Stockscom Report for Sunday Aug 25 2002

Publisher: Colin Alexander     Editor: Ken Wilson

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

 

Market Synopsis

Despite the market’s abrupt reversal on Friday, we still consider this to be a rally of some magnitude whose significance should not be minimized. The indexes all ran into the same situation on Friday: the lack of buying interest and action on the downside intensified as the day wore on. Stocks are normally driven by one of two conditions: the first is buying and the second is lack of buying. With stochastics in extremely overbought areas of their charts and with stock prices having risen 13% on the S&P500 and 14% on Nasdaq from their respective August bottoms, the buying ceased. Once buying activity has been exhausted, the pressure to buy gives way and prices drop as a consequence.

 

While retracement is inevitable, the true question is whether or not the rally has exhausted itself. Certainly we are approaching the month of September, normally a cruel month for equities, when stock indexes historically lose. The charts however, indicate that there is support for the current prices just above 900 on the S&P and 1300 on the Nasdaq Composite. And one could argue that this September could be a very different animal when considering that the previous two years have seen large losses in an uncompromising bear market.

 

We continue to preach caution and look for any retracement to find support especially at moving averages such as the 40-day. Once we get that support, our confidence is increased a notch and our belief in recovery solidifies. At that point, we’re able to encourage investors to increase their participation in the equities markets.

 

There are several reasons why support could fail in this current retracement starting with the historical perspective, which clearly shows the average September being a losing month. Also there have been signs in the recent past that consumers are reigning in their spending habits and disappointing economic numbers further feed this negativity. With business investment still on the sidelines, the consumer’s importance cannot be underestimated. The next few weeks will also bring us the quarterly pre-announcements of corporate performance, which depending on how companies have performed vis-à-vis their expectations, may induce a bad case of indigestion on the part of markets.

 

To all of this we add a couple wild cards: the Federal Reserve could decide that the economy is weaker than expected and cut interest rates again. This action could provide some underlying support to the equities markets. The other looming wild card is the possibility that the federal government will enact legislation to remove or increase the $3,000 limit to capital losses, which can be used as a deduction from other income. According to current rules, capital losses are applied against capital gains, but if one has no capital gains, the maximum capital losses that can used as a deduction against wage income is $3,000 per year. The Bush administration has hinted that these rules could be changed to permit investors to clear the slate, however this would have nefarious effects on the stock markets. If the $3,000 limit were increased, more investors would be encouraged to sell their losing positions and this in turn would increase mutual fund redemptions, which would cause those fund managers to sell more stock in order to redeem the investments. The snowball effect of such action would drive the equities markets to new lows, the government deficit would grow because of lower tax revenue, but the investor would have new money with which to purchase equities once more. The question is, would they?

 

The stop losses of $7.80 on AOF and $11.20 on MUO are maintained. We also use a stop of $29.00 on SYMC seeing how there has been a floor created at that level. For BMET, we continue to use a stop-loss of $25.50 and for JNJ, a stop-loss of $50.00

 

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	9.12	B
07/29/02	Amgen	AMGN	43.80	47.25	B
08/19/02	Biomet	BMET	28.41	28.02	B
07/29/02	Friedman Billings Ramsey	FBR	9.30	10.80	B+
08/19/02	Johnson & Johnson	JNJ	55.01	54.82	B
02/01/01	Pioneer Interest Shares	MUO	11.95	11.60	B
07/29/02	Symantec	SYMC	32.81	31.57	B