Stockscom Report for Sunday May 27, 2001

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

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

 

Markets move lower - we remain cautious

Preparing for second quarter earnings warnings… and more economic warnings

 

Market Synopsis

 

Markets moved in opposite directions this week under the weight of new economic indicators further confounding the so-called experts. These days any random sampling of analysts often reveals an equal number of bulls to bears. But we remain firmly in the bear camp. Market action continues to look as if it has reached a near-term peak and indeed the Dow Jones has again stepped back from the 11,400 level, which some might consider some form of vertigo.

 

The Nasdaq continues to exude a more puzzling character slowly revealing the major direction that it intends to follow. On Monday, the index jumped a healthy 106 points and remarkably held that gain and added a few more points on Tuesday. However, the rest of the week saw the market lose all but 52 of those points, which meant that at week's end it was still hanging in by the slimmest of margins to the magic level of 2250. Why is this a magic level? Quite simply, there is a technical resistance level at this point, which it managed to break through in dramatic fashion on Monday. If we assume that the resistance level will hold firm then it logically follows that the next ride will be in the down direction.

 

So will the Nasdaq deteriorate from this point on? Probably - a bear market is characterized by a pattern of zigzags whose general trendline shows a market moving down. Rallies in bear markets have historically been impressive at times, but the one common thread between them was that they represented just one more step down the market staircase. The rally we've experienced in recent weeks is normal bear market activity, and certainly no new economic indications give rise to believe otherwise. In the coming weeks, we will witness a slew of new quarterly warnings especially from the tech companies, which should add to the downside risk already inherent in the Nasdaq index.

 

The economic reports that we did see this week, weren't a harbinger of good times ahead.  Friday's report of a large 5.0% drop in consumer durables coupled with the news that new home sales tanked in April ought to provide good fodder for the markets on Tuesday. And Alan Greenspan's speech this past Thursday was notable for his comments that improvements in Corporate America won't be visible for several months yet. In Greenspan-speak, this means the door has been left wide open for further rate cuts, though as we mentioned last week, the Fed's ability to cut interest rates is hampered by the increasing rate of inflation.

 

Therein lies the conflict - Don't fight the Fed - one mainstay of any market activity is to follow the indications given by the Fed, indications which are revealed either as interest rate increases or rate cuts. Cutting 2.5% from the Fed funds interest rate is a strong indication of a looser monetary policy and historically, a powerful incentive to invest in the stock markets. In fact, the most recent rally may be due in part to this increased money supply, but with corporations shelving investment plans, announcing weaker earnings and even the Fed chairman giving his synopsis as one where economic weakening will continue, do we really want to invest? Only with extreme caution at this point when the downside risk is so great and the chance for upside movement has limited potential at best.

 

Recommended Actions

 

We continue to hold our shorts as we remain optimistic that the market has reached another peak in the cycle and that we are on the doorstep of another downward movement both on the Nasdaq and the Dow. The only consolation being that the latter may not suffer as crippling a fall as the former.

 

A few words about last week's recommendations:

 

ALLY was down slightly on the week but still shows great chart action.

 

QFAB jumped up nicely on the week and continues to move in the right direction.

 

SCIO - we got a lousy entry on this one and saw selling this week due perhaps to nervous investors who wished to cash in their chips before the presentation to the advisory panel of the FDA. This heart drug was already presented once before to the advisory panel (this group advises the FDA whether or not a drug should be permitted) and while they passed the first time, the FDA acted independently and refused to allow the company to market the drug citing weak testing methods.

 

On Friday trading was halted all day on SCIO stock pending the panel's decision. In the early evening the panel announced that the company was given the green light (for the second time), but what was remarkable was that the panel voted unanimously in favor, which happens only in rare cases.

 

There is tremendous upside to the stock if and when the FDA gives their final approval, which should be forthcoming in the very near future. Potential market for this drug (an improved treatment for congestive heart failure) is estimated from $200 to 300 million per year. Also there are other drugs in the development pipeline, which should prove to be just as promising.

 

 

New Buy Recommendations:

None

 

New Short Sales

None.

 

Stock Positions to Sell/Exit:

 

None.

 

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 gotten 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	8.35	H
02/01/01	Acm Government Opportunity Fund	AOF	7.99	8.15	H
05/21/01	Alliance Gaming	ALLY	29.00	28.66	B
12/18/00	Kinder Morgan	KMP	50.00	70.97	B
02/01/01	Pioneer Interest Shares	MUO	11.95	11.65	H
12/18/00	Precision Drilling	PDS #	33.19	42.98	B
05/21/01	Quaker Fabric	QFAB	10.02	10.52	B
05/21/01	Scios Inc.	SCIO	29.28	24.56	H
04/30/01	Skechers	SKX	36.00	38.80	B
12/18/00	Trans Canada Pipelines	TRP #	11.19	11.79	B
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	17.09	S
03/21/01	Citigroup	C	44.31	51.86	S
12/18/00	Coca-Cola	KO	54.00	48.17	S
03/21/01	Juniper Networks	JNPR	53.00	52.16	S
03/21/01	McDonalds	MCD	25.60	30.51	S