Stockscom Report for Sunday Jan 6, 2002

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

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

The “January Effect” seems to be blowing in strong at this, the start of the year. While we weren’t expecting another powerful leg upward in market indexes to begin the year, we suspected that optimism for the coming year would drive markets into positive territory. Starting on Wednesday this past week, during the last hour of the trading day, an immensely bullish (short-term) signal was produced with buyers bidding up prices on all three markets driving them onto the plus side for the day. This momentum carried into Thursday and remarkably Friday as well, though the push was lacking the same conviction with the close settling at about the halfway mark of the price range for the day. Markets proved once again that there is certain resilience in market psychology and that many investors are simply afraid to miss getting in at the trough.

Much of the reason for the upward push this week was due to both the ISM (formerly NAPM) numbers and the December unemployment figures. ISM numbers showed clear evidence of a rebound occurring in the economy, albeit slowly. The manufacturing side of the ledger showed continuing slowdown but the trend traces a gentle upward sloping line that is proceeding along towards the 50 mark – the point separating contraction from expansion. On the service side, the number reached above 50 signaling an expansionary trend for business, a first after several months of contraction.

Unemployment figures met most expectations, but here too, there was optimism as monthly job losses were reduced once more after the explosion of layoffs during the months of September and October. Scrutinizing the report further, we see that the workweek grew last month – an early signal that staffing requirements are being met with current employees working longer hours. Eventually, requirements are great enough to justify adding new employees.

Despite our mild optimism for 2002, the near-term prospects look decidedly grim. The rally, that began in late September and has gone on unabated, has driven valuations to unsustainable levels. Currently the S&P 500 sports a P/E ratio (based on the previous 4 quarters reported) of 41 and the equivalent figure for the Dow Industrials is 28, numbers which do not normally indicate the closing stages of a bear market. Utilizing future earnings in those P/E ratios still gives values not conducive to rapid share price increases as most 2002 earnings are expected to be soft. So while the trend is our friend, we prefer to err on the side of caution at this point by not initiating new positions.

One of the principal reasons for our reticence about new purchases is the VIX, a volatility indicator, which continues to trend down and we anticipate that we will be getting a general market sell signal from this indicator shortly.

Our Stock Picks

The stop losses of $7.80 on AOF and $11.20 on MUO were not triggered (though in the case of MUO, came extremely close). We retain these stop losses and continue to monitor closely what transpires.

SO appears to be retracing some of its most recent gain. And BCE is now improving which, when added to the small (positive) mention in Barron’s on the weekend might provide some pop to its share price.

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 as Canadian content in Canadian RSP funds. Otherwise there is a 30 percent restriction on foreign stocks held in these accounts.

*    FE purchased GPU – prices reflect share exchange of 1.2318 shares of FE for each GPU share