Stockscom Report for Sunday Dec 15 2002

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

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

Market Synopsis

Perhaps it was investor nervousness about a market over-extended or perhaps it was the revelation that North Korea was able to ship weapons halfway around the world and now posed a nuclear threat or perhaps it was George Bush’s anger with Saddam Hussein and Iraq once more. Whatever it was, be it the threat of war or the fear of one more dip in the markets, it caused material damage to the charts and prompts us to change our tune, at least temporarily.

War was certainly on the minds of those trading gold and silver this week. As we have mentioned many times and more frequently of late, we’ve been watching gold with more than casual interest. On Thursday, gold, both spot and futures, managed to set a new high for the year in jumping above the $332 price level (per ounce on the February futures contract). This price is absolute key. With a new high, the long seven-month pennant that formed has resolved, as is often the case, in the direction of the major trend: a rising trend. The breakout in price above the $332 level means that we will likely witness another strong move up in the price of gold at least equal to the previous step of $50 per ounce. Some analysts are blaming the likelihood of war for the latest jump in gold prices while still others are suggesting that the threat of deflation will cause central banks such as the Bank of Japan and the Federal Reserve Bank to flood the market with liquidity creating a sudden bout of inflation. Gold, being a hedge against inflation and a store of value, preserves investors’ capital in times of inflation. One interesting idea being floated in one of many gold bugs’ reports (mixed in with various conspiracy theories about why the price of gold isn’t going up) was a story that Robert McEwen, the president and CEO of Toronto-based Goldcorp, attempted recently to purchase 40,000 ounces of gold on the spot market and encountered considerable difficulty. While it’s difficult for us to believe that there’s a gold shortage, it remains an interesting story. Again, we must reiterate that we are not gold bugs, but indeed when charts tell us we should buy gold, we heed their guidance.

As is often the case, gold prices move in inverse relation to the overall equity markets. Friday’s market action on the Nasdaq and S&P 500 was the most telling. After having lost several points on Monday, they proceeded to climb out of their respective pits and by Thursday had regained much of what was lost. Too, the charts appeared to be starting a new leg as stochastics had once again turned from the oversold condition that had held them over several sessions. But Friday ended all that. Both markets began with significant negative gaps at the open and, in unrelenting fashion, spiraled downward throughout the session. While trading volumes have been relatively low during this bout of selling, it does not hide the fact that Friday’s closes were below their respective 40-day moving averages and settled close or just below their 50-day moving averages. Moreover, the charts show distinct head and shoulders patterns now and we are presently sitting or sliding off (depending on one’s perspective) the second shoulder.

With these indications, it is abundantly clear that we must prevent material losses in equities and, as is always the case, we prefer to err on the side of caution. Essentially we are exiting all but four positions and those four we are keeping only because the charts remain quite bullish regardless of the current circumstances. And to those positions we add certain gold shares in anticipation of the rising price of gold.

The four positions that we keep are the following:

Amgen (AMGN)

Lannett (LCI)

Petsmart (PETM)

CP Ships (TEU)

Owing to uncertainty, we also wish to apply stop-losses on Amgen (AMGN) at $48 and Lannett (LCI) at $17.

New Buy Recommendations:

We add the following gold shares to our recommended list and these are in order of preference, which was ascertained from a chart analysis of each equity. Similar to our choices in the last run up in the gold price, these companies are completely unhedged and thus in a strong position to profit fully from an increase in the price of gold. One particular company not listed, but which could be interesting to subscribers in a more speculative sense is Golden Star Resources (GSS) that trades both in NY and Toronto.

Goldcorp # (GG)

Glamis Gold # (GLG)

Hecla Mining (HL)

Gold Fields (GFI)

Harmony Gold (HMY)

New Short Sales

None.

Stock Positions to Sell/Exit:

Aber Resources (ABER)

Amylin Pharma (AMLN)

Blue Rhino (RINO)

Chico’s Fas (CHS)

Citrix (CTXS)

Cognos (COGN)

Inco (N)

Masonite (MHM)

Qualcomm (QCOM)

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.