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Psychology is truly critical matter in a better understanding of stock markets. This week provides us with a case in point. Various forces propagated by news events came together to affect the market: weapons inspectors in Iraq, the almost certain bankruptcy of United Airlines, probable disruption of oil supplies from Venezuela, the abrupt resignation of two top economic officials in the Bush Administration, deflation or the fear of it in the number two and three economies in the world, a slow recovery in the US economy, still rising unemployment in the US as more jobs are lost and, of course, the bear market decline in stocks. Markets despise unknowns and this week contained absolutely no shortage of them. Fear drives many prices to extremes or at least temporarily to previously set turning points, which technically-speaking, results in a confirmation and/or resolution of the direction that the price will take moving forward.

One prime beneficiary of fear in investors has always been the price of gold and we saw that again this week. While we are definitely not gold bugs, we have traded gold quite successfully in the past year. Moreover, we’ve mentioned even recently that the price of gold in the commodities markets bears watching for over longer periods, best viewed using the weekly chart, the pennant formation is as distinct as it is textbook. The close this week matched that of July 19, 2002 and reached a high in the price range not seen since September. We have always insisted on the need to see a new high in the yellow metal before believing in the theory of a new bull run in gold and a new high was definitely not in the cards this week. Nonetheless with equity markets dipping and with the threat of war looming, the fear of an uncertain world begins to unfold in the form of higher gold prices.

Friday’s action resulted in both the peak of gold prices as well as the subsequent failure to set a new high. The confluence of various forces brought about by such news items as the end of the first part of weapons inspections, higher unemployment, a shake-up in the White House, and a technical bounce in the equity markets was strong enough to suggest that any new highs in gold would be made at a later date.

In the end, the story was the same in that equities reached down to touch 40-day moving averages and made strong recoveries to close with price reversals. On a week where most daily closes were down, the reversal on Friday coupled with the low stochastics on the daily were sufficient to convince traders that the retracement in equities was complete. Here again we see that psychology plays a major role as fear subsides and is replaced by confidence and seeing that forceful shift in psychology is one more step forward in the belief that the bear market that has wielded control for over two years is weakening.

Our own picks should do well moving forward assuming that the signal on Friday sees follow-through on Monday. Our stop on STCO at $10.00 was triggered when price dropped significantly in the early part of the week before rebounding to end the week. Inco would be the one that necessitates a close watch now with Friday’s recommendation at Prudential to sell shares coupled with the announcement by Inco of a suspension in the development of a key nickel deposit in Indonesia resulted in price testing recent lows and closing near the top of the day’s trading range. In the paradox that is commodity pricing, the fact that development has been temporarily halted at a large new project is seen both as bearish on the company and then bullish as a future reduction in supplies (in this particular case, nickel) results in higher commodity prices for the metal.

Only one stock do we find supportive of adding to positions and that is CTXS. This week CTXS was the subject of favorable comments and this included word from the corporation that their financials should be stronger than originally expected.

New Buy Recommendations:

None.

New Short Sales

None.

Stock Positions to Sell/Exit:

STCO was sold.

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.