Stockscom Report for Monday Oct 21 2002

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

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

Market Synopsis

Market indexes enjoyed a powerful rally supported by better than expected earnings this week and rosier than expected forecasts for future earnings. And the charts are signaling that this climb may have stronger legs than the previous attempt in the summer (from late July) though with Friday’s action, we strongly suspect that a retracement is in the near-term picture. This upcoming week, there will be approximately 150 of the S&P corporations reporting their quarterly results pushing the two-week total to 300 or about 60%.

Overall, the chart action on the dailies for the three major indexes is very bullish in the near-term. We prefer to use the S&P 500 as a proxy for the entire market inasmuch as it encompasses a much larger number of companies and because its chart has been a reliable gauge for the market in general these past several weeks.

With the rebound from the low on October 9, the S&P chart now has a double bottom having touched down in the area of 775 in July. For chart-readers, this move is a successful test of the July low with the result being an expectation of a significant rebound in the indexes. Both the Dow and the Nasdaq have participated in this latest push, but already these indexes have popped up 16% and the S&P is 15% higher than its low.

So this market action drives the question that looms large on most traders and investors minds: Is this the beginning of a bull market or is it another bear market (sucker) rally? The answer is: While it is more than likely a tradable rally, the global economic climate has changed very little and consequently, the nimble traders who can take profits off the table when the time comes, will benefit the most from the rally.

The world is still in a global recession or for argument’s sake, a no-growth economy. Both the second and third largest economies, Japan and Germany, have serious deflationary problems – Japan’s has been on going for 10 years while Germany’s has just begun – thus putting pressure on the US to avoid such a disaster. The US advantage of flexible workforce rules coupled with far fewer supports for failing businesses means that the economy is better prepared to weather these storms. However, the threat remains. Corporate profits need to rebound forcefully otherwise companies will feel forced into another round of job cuts and reduced capital spending. Another wave of job cuts would put pressure on the consumer to reduce spending and that in turn, would cause profits to shrink further putting into doubt hopes for a recovery.

The key to succeeding in this hostile environment is market timing. Even in the worst possible times, there are some stocks going up and more coming down. But in the universe of over 7000 stocks on NYSE, Nasdaq and the ASE, there is every opportunity to uncover winners amidst the carnage of a severe bear market.

We prefer to make some portfolio changes with the rally in full swing. Our first move is to sell those issues not fully participating in the rally – this means selling WCBO and MCL. Second, we wish to add several new recommendations to our list:

RINO – in a nutshell, this company fills propane cylinders but with the growth their experiencing, it’s difficult to ignore their success no matter how basic the industry may seem. The chart using any interpretive tool is impressive and shows no sign of slowing. As for 2003, they expect to increase profits about 70% without calculating in the potential gains from the 9 distributorships that they are currently in the process of acquiring.

STCO – this company develops state-of-the-art electronic components and systems for defense, space and commercial wireless communications. While this company actually flew under our radar screen last week, there is still enormous upside potential.

PETM – anyone owning a dog or cat has undoubtedly heard of Petsmart, the retailer for animal supplies. This week the chart broke out to new highs and here with that action, we wish to add it to our list.

MME – similar story here with a chart that broke out this week to new highs and appears unstoppable. MME is in the health care business – it operates four HMOs and sells insurance and home health care services.

AMLN – this is a biotech company that recently signed an unusual contract with Eli Lilly whereby Lilly agreed to invest through payments and stock purchases totaling $325 million in return for shared rights to an experimental drug for type-2 diabetes.

CHS – a clothing store known for its loose-fitting casual style saw same store sales increase over 21% in September when other retailers were suffering declines. We’ve included it here as it appears poised to break out to a new high for the year. If it failed this attempt, we would likely drop this recommended stock.

TEU # - this is a shipping company formerly part of the Canadian Pacific conglomerate and, with the break up of CP, is on its own as CP Ships. Similar to other recommendations here, TEU broke out this week to a new high for the year.

As a general recommendation, given the volatility of the stock markets and the still unclear sustainability of recent gains, we would advise subscribers not to devote more than 50% of investment capital to stocks. Since bonds could slip significantly with a rally in equities, cash and money market funds should be used to prevent unnecessary losses. Of the shares recommended, the order of preference is as listed.

New Buy Recommendations:

RINO

STCO

PETM

MME

AMLN

CHS

TEU #

New Short Sales

None.

Stock Positions to Sell/Exit:

MCL #

WCBO

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.