Stockscom Report for Monday Sept 9 2002

Publisher: Colin Alexander     Editor: Ken Wilson

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

 

Market Synopsis

September began much as anticipated in last week’s report, that is, poorly. But it did have a reasonable excuse in the purchasing managers’ report and a more optimistic finish than we would have believed. In the case of the ISM numbers, they demonstrated that August had flat-lined from July’s figures and there was even the ominous tone supplied by a contraction in the orders part of the index, which hardly bodes well for bulls in the coming months. Friday morning gave us the release of the US employment report and this was quite a surprise due to the drop in unemployment from 5.9 to 5.7%.

 

But the most important story in the market remains Iraq and Saddam Hussein. The US administration’s public mulling of an attack and desire for “regime change” has inflamed oil markets with a certain war premium and been a catalyst for weaker equity prices. Perhaps more importantly, is the potential for a long drawn out public debate on the need and/or probable level of success of such military action as both camps weigh in to press for their side of the debate. Meanwhile, President Bush is meeting various Western and Middle Eastern leaders in a broad effort to build consensus but finding a majority of states unwilling to participate in a military campaign. The relative doves in the Administration include such military notables as Secretary of State, Colin Powell and US General, Norman Schwarzkopf. It is worthwhile mentioning that both the doves and the hawks in the administration are in favor of the removal of Hussein, they simply differ in their views about how changed should be effected.

 

This week, the door to the resumption of UN weapons inspectors opened a crack as Hussein, obviously feeling the pressure from the bellicose comments emanating from the US, announced that the inspectors would be welcomed back under certain Iraqi conditions. This action looks to be simply a strategic move to buy some time and curry favor with nation fence sitters. However, it does succeed in pushing back the timeframe of any potential attack and with Congressional elections arriving fast, the Bush Administration is unlikely to pull the trigger on an attack now, before those elections.

 

With this talk of war, equities will continue to feel the pressure, but by delaying the attack, the charts have more chances to build support and avoid setting new lows. (If an attack were to happen tomorrow, markets would likely plunge on the news and being close to the bottom already, would probably set new lows.) On the negative side however, all this talk about war has now spawned a risk premium on equities and seriously hindered the progress towards a recovery in prices.

With the considerable loudness of the war drums beating, the price of gold has once more woken up. The futures contract price of gold currently stands at around $321 after having retraced from its peak of $331 to its trough around $300. Gold equities have sprung to life lately on this gain in the price of gold and we are watching with immense interest. If gold pushes through the $331 level and stays there, then we would be buyers of equities (like many other technicians no doubt), however at this point, we prefer to do nothing since the channel which contains its price has not been broken and that channel’s trend continues to be downward.

 

Of gold, we should reiterate that we are certainly not gold bugs and that our interest in gold results simply from charting the price of gold. Choosing equities occurs after we’ve decided that the price of an ounce will climb, in other words, we analyze the sector first. And the story of gold has many different facets to consider such as the ability of mining and exploration companies to find ever more pockets of profitably mined gold, the selling of gold by central banks such as the Banks of England and of Switzerland, the buying of gold by the central bank of China, and the unwinding of hedge positions by companies such as Barrick Gold. With these individual pressures and the odd psychological quirk that Americans tend to regard gold equities with total disinterest, we are quite agnostic about holding gold. But we will if the charts tell us we should.

 

Of the stock indexes, the S&P500 is the most promising having retraced back to support at the 875 level so this week could see it begin another leg to the upside. Stochastics are now heavily oversold and turning up. The key factor would be that it set a new high above the 963 level in order to confirm the upward trend in place.

 

There are similar situations with the Dow and the Nasdaq though support is not as well defined on the Nasdaq (except for the low at 1192) and clear support on the Dow is located around 8000, which is a significant drop from today’s level.

 

Other obtuse indications such as trader sentiment being much more bearish this week than last (a bullish indicator) and the VIX, which is the market volatility indicator, showing that it peaked Tuesday through Thursday are further reasons to believe that a rebound to the upside could occur this week.

 

The stop losses of $7.80 on AOF and $11.20 on MUO are maintained. For BMET, we continue to use a stop-loss of $25.50 and for JNJ, a stop-loss of $50.00

 

New Buy Recommendations:

 

Lannet Co (LCI). We’ve recommended this drug manufacturer in the past and we are re-entering a small position as the significant retracement over the past 10 weeks is indicating that price is now about to push into new higher levels. Both monthly and weekly charts held up firmly during the retracement and with 3 solid closes on the daily, it merits a position.

 

West Coast Bancorp (WCBO). This regional bank looks set to soar once more after jumping out of its recent consolidation. Longer term, its chart now looks to be at a similar point as it was in mid-1996 and that was before it made an exponential climb to its peak.

 

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	9.29	B
07/29/02	Amgen	AMGN	43.80	44.75	B
08/19/02	Biomet	BMET	28.41	26.69	B
07/29/02	Friedman Billings Ramsey	FBR	9.30	10.88	B+
08/19/02	Johnson & Johnson	JNJ	55.01	54.92	B+
09/03/02	Moore Corp	MCL #	12.11	11.75	B
02/01/01	Pioneer Interest Shares	MUO	11.95	11.82	B