Stockscom Report for Sunday Oct 13 2002

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

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

Market Synopsis

Last week’s reference to MACD whereby we mentioned that the last time the Dow’s MACD chart had reached such low levels should have been qualified with the information that the Dow charts being studied were monthly charts. It is certainly true that the daily charts currently have MACD values, which are greater than July’s and these in turn are greater than those realized in September 2001. Even though this remains an imperfect tool for analysis, it is generally considered to be supportive of prices when chart tools such as MACD and stochastics have higher highs and higher lows making W-forms similar to bullish price movements.

All of this discussion leads to a look at daily charts encompassing this week’s action, which are remarkable for the W’s present on both stochastics and MACD, that is, though the price bars by strict definitions violated the previous lows from July on both the Dow and the SP, lines charting stochastics and MACD display higher lows from recent trading days in Oct than in July. Often this diversion between lower prices and higher buying pressure resolves itself with higher prices after indefinite periods of time and may often signal market attempts at base-building or in this case, a bottom.

It is worthwhile remembering that markets go downward because of a lack of buyers - not because sellers move in. Though price action is described often in terms of the presence or absence of sellers, when markets move higher, it is foolhardy to believe that sellers are waiting in the wings to pounce once certain price levels are attained. Moreover the very idea of sellers controlling the market is preposterous given that most market participants are there to invest in companies or purchase stock as a means to achieving certain goals related to personal wealth. Certainly there will always be some seasoned professional traders who will sell short, but in general, the crowds waiting in the wings are buyers. During the heady days of the bull market, buyers needed only to wait for retracements to complete before diving back in with enthusiasm. Fast forward to Oct 2002 and the picture is vastly different with buyers firmly planted on the sidelines and unwilling to commit more funds to a market that gobbles up their money with indifference.

In similar fashion to stochastics and MACD, we also saw indications of an impending market turnaround with the rising VIX values and downward leaning tick graphs. Symptomatic of a market trying to make a bottom, the VIX indicator hit 50.48, which compares closely to July’s high of 56.74. Peaks of this magnitude (over 50) are often closely followed by rebounds in the equity markets. As for the hourly tick graphs, by mid-week they were showing immense negativity with the balance tipped heavily to the downside. This action again was similar to the lows reached in July thus favoring a bounce.

One effect that we found little surprising while markets rallied, was the effect of the market rebound on the world price of gold. The price of gold having failed to ignite surrounded by this overbearing negative sentiment in equities, the increasing threat of war with Iraq and the decidedly poor economic performance of both the second and third largest economies in the world (Japan and Germany), was destined to fall sharply on a rebound in equities and that is exactly what happened. Price settled on Friday below the 100-day moving average, a strong support/resistance line for gold bugs. Whereas we once considered the possibility of re-entering trades in gold equities, we believe now that these are best avoided whilst the price of gold remains below the $335 per ounce level.

For BMET, we continue to use a stop-loss of $25.50. As for WCBO, we continue our protective stop-loss of $13.00, which held this past week much as we thought it would. We initiate a stop of $8.70 on MCL in order to avoid further unnecessary losses.

New Buy Recommendations:

Owing to the volatility in the markets, we prefer not to add any new recommendations this week. The rally begun on Thursday appears ready to continue its climb this week but our confidence level will only increase once a small retracement occurs in the indexes to certify the latest rebound. Those wishing to add to equity positions should strongly consider those which are marked with plus signs below, AMGN and FBR. These charts are the strongest and indicate further upside potential is most likely.

New Short Sales

None.

Stock Positions to Sell/Exit:

We were exited from AOF and MUO upon hitting our stops this week.

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.