Stockscom Report for Sunday July 8, 2001

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

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

More earnings warnings and warning signs on the horizon

Markets tumble with more to come

Market Synopsis

This week’s action brought an ominous tone to the markets. Despite the lower trading volumes and shortened trading week, market technicals display a distinct sell signal. Although we had earlier determined that the Dow was in a sell position, both the Nasdaq and the S&P 500 joined this week and now all three should be considered as sells.

We have been patiently waiting for the Dow to exhibit strong selling action. We wait no longer. Almost all of the Dow issues finished this week with technicals that suggest that a bottom is far from close. With a point drop of 315 points, the Dow is only now approaching the midpoint of the last climb from the 9100 level to the 11300 level. In the case of the other two, both the Nasdaq and the S&P 500 gave us outside key reversals to the downside signaling further weakness to come. It is worth mentioning that our sister publication FiveStar Futures recommended selling both of these indices in the last two days.

We continue to believe that market action will typically be characterized by the descending roller coaster of a bear market and that again we are witnessing one further bear market trap on the road to an ultimate low sometime in the fall of 2002. That is not a misprint – a normal bear market, which we haven’t experienced for many years, can often last two to three years. Its length is directly related to the length of the previous bull run, which in this particular case had endured longer than normal. We still have yet to see the Dow nosedive in similar fashion to the Nasdaq and even the S&P is only off about 23% from its all-time high. We see long-term support for the Dow in the area of 7500 and for the S&P in the 900 range. Though the Nasdaq has preceded the other two indices on the downside and the fall has been excruciatingly far, we perceive further possible weakness in the Nasdaq and calculate support to be in the area of 1500 for the Composite index over the long-term.

The cause of this turmoil is the ever-increasingly weakening economy. Unemployment continues to rise as the layoffs persist. Confusing signals from the week before have shown that unemployment is not stabilizing and that it is most certainly getting weaker. We’re still waiting for the other shoe to drop and watch for consumers to close their purses and resist the buying pressure. The economy is being propped up by the consumer and has precious little support from business investment, which dried up months ago and hasn’t been seen since. New evidence of this was released Friday with the warnings emanating from both AMD, the microprocessor chip company, and EMC, the data storage company. Both admitted to dwindling sales revenue far below expectations and consequently their share prices got hammered. These two companies seemed to be the catalysts for the large sell-off on Friday.

One of the strongest sectors in the recent past has been the housing industry, which continues to benefit from the lower interest rates. As people renegotiate their mortgages, the cash freed up is used to purchase other consumerables, which in turn keeps this economy from faltering even further. Now as the flow of interest rate cuts slows down and the Fed reaches the end of the line for total cuts, their ability to incite spending is diminished and this may signal the end of the line for the consumer’s ability to support the economy. At that point, the other shoe will most certainly drop.

Our Stocks

With the latest movements in stock prices, we see that our call to sell several issues was prescient and we have managed to hold onto those which can and often will hold up reasonably well in similar market conditions.

With the latest slide in the markets, we recommend adding Micron Technologies and Boeing to our list of stocks held short. Both of these companies display sell signals in their market technicals and with the Dow and Nasdaq showing increasing weakness, their propensity to move up is severely reduced thus reducing any inherent risk in selling. In short, the risk to reward ratio heavily favors a downward movement in both stocks.

New Buy Recommendations:

None.

New Short Sales

Boeing (BA)

Micron Technologies (MU)

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
30 percent restriction on foreign stocks held in these accounts.

·       Rolled from the March contract and price adjusted

Short Sales