Stockscom Report for Monday Feb 17 2003

Publisher: Colin Alexander     Editor: Ken Wilson

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

 

Market Synopsis

 

The equity markets responded to the lower threat of war so evident on Friday, when Hans Blix released his report to the UN, by rallying strongly throughout the day. The large one-day rally was a tremendous help for the indexes in their bid to carve out weekly closing price reversals and set up expectations for an additional rally this week. Historically, there is often a strong performance leading up to a holiday weekend as short traders move to cover positions to prevent losses due to unforeseen events (such as this one). Thus the benefits of a holiday shortened week added to the reduced threat of war and served to ignite what could be a significant rally. For now, the fear of war will dissipate even while more US military personnel is streaming toward the Arab Gulf to join the thousands of US soldiers already on location. Naturally, the fear of war is still elevated given the propensity of various nations to discuss war and as preparations for an invasion of Iraq advance full speed ahead. And just one terrorist attack attributed to Osama bin Laden would be enough to ratchet the fear factor up several notches.

 

Regardless of analysts’ opinions, markets are still well contained within the iron grip of a bear market. Economic news has been moderately better or at the least, better than a year ago, but that doesn’t change certain facts:

 

-        In all traded markets there is a propensity to overshoot the mark in whatever direction that they happen to be trending.

-        In most bear markets in equities, the end is marked most often, if not always, with P/E ratios in the single digits, unlike the double-digits more often seen currently.

-        Industrial capacity has barely budged for many months demonstrating that manufacturing isn’t recovering one iota.

-        The unemployment rate was much improved last month but masks the fact that the labor force participation rate in the employment statistics is now at 66.3%, which marks the lowest rate since late 1993.

 

A rally however, could extend several percentage points without violating any bear market measuring stick. Referring to the monthly charts on the S&P 500, a solid rally could take this index to the neighborhood of 921.00, a rise of over 10%, and still remain squarely inside the downward moving channel. In other bear markets, it has not been entirely unusual to have rallies taking the indexes higher by 30% or 40% or more. The one essential thing to remember is that a rally is only a rally and in terms of fair value, stocks have further downside potential given their lack of foreseeable profits and high prices.

 

On a strict technical basis, the picture is no better with companies such as Microsoft and GE, both star members of the Dow Jones 30, in veritable bear markets of their own. Microsoft is now below its 40-month moving average, but it’s the 25-month moving average, which is the important resistance line its price needs to cross before a new bull market could start and that line is currently in the neighborhood of $58.00. As for GE, the situation is even worse with the sharp downward slide putting a cap on advances above $27-28.00 and a potential bottom being found at around $15 where long-term support would enable the stock to firm up.

 

The fact is if we look at all 30 members of the Dow Jones index, we see only two stocks that remain interesting for investors as low risk long-term winners. These are JNJ and MMM. Of the other 28, there are approximately five or six that could be winners but at this point, given the market risk, the potential for gains doesn’t compensate sufficiently for the inordinate risk that one would take on owning these shares.

 

As for gold shares, the price of gold bullion has taken a large hit today in overseas markets and we thankfully have stayed away from owning bullion, which reached almost $390 an ounce last week. Since then bullion has dropped along with the fear of war and terrorism and the subsequent gain in the value of the US dollar. As for the share prices, there has been less reaction to both the recent rise and fall and consequently, while still weak, the lines of support haven’t been crossed. In trading today in Toronto, both GLG and GG were both down around a manageable 1-2%. Though the US dollar is rallying, the likelihood of an end to the bull market in the euro is highly improbable given the projected US budget deficit and US current account imbalance, therefore once the rally ends as it surely will, gold and gold shares will recover along with the euro.

 

 

New Buy Recommendations:

 

None.

 

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.

Date of Entry	Name	Symbol	Entry Price	Current Price	Action Rating
12/16/02	Glamis Gold	GLG #	10.40	11.65	H
12/16/02	Gold Fields	GFI	14.68	12.30	H
12/16/02	Goldcorp	GG #	12.75	11.80	H
12/16/02	Harmony Gold	HMY	16.98	14.35	H