Stockscom Report for Sunday June 1 2003

Publisher: Colin Alexander     Editor: Ken Wilson

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

 

 

Market Synopsis

Friday's trading brought the S&P 500 to a new 10-month high of 963.59 besting the August 2002 high of 962.70 and by consequence, this marks the end of the bear market leg that began approximately three years ago in mid-2000. Reaching this milestone was made more significant by the fact that the key level was attained and recorded as a month-end closing level. (Given that the S&P 500 is composed of such a broad selection of sectors and companies, we prefer this as a general barometer of the market to the Dow Jones Industrials.)

 

There is now a distinctive “W” formation on the monthly chart of the S&P, which confirms the same formation on the Nasdaq chart. As always, we prefer the monthly charts as the long-term indicator of general market direction and especially in choosing stocks. With the latest leg in the rally, there is now firm evidence that the inflow of money into the equity markets is so great and so resolute that we must recognize the shift in sentiment as more than temporary in nature. In addition, we are witnessing a break in downward trending channel lines that have until now delineated the upper boundary of prices. The monthly close (Friday) on the S&P has effectively broken the channel line on the upside providing further confirmation of the change in direction.

 

Overnight this Sunday evening, the S&P 500 June futures contract is trading 5.30 points higher as traders interpret the chart technicals in similar fashion and buy stops get tripped on the way higher. Having passed through this key level, the rally could very well develop a second wind pushing prices much higher despite the overbought nature of the market.

 

The key element driving up the market indexes on Friday was the release of the Chicago Purchasing Manager's index, which jumped to 52.2% well above the 48% that had been expected. On Monday morning the National PM index reading will be released and now, many analysts are expecting it too to either be positive or run close to the 50% level, which is the boundary between an expanding economy and a contracting one. Perhaps surprisingly, little attention was given to the 2.4% drop in durable goods orders for April that was announced on Wednesday morning. And certainly a strong case could be made to ignore such bad news representing historical data during a particularly difficult period when confronted with a reliable forecasting tool like the PMI figures.

 

Of course, one important characteristic of a strong market rally is its ability to ignore ambiguous or decidedly negative data and this rally has seen its share of bad news. The public has voted with their investment capital in the past two months and ignored or disregarded the effects of the conflict in Iraq preferring instead to believe in a solid economic recovery. Data released this week may clarify that picture with manufacturing shipments, inventories and orders as well as the employment numbers on deck.

 

While the rally in stock prices is real and must be respected, we continue to express caution at current levels. Fundamentally, there are still many economic problems both present and on the horizon not the least of which are the decline in consumer spending, the burgeoning unemployment rate, and the low capacity utilization leading to the lack of pricing power at the producer level. Given these very significant problems in the economy and an outrageous P/E ratio for the S&P today of 35, it is not inconceivable that a failure in this rally or one other will result in another downward leg that settles below the October 2002 low.

 

New Buy Recommendations:

 

IMAX # – This is another one of the small cap issues flying under the radar screens of most analysts that is worthy of our attention. Imax cinemas have evolved and rebounded from their near collapse with new theaters and more films, many of which are blockbuster films redeveloped using the Imax large screen technology in order to reach a wider audience. Earnings are now beating expectations and the executive suite is sending a strong buy signal with their own purchases of Imax shares the past few months. The charts are sending a signal that a new 52-week high is imminent and the daily provides us with an indication that the most recent retracement has been completed and it has resolved to move higher.

 

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
04/21/03	AES	AES	4.43	7.92	B
05/12/03	Cott Corp	COT	20.02	21.51	B
03/05/05	Encana	ECA #	33.66	36.65	B
03/04/03	Energen Corp.	EGN	30.68	32.63	B
03/04/03	Firstfed Fin. Corp.	FED	30.55	33.93	B
03/05/05	First Niagara Fin G	FNFG	12.59	13.68	B
04/21/03	LCI	LCI	13.60	17.15	B
04/28/03	TransCanada Pipe	TRP #	15.85	17.68	B