B++
3/2/00 Broadvision(BVSN) 85.75 56.63 B++
5/15/00 British Petroleum Amoco(BPA) 54.44 56.00 B+
5/15/00 Cdn Occidental Petroleum(CXY)# 26.13 24.94 B
5/15/00 Chieftain Development(CID)# 20.50 21.00 B
3/2/00 Ciena(CIEN) 181.50 134.56 B++
3/2/00 Cognos (COGN)# 33.00 38.88 B++
3/2/00 Corning(GLW) 200.00 208.88 B++
3/2/00 Fusion Medical(FSON) 17.75 13.31 B
3/2/00 Genzyme Molecular(GZMO) 29.00 12.63 B
5/15/00 Global Marine(GLM) 26.38 25.63 B
3/2/00 Idec Pharma(IDPH) 149.88 86.44 B++
3/2/00 LSI Logic(LSI) 69.25 62.50 B++
5/15/00 Nabors Industries(NBR) 42.25 39.38 B+
4/3/00 Novell(NOVL) 28.38 8.84 H
3/2/00 QLT Therapeutics(QLTI) 73.25 58.56 H
3/2/00 Rogers Group(RG)# 33.75 28.25 B
3/2/00 Royal Phillips(PHG) 50.10 49.75 B++
3/2/00 Seagate(SEG) 51.25 63.47 B++
5/15/00 Shell Transport & Trading(SC) 51.75 50.25 B
3/2/00 Sony(SNE)# 303.00 104.87 SELL
5/15/00 Transocean Sedco(RIG) 51.13 45.50 H
5/15/00 United Technologies(UTX) 63.50 63.13 B++
4/3/00 Yahoo!(YHOO) 168.75 134.50 B+

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