Stockscom Report for Sunday Aug 18 2002

Publisher: Colin Alexander     Editor: Ken Wilson

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

 

Market Synopsis

Technically this was a week like few others since April 2002 with signals to buy equities on all 3 major indexes. The S&P is by far the strongest index of the three, for although the 3 indexes managed to close above 25 and 40-day moving averages, the S&P 500 accomplished this with an unequalled push into positive territory on a percentage basis. On a relative basis, the Nasdaq Composite was the weakest having only managed a break above the 40-day moving average at the close of Friday while the Nasdaq-100 proved to be a much stronger performer in recent days thus supporting the argument in favor of choosing only the large capitalization issues at the outset of a breakout.

 

 The “large cap first” rule was also in evidence with the performance of the S&P Midcap 400 and the Russell 2000 small cap index, whose relative performance this week paled in comparison and this again, was measured on a percentage basis.

 

Arguing in favor of the buy signal on the Dow and S&P 500, we see clear evidence of W-shaped graphs rising from the July lows and although stochastics are now in overbought territory, the trade is finding support at the 40-day moving average. This support is to be expected, as any resistance line that is breached automatically becomes the support line for rising prices.

 

Most investors would ask themselves if this is a safe entry point back into equities since there is unambiguous evidence of a bullish trend taking place in the stock markets. The answer is a cautious yes. At this point, investors should be scaling back on bonds and weighting themselves more toward equities but the equities portion should not be above 50%. The bullish run in interest rate instruments might have ended for the present time, but there is no reason to believe that upward pressure on interest rates will occur anytime in the next several months.

 

So despite the bleak outlook being proffered by stock analysts in the general media, here are some adequate arguments favoring a return to the stock markets:

 

The first has been developing for the past few weeks – a contrarian mindset in relation to the general media. Once the general media start offering doomsday scenarios of the bear market, once they concentrate on stories of the bear market, and once these talking heads mull the extent of the bear market, it is often a good indication that selling has subsided quite substantially and the timing is better for entry points into several equities.

The second is the bottoming action, which in spite of a double-bottom where the second was lower than the first still proved that support existed in the Dow at the 7400 mark much as we stated many months ago.

 

The third point is only now being mentioned in the media and that is that the threat of a meltdown in equity prices would prompt the government into action to avoid a rout in the November elections. There is now talk that a package of tax breaks for investors is envisioned by the president’s advisors and that it includes a larger annual allowance for capital losses when filing income taxes, which right now stands at a meager $3,000. This rule if expanded, would cause a one-time hit in income tax remittance to the government, but would greatly speed up the return of investors to the stock market. Under current conditions, investors are increasingly discouraged with the equity markets and in many cases have vowed to stay away in the hope of finding investment alternatives. This attitude and the low interest rates have fueled the housing market boom for the past 18 months and in the process threatened the livelihood of thousands whose jobs depend on the investment industry, namely brokerages and investment banks.

 

The fourth point is that the stock markets themselves are predictive in nature and the rise from the double dip that has recently completed in the markets could be emphasizing a brief return to recession, but that six months from now, recovery will be firmly in place. Certainly with reported growth and with general outlooks offered by corporations, there is the possibility that we could actually be in a recession at the present time, however we only learn of these periods after they’ve begun.

 

The fifth point is perhaps the most important. Unless price levels are sustained above the moving averages, this could simply be another bear market rally that fizzles just as soon as we’re expecting sizzle. And for this reason especially, we advise subscribers to proceed with caution investing less than 50% in equities and only increasing that percentage as the fog clears from corporate outlooks.

 

As is central to our system, not all stocks in the indexes will go up – some go up and some go down and our strategy remains to find those that offer the greatest strength and best chances for capital appreciation. We already see that at a minimum the next 12 months will be a stock-pickers environment with the increasingly wide disparity between corporate performances expected over that period.

 

New Buy Recommendations:

 

We have 2 new recommendations this week and both are in the drug/health sciences sector, one equity sector, which has enjoyed a strong run of late. The first is JNJ, a Dow stock and the other is BMET, a Nasdaq-100 stock. Both have similar stories on their monthly charts, that is, they have recovered from steep retracements, which in both cases tested and found support at their respective 40-month moving averages. Stop losses should be set high as a precaution – on BMET, a stop-loss could be set at $25.50 and on JNJ, the corresponding stop-loss could be set at $50.00.

 

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	9.08	B
07/29/02	Amgen	AMGN	43.80	47.53	B
07/29/02	Friedman Billings Ramsey	FBR	9.30	10.78	B
02/01/01	Pioneer Interest Shares	MUO	11.95	11.88	B
07/29/02	Symantec	SYMC	32.81	32.93	B