Stockscom Report for Sunday April 8, 2001

Publisher: Colin Alexander (613-745-5593) Editor: Ken Wilson (450-691-4617)

Subscriptions and Administration: Pierre Fichaud (1 866 487-9711)

 

Fed Watch begins again in earnest

Interest rates still going down and treasury bonds to rise

Hold energy stocks and bonds selling at reasonable value

Keep more cash than you think you should

Beware of buying any more stocks and don’t get sucked into a rally

 

Current market conditions

 

Last Thursday there was another huge rally from a deeply oversold condition. Does this mean that the end of the bear market has come? Our strongly held view is that by all of our standard definitions a bear market remains in force and that all retracements are unlikely to constitute a conventional bear market bounce. It is worth recalling market action on the way up. Then there were huge declines during the course of the bull market, and they did no more than set the stage for the next upward leg. Now that there are downward zigzags on the monthly and weekly charts for most indexes and indeed for the majority of individual stocks, this downtrend in force is likely to continue for some time to come. There could well be an extension of the rally this week, as often occurs before a holiday, and it might even continue into May. However, there is seldom much to be made from owning stocks between May and November at the best of times. So in the worst of an entrenched market, the probabilities are unfavorable for owning the majority of stocks now.

 

It is worth noting that by most criteria, signs of recession and of a general bear market are only now starting to emerge. In February, there were net withdrawals of $10 billion from mutual funds, almost mirroring the inflow at the top of the market a year earlier. But this is most likely just the start of an outflow from mutual funds.

 

Similarly, unemployment has only started to inch upward, to a grand total of 4.3 percent. Again, so far there has been barely a perceptible decline in consumer spending or in activity in the housing market. The general public is oblivious to the risk of an economic downturn or to a sustained bear market in stocks.

 

While it is true that many conventional market indicators have recently been at levels normally associated with bottoms during a bull market, that doesn’t mean that these levels will do anything to effect any new major upturn in a bear market. Yet again, sentiment is overwhelmingly looking for a bottom in the stock market any time now. That bullish sentiment is almost certain to be confounded, if only because it almost always is when there is too much of a good thing.

 

What we have been doing

 

The Fed's interest rate watch continues. Many industry types have begun speculation that the Fed will announce a rate cut in the coming days if not weeks. Friday's announcement that unemployment hit levels not seen in 20 months was simply another nail in the coffin for the major indexes and has led to this expectation of a rate cut. It is widely believed now that the economy is actually in a recession but as with many other indicators, a recession is only really confirmed 6 months after it happens.

 

With no economic support, the lack of visibility in earnings guidance, and no technical support, the NASDAQ Composite should be testing its next support level of 1357 in the near future. This is the low-water level that it reached in October 1998. Additionally, the S&P will test its late 1998 low of 923 and the Dow Jones should be testing its corresponding support level of 7400. As you are no doubt aware, these levels are far below current levels and entail drops in the order of 20-25%!

 

The ongoing deterioration of business conditions due to a glut in the inventory cycle and the end of a capital investment boom has led us to believe that major interest rate cuts are inevitable and will do little to ease the pain of wringing the excesses out of the economic system. As we have repeated many times in the past few months, a bull market of the duration that we have seen cannot simply end with a bear market measuring a couple of months.

 

Admittedly, there could be a strong rally from this level at any time. This will not signal a new bull market, but more likely a bear market rally which should be avoided. There is no indication that the North American economy will be rebounding anytime soon. This goes ditto for the global economy. Some sectors seem to have escaped the carnage namely, banks, but we see this situation being rectified in the very near future. Slowly the realization that the enormous debt that the American consumer is carrying (about $8,000 per credit card) coupled with job losses could inflict the banking system with steep rises in personal bankruptcies.

New Buy Recommendations:

None. But we reiterate buy recommendations for treasury bonds and for closed end bond funds. Treasury bonds could well be ending a four month consolidation phase prior to making another leg up. Even if we are wrong a bout the potential for a substantial advance, we believe that the downside risk is minimal.

New Short Sales

None

Stock Positions to Sell/Exit:

 

Compuware (CPWR). This stock is meandering sideways and we prefer to exit in case it bounces higher before going lower, which in any case might not happen.

 

List of Current Stock Recommendations:

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 two. 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. In the case of stocks held short, the rating is S where

positions should be retained. S+ and S++ indicate stocks for which there is a technical

case to add to the positions with plusses adding weight similar to long positions. The

maximum number of plus signs is 2.

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

Date of Entry	Name	Symbol	Entry Price	Current Price	Action Rating
02/01/01	Acm Government Income Fund	ACG	8.07	8.02	B++
02/01/01	Acm Government Opportunity Fund	AOF	7.99	8.13	B++
12/18/00	Alberta Energy Co.	AOG #	42.63	44.30	H
12/18/00	Kinder Morgan	KMP	50.00	62.07	B+
12/18/00	Occidental Petroleum	OXY	21.88	25.43	B
02/01/01	Pioneer Interest Shares	MUO	11.95	11.52	H
12/18/00	Precision Drilling	PDS #	33.19	36.78	B+
12/18/00	Trans Canada Pipelines	TRP #	11.19	11.87	B++
12/18/00	Ultramar Diamond Shamrock	UDS	28.38	37.00	H
02/12/01	US Treasury 20 Year Bonds	USH	104.21	104.21	B ++

·        Rolled from the March contract and price adjusted

Short Sales

Date of entry	Name	Symbol	Entry Price	Current Price	Action Rating
03/21/01	Amazon.com	AMZN	10.38	8.36	S
03/21/01	Citigroup	C	44.31	42.75	S
12/18/00	Coca-Cola	KO	54.00	45.00	S
03/21/01	Compuware	CPWR	8.91	9.72	Cover
03/21/01	Juniper Networks	JNPR	53.00	33.79	S+
03/21/01	McDonalds	MCD	25.60	26.25	S

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