Stockscom Report for Monday Jan 21, 2002

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

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

Market indexes were sold heavily last week as investors began taking some of their recent gains off the table. The tech-laden Nasdaq has rebounded tremendously since the trough reached on September 21. And the Dow and S&P have both seen their prices rise dramatically only to arrive at a point where fewer and fewer investors are willing to hang on. In typical overbought action, market indexes have risen lately on lower volumes but slide on greater volumes.

Some of the responsibility for the slide appears to be corporate results from IBM, MSFT and INTC while Greenspan’s speech of the week before also encouraged traders to beat a hasty retreat.

Corporate results in the tech sector this week were mildly optimistic with some lowered expectations met, but what hastened the exit, was the guidance moving forward which expressed the view that earnings visibility was foggy at best and in Intel’s case, that capital expenditure would be cut significantly as a result. The reduction in capex immediately threw the chip equipment manufacturers’ stock prices into pullback mode and ignited concern over the future of the PC manufacturers. Microsoft added to this latter concern when it predicted much softer sales of its XP operating system due to the lower expectations of sales of new PC’s. IBM attempted to put on a much braver face describing how selling services would be this company’s savior. Company officials neglected to emphasize that revenues had dropped 11% in the latest quarter but this figure didn’t escape the attention of analysts.

Greenspan’s comments of the week before were also sited as reason for selling equities as his suggestion that recovery may or may not be right around the corner was enough to convince traders that the top banker in the US couldn’t be sure of recovery in 2002. By week’s end, there were reports that Greenspan didn’t wish to appear as negative on the economy believing instead that the road to recovery is at hand. This is the same person who gave us the expression “irrational exuberance” and arguably had as much a hand in creating the tech bubble as anyone.

This abrupt turn around in Greenspan’s view of the economy led us to question whether the week would start with a healthy bounce after taking a break for Martin Luther King Jr. day, but in fact, the overnight markets are signaling further weakness for Tuesday’s trading. And again this week, the corporate calendar is full with additional pressure on stock prices as a result.

As we mentioned last week, we’re monitoring the VIX volatility indicator and this week we have a definite crossing of the slow curve by the fast curve, which if history is a good indicator, serves as a signal to sell the index. As a matter of fact, our sister publication Fivestar Futures (www.fivestarfutures.com) did just that and recommended selling a contract on the Nasdaq market on Jan. 9^th

Our Stock Picks

The stop losses of $7.80 on AOF and $11.20 on MUO were not triggered. We retain these stop losses and continue to monitor closely what transpires.

Additionally, we add three new stops for stocks that could be susceptible to corrections over the next few days.

The first is Adaptec (ADPT), which trades on Nasdaq and is suffering the fate of anything listed on Nasdaq – it’s dropping of course. We set an exit at $15.50, which is right in the middle of the 25 and 40-day moving averages. While we still like the company, everything listed on Nasdaq is guilty by association these days.

The second is The Southern Company (SO), which appears to be on quite a roll these days and had a wonderful week just past. However, an article in this weekend’s Barron’s about falling electricity prices and reduced demand might lead investors to dump this stock, which was mentioned as one of several companies that could see weaker earnings as a result. Related to this is First Energy (FE), another electricity company, which would also be affected by such a sell-off. Chart-wise, these two companies appear set to move higher, but after this weekend, there may be second thoughts. Also noteworthy this past week was the court ruling that would allow the EPA to file lawsuits against these two companies and others for pollution infractions related to several power plants around the country. We apply stops of $24.50 for SO and $35.00 for FE.

Gold continued the nice breakout this week and looks very enticing moving forward. With currency devaluation in Argentina, falling currencies in South Africa, Canada and especially Japan, more investors will remark how the bullish price of gold provides solid protection against the currency losses and as they do, support for higher prices will grow. Chart action in gold stocks and the price of gold demonstrates a definite break in the bearish trend that had been in place for several years and while it remains difficult to predict how far this new bullish sentiment could go, the store of value concept is boosting gold’s future prospects.

New Buy Recommendations:

None though we do consider any additional purchases of gold shares as a solid conservative investment strategy.

New Short Sales

Microsoft (MSFT) – Having consistently failed to make a new high, this stock appears to be resolving on the downside. Particularly ominous for MSFT is the fact that the 25-month line is about to descend through the 40-month line.

Stock Positions to Sell/Exit:

Bell Canada (BCE) – Unfortunately the desired breakout never appeared and with the slow drooping price line, we consider it to be no longer worth retaining. Conceivably, this could comeback to surprise us, but it isn’t worth waiting for. The chart gives every indication that a further pullback in the price is more than likely. At least we got the dividend.

Micronetics Wireless (NOIZ) – We were quickly sent scurrying to the exits by our stop-loss of $3.80 on Friday and looking at the chart, this may be a very good thing. It now appears that a distribution is happening in these shares and that the signal to buy was false.

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