Stockscom Report for Monday Oct 7 2002

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

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

Market Synopsis

The economic news continues to hold sway over the market and indeed many investors are finding it difficult to hide from the effects when reality dictates that most investment funds should be in cash or at least bonds to protect oneself from the fallout.

This past week, the ISM report of purchasing managers intentions was released for both the manufacturing and the service sectors and while manufacturing showed a slight contraction, the orders portion actually provided some hope with a figure indicating expansion after last month’s contraction. However, we must keep in mind that for the last four months, the trend on this data has been lower albeit following the orders portion. The service sector figures were much more bullish revealing an expansion in the services side of the economy.

September’s unemployment report released on Friday had a hot and cold aspect to it for there was a markedly lower rate of 5.6% but there was also 43,000 fewer jobs. Usually this means many people have simply given up looking for work and dropped out of the workforce, at least temporarily. With fewer people working, consumer confidence is likely to take a hit as well as consumer spending which certainly does not bode well for a strong recovery.

In this depressed situation, we search through historical charts to gain some perspective of trends and how they progressed through different phases of bear markets. Considering that the only historical chart with data going back several decades is the Dow Jones, we have no choice but to use this one as a proxy for everything. While seemingly untenable, there is, fortunately, a direct relationship between the 30 Dow stocks and the broad market of over 7000 stocks.

The last time that the MACD chart for the Dow was as low as it is presently was in the final days of 1974. The chart is also quite similar in its trough formation with a slow descent over three years starting in early 1972. The Dow had fallen approximately 47% from its peak and having dropped below the 200-month moving average, now a resistance line, the chart was most likely a good barometer of the market psychology at that time. Still it should be noted that On Balance Volume wasn’t nearly as bearish as it is currently, the Dow has fallen only 37% from its peak and the 200-month moving average, at approximately 3200, is less than half the current level of the Dow.

Moving chronologically backwards, in mid-1964, MACD began another slow descent similar in nature to the present one reaching its trough in mid-1967. Here losses were held more in check as the price level dropped around 25% to the 40-month moving average where it found strong support but interestingly, it also began its ascent approximately three years after beginning.

Another example though weak, is the period from late-1955 until mid-1958, again a period of just under three years. While the MACD chart has a similar slope to today’s, the drop in price level was not nearly as damaging losing a mere 21% and again, it was the 40-month moving average which provided the support preventing further losses. This era is also notable for having a price chart that was very similar to today’s over a period of a decade. From late-1953, price began a steady climb until it peaked in 1956 and was range-bound until late-1957 when it began the descent. Again, the total loss was not nearly as injurious as the most recent.

Finally for comparative purposes, the crash in 1929 had a MACD chart that peaked in 1929 and bottomed less than 3 years later in 1932 following a steep drop both in price level and MACD. From peak to trough, the loss in price was 89% - little wonder why it’s called the Great Depression.

For those investors dreaming of days where the bulls run once more, there is something to be said for the three-year waiting period. The MACD chart peaked at the beginning of 2000 and we are approaching the third anniversary of this occasion. Too, the autumn is usually the time that significant lows are reached and stock prices often rally forcefully from these levels. And as we have mentioned many times, the 7400 level on the Dow constitutes a major long-term support level (going back to 1998) where price has rebounded from once in July and twice this past week (Monday and Friday) potentially laying the groundwork for a significant rise.

The stop loss of $7.80 on AOF is changed to $8.20 while that of MUO is maintained at $11.20. For BMET, we continue to use a stop-loss of $25.50. As for WCBO, our patience is severely tested with the move last week. Similarly sized banks were knocked down on an equal-footing as WCBO and nothing fundamentally has changed with the bank’s situation. Therefore, we initiate a protective stop-loss of $13.00 – we prefer not to use this as we expect the situation to rectify itself.

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.