Stockscom Report for Sunday Jan 26 2003

Publisher: Colin Alexander     Editor: Ken Wilson

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

 

Market Synopsis

 

 

Friday’s strong breakout signal on the Nasdaq was the ultimate indicator that down was the predominant direction now. This move concluded a Lindahl sell signal on the daily chart while confirming what we already believed on the weekly, that the outside bar on the weekly chart last week really was a warning call to be heeded. The Nasdaq has been the leader to the upside away from the October lows and has managed to retain that roll on the downside. Both the Dow and the S&P daily charts are notable for having fewer peaks than the Nasdaq and both have formed head and shoulders patterns that are quite bearish. On a positive note, while the Dow and the S&P have violated several recent lows since the time of the Oct low, the Nasdaq index has exhibited greater strength and the current move is seen as a retracement of those gains.

 

The principle beneficiaries of this latest retracement in US equity markets are the euro currency and the price of gold bullion. The euro currency has been steadily gaining against the US dollar since April 2002. Other currencies have also appreciated against the US dollar though none as vigorously and this is probably due as much to the expansionist monetary policy employed by the Federal Reserve as it is the global shift out of US dollar-based investments and into financial assets denominated in another reserve currency.

 

This expansionist monetary policy is also one of the primary reasons for the rise in the price of gold. An expansionary monetary policy puts downward pressure on the currency as more money is put into circulation. Investors wanting to preserve the value of their capital assets will often convert them to precious metals or buy representative shares in order to preserve their value in constant currency terms. As the Fed strategy changes from fighting inflation to preventing Japanese-style deflation, they have been quite forthcoming with respect to the mechanics of preventing deflation. Fed Governor Bernanke told the National Economics Club in November that there existed a technology called “a printing press” that could be used to print as many US dollars as the Fed wanted in an effort to halt deflation. Obviously they have learned from the Japanese experience and do not wish to repeat it.

 

The price of gold has actually been in a bull market since the fall of 2001 and although there was a large retracement of those gains in the early summer of 2002, the bull market, we learned, was not over yet. It has since restarted and has continued even more strongly in the months that followed. While we don’t have a price target, unlike the gold bugs that routinely suggest that gold at $1000 per ounce is coming fast, we do understand that the current price would not be subjected to strong resistance until it reaches the $410 - $420 per ounce level, a height it reached in 1996. Along the way, there will be pockets of resistance created by central bank selling at various price levels but once the market soaks up this supply, price eventually moves up to the next target. Too, some central banks are buyers – the Chinese central bank was a significant buyer of gold in the month of December.

 

History has shown that stock market booms are always followed by busts and just as some individual sector leads the way during the boom, the bust that follows erases that strategy and any new boom is based on a different sector. We are receiving an early warning from the markets that the next boom will be lead by a wholly forgotten sector for many years – commodities. Hard commodities are shaping up to be the leading sector in the years ahead and this ties in directly with gold, which at its lowest level is just one of several precious metals. Other commodities such as the base metals group and nickel in particular have seen prices rise significantly throughout 2002. Lumber prices fell in 2002, but now appear to be bottoming out while coffee and sugar have also shown considerable strength.

 

New Buy Recommendations:

 

We have put two plus signs beside Goldcorp (GG) in the table below. The reason being that while the other gold mining companies rallied last week with the jump in the price of gold, there is every indication that Goldcorp will participate in the rally this week as Friday’s action concluded with a breakout signal. We should be looking at a gain in the order of 10% by next week.

 

New Short Sales

None.

 

Stock Positions to Sell/Exit:

 

While we voiced our concerns last week with respect to market indexes that were seen to be tumbling, our recommended stocks had retained some semblance of strength. We are no longer sure of that after Friday’s devastating losses and consequently we are advising subscribers to exit all other positions except for gold mining shares.

 

Our Stockscom Alert already advised subscribers to sell positions in Hecla Mining and Petsmart on Thursday.

 

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.

Date of Entry	Name	Symbol	Entry Price	Current Price	Action Rating
07/29/02	Amgen	AMGN	43.80	52.24	SELL
01/13/03	BCE	BCE #	19.22	19.02	SELL
01/13/03	Echostar Comm.	DISH	27.05	23.57	SELL
12/16/02	Glamis Gold	GLG #	10.40	12.98	B
12/16/02	Gold Fields	GFI	14.68	15.25	B
12/16/02	Goldcorp	GG #	12.75	12.95	B++
12/16/02	Harmony Gold	HMY	16.98	17.30	B
12/16/02	Hecla Mining	HL	4.74	4.40	SOLD
10/21/02	Petsmart	PETM	19.95	15.60	SOLD
10/21/02	CP Ships	TEU #	12.20	13.85	SELL