According to the mass media this weekend, we are NOW firmly in the deep-seated jaws of a full-fledged bear market. One train of thought is that when the Time’s and Newsweek’s of the world begin beating the drum of a particular market direction, either a bull market or a bear market, the time is ripe to deploy one’s finances in the exact opposite of the direction implied by these journalistic giants. So while we are tempted to take a contrarian view of this dire situation, we hesitate knowing fully that the odds favor a deeper pit for prices on Monday. One needs only to look at the infamous Black Monday, Oct 27, 1997, to see how the previous Friday’s action lead into the debacle of Monday.

Naturally today’s development with regards to WorldCom makes the possibility of a stock market slump all the more possible as WorldCom filed for Chapter 11 bankruptcy proceedings hoping to stave off a complete liquidation of its assets. Already this evening the S&P500 futures contract has been trading lower in anticipation of a lower opening. We make very little commentary about the decline since the downtrend has been noticeably in command for many months now and very little has changed with the technicals of the markets over the past few weeks except that the Dow, which had been resistant to any significant descent, now finds itself falling inexorably downward.

We discovered a quotation, which we particularly enjoyed as a forecast for future stock market index levels. The reason that we enjoyed it so much is that it was taken from our own newsletter of June 17, 2001:

In the case of the S&P, assuming a break of the support line created by the previous low at the 1080-1090 level, we see long term support at the 920 level, which it dropped to in the Fall of 1998. A dive to 920 would represent a 40% retracement from its peak in the Spring of 2000, which when looked at from a long term perspective is actually quite a normal situation. This plunge almost pales when compared to 1974, which saw a greater than 50% decline from market top to market bottom that began in 1973.

As for the tech world represented by the Nasdaq Composite, the most recent low providing support occurred at the 1619 level, but we see the long term support line at 1357 reached in the Fall of 1998 as the more viable of the two supports. From top to bottom, the retracement here is 68% from the peak. There is no precedent for this magnitude of drop in the history of the Nasdaq market.

The Dow Jones, which we have described as being unhitched from the movement of the other two markets, displays a clear weekly Lindahl sell signal and with this downward movement should be in a position to test the low of 9100 that it hit in March. Long term support of the Dow is located around the 7400 level, which it dove to in the Fall of 1998 much like the other two markets.

Perhaps we shouldn’t derive so much pleasure out of it since we have been proven to be far too conservative on the potential for losses on the Nasdaq and S&P 500, however any forecast is prone to error and while we may have been wrong about the extent of the losses, we certainly had some idea of the great potential for market plunges. At the time of writing, the Nasdaq Composite was trading at 2028, the S&P at 1214 and the Dow at 10,624 and few analysts were calling for such significant declines in market indexes.

While WorldCom and its web of corporate connections will most certainly affect Monday’s trading, the overall picture is not so dismal. We currently see some bottoming in the Nasdaq 100 at this level and there’s significant support at both 950 and 936, which we believe could hold. On the S&P, the support is at 844, which is roughly the current level of the index and the Dow remains the most vulnerable as its support is further down at 7400. On the positive side, the Dow’s test of this support level could come much sooner than later after having fallen so much in the past two weeks.

It is worth noting that even if support at these levels holds, it will mark the beginning of a bottoming process that could entail a trading range for several weeks before any significant rally occurs.

Also quite remarkably, the extensive losses on the Dow over the past two weeks were not accompanied by gains in either the price of gold or gold share prices thus lending credence to the idea that the bull market in gold is truly over for the moment. In trading on Friday, the price of gold jumped over $6 per ounce, but there is very little follow through this evening. Share prices in the shiny metal barely budged on Friday in reaction to the move in the price of the metal proving that buyers in gold are truly absent now. Without a move above $330 per ounce, we have no reason to think that this is anything but a rally that will soon end.

Our Stock Picks

The stop losses of $7.80 on AOF and $11.20 on MUO are maintained.

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.

Date of Entry	Name	Symbol	Entry Price	Current Price	Action Rating
02/01/01	Acm Government Opportunity Fund	AOF	7.99	9.20	B+
07/08/02	CP #	CP	24.58	22.34	H
06/17/02	Friedman Billings Ramsey	FBR	10.75	9.25	H
07/08/02	Norfolk Southern	NSC	23.70	19.83	H
02/01/01	Pioneer Interest Shares	MUO	11.95	11.70	H
07/08/02	Yellow Corp	YELL	30.41	26.52	H