Stockscom Report for Sunday Aug 19, 2001

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

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

Nasdaq and Dow display very weak tendencies

Sell most positions and stand aside

Market Synopsis

As we mentioned last week, there were ominous clouds on the horizon for the short term in the markets. We believe, more strongly now, that a major dive is beginning on all three major markets towards a new low at some point in October or November. At a minimum, we see the approach of a test of the spring lows seen earlier this year, but more likely is the occurrence of a new deeper low extending the losses to levels not yet seen. Chart action is extremely unfavorable to any rebound and, as we’ve stated in the past, the long term support levels for each of the Dow, Nasdaq Composite and S&P500 is 7400, 1350 and 920 respectively.

All week long, technicals were virtually unchanged in their downward momentum. Friday was simply the icing on the cake. This massive down day broke the markets’ back and it appears unthinkable now that any of them will be able to exhibit any strength in the days ahead. On the daily graphs, most show daily stochastics with over sold conditions and on-balance volume falling. Also, the Dow and the Nasdaq completed examples of Lindahl sell patterns by the middle of the week and the Nasdaq also managed to crash through support at the 1930 level.

Certainly there is the chance that when the Fed meets this week (Tuesday), they may decide on a bigger rate decrease than expected (a quarter point cut is the minimum) and actually go with a half point cut. The surprise element of a bigger cut in the interest rate could generate in itself a rebound on the markets, but don’t be fooled. This market environment has one major direction right now and it’s downward. We are in a bear market and despite all the hopeful numbers being tossed around such as rising consumer sentiment and lower inflation, there is no way that we’ll be loosening its claws in the days ahead.

Once the stock markets continue their death spiral, then we’ll start to witness the reverse of the wealth effect as consumers start clamping down on their spending and the vicious spiral feeds on itself leading markets inexorably lower. At the same time, this reaction to the markets will probably be the final push needed to move the economy into recession.

It’s at times like these that we prefer to stand aside, return to the safety of cash and watch as others run for the exits. Some of our picks have managed to move higher and show signs of reaching newer 52-week highs, but once mutual fund redemptions speed up, they will be forced to sell even their strongest performers in order to pay off investors. If this were predominantly a bull market, these same stocks would remain in our portfolio despite the weakness shown by some of the others, but in this sort of environment we don’t want to see our winners become losers.

Our Stock Picks

Virtually all of our stocks get sold this week with notable exceptions being TRP and KMP plus the bonds, which naturally have managed to perform well in this environment.

Many stocks could be added as shorts this week including MSFT and DELL, but we decide to initiate just two new positions. These are Calpine (CPN) and American Express (AXP).

CPN is in the business of building new energy capacity especially for California where power supplies continue to be a political hot potato. The stock rose to new heights this spring but is now a fading flower and is well on its way lower. It should continue dropping to at least $18.

AXP is set to move down to new lower points after having completed a failed attempt at a new high. On the downside, this stock could easily drop to $22.

New Buy Recommendations:

None

New Short Sales

CPN

AXP

Stock Positions to Sell/Exit:

CAT

CPWR

GSB

IDCO

IFF

QCOM

SYMC

TMX

TXN

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