Stockscom Report for Sunday Oct 27 2002

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

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

Market Synopsis

Market indexes continued to pile on gains this week as the rare rally in stock prices sent short sellers diving for cover while institutions awash in cash found the courage to invest some of it in equities. And while blue-chip operating companies would seem to be the logical recipients of this largess, chart action suggests that the Nasdaq 100 index saw an inordinate portion of these funds. The Nasdaq 100 has increased around 25% from its low reached Oct 8 whereas performances of other indexes fall between 14% (Dow Jones, Russell 2000) and 20% (Nasdaq Composite).

It is almost perverse that the technology stocks that have destroyed so many portfolios and so many funds’ performances are the ones that investors run to immediately. And this occurs despite the well-publicized fact that capital expenditure for information technology is down dramatically since the passing of Y2K and forecasting the future for these tech companies is fraught with risk. The high flyers of the year 2000 have become speculative penny-stocks in the year 2002.

Undoubtedly, part of the attraction is akin to the dream of winning a lottery. With severely depressed stock prices, many investors either buy to lower their cost per share or take long positions believing that the current price cannot go any lower. One investment rule that we live by here at Stockscom is that no price is too low that it can’t go lower. This is especially true in the case of reverse splits, which have the effect of increasing the stock price by the same factor as the reduction in number of shares. While stock exchange rules differ from one market to the next, one common rule is that stocks traded must have minimum prices - usually $1. Often this significant change in stock price affords the opportunity to short sellers to short the stock once more from a substantially higher entry point.

All of this relates to investor psychology and how the recent rally has rekindled dreams of fast, easy money. Prices are being bid up as investors enthusiastically purchase stock in firms whose futures are questionable at best. The best examples of this are telecom companies such as Nortel and Lucent where stock prices jumped by large percentages this week with little regard to the dire straits in which these companies find themselves. By their own admission, corporate executives at both companies see a difficult environment becoming even more challenging in the weeks and months ahead. It is difficult to believe that the bear market is completely over when investor psychology is such that investors still believe in the once high-flying sector of the last great bull market.

In general, market indexes appear to have topped out in the current run and are due for a retracement. Overhead resistance seems strong and is unlikely to melt away without first taking a bit of a break. This retracement however, may pass quite quickly as market psychology has definitely shifted from bearish to bullish. An excellent example of the shift is AOL, which announced this past Wednesday, the need to restate revenues and profits for the past two years due to an errors in their financial statements of approximately $200 million. The stock price jumped 9% through Friday’s trading.

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:

We are adding three additional recommendations this week and much like last week’s recommendations, these wouldn’t be considered high tech stocks. ABER is a pick that we’ve had on other occasions – a diamond miner whose mine should be finished construction by February 2003 – and whose stock price is once again showing signs of life probably due to the impending arrival of product. MHM is a manufacturer of doors and frames, which has capitalized greatly on the residential housing boom in the US and continues to see strong growth moving forward. Finally N, Inco, is the largest nickel producer in the world and upon releasing their third quarter data on Oct 18, stated that company inventories were at 7-year lows and that demand was increasing from the Far East, especially China.

ABER #

MHM #

N #

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.