Stockscom Report for Sunday June 15 2003

Publisher: Colin Alexander     Editor: Ken Wilson

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

 

 

Market Synopsis

 

What has happened to the stock markets over the past thirteen weeks? For those investors dreaming of a return to the previous decade, the rise has been nothing short of astounding and has given a big boost in confidence to an investing public ripped apart by depressed market capitalizations and shady corporate scandals. Have we been overly pessimistic or justifiably cautious? Should we join the bullish rally?

 

Perhaps we have been fighting the tape and the easing of the Fed. However, this market has many of the characteristics of a bubble, with absurd valuations for many stocks, especially tech-related, which leads of course to heavy insider selling. In May alone, corporate insiders disposed of $3.3 billion worth of stock, which represents the highest amount of selling in a month in the past two years. It might be argued that executives had no better opportunities to sell in that period but a quick perusal of price action shows that the rally after September 2001 and the one that began in December 2002 were also significant carrying the indexes upward more than 20%.

 

The current rally has produced gains of 21% on the Dow Jones, 24% on the S&P 500 and 28% on the Nasdaq. As a matter for comparison, Japan's Nikkei, representing in broad terms similar market risk, has seen similar performances over the course of its descent from 39,000 to its current 9,000 level. Specifically, the period from the 1992 lows to the peaks in 1993, 1994 and 1996 closely mirror the price action seen here in North America for the July 2002 to present day period. But to put everything in clearer perspective and to provide some idea of potential risk, from that same peak in 1996, the Nikkei has fallen fully 57% to where it is today. Therefore no one could be faulted for missing those rallies in a secular bear market.

 

Verifying the monthly charts for indexes, we see that we're at an extremely early stage of a new bull market, if it is one, and truthfully, this rally hasn't negated neither the bear market nor the potential to be entering a sideways mode. Moreover price action is now bumping into the 25-month moving average on all three indexes. Whereas before the 25-month line provided concrete-like support from 1995 until 2000 to both the Dow Jones and the S&P 500 and allowed only a small breach on the Nasdaq, once breached for good in mid-2001, the same line has instituted unforgiving resistance. In the past two weeks however, the Nasdaq index has attempted to break through this line, but each time, it fell back leaving us to question whether this resistance is still as strong as it has been in the past.

 

Even if we presume that the bear market has finished, there is always the strong potential for sideways action instead of another bull market beginning. The Dow Jones gives us a good example of the sideways pattern during the period from 1966 until 1982, where for sixteen years there were sizable rallies, but none that marked the beginning of a new bull market. Now with summer fast approaching, it would not be unusual for a seasonal decline to begin reaching an autumn low a few months hence.

Just because we are cautious doesn't mean that we are wrong to be cautious because there is considerable justification for caution. Our recommendations are designed to be conservative options, which above all, respect the risk potential in any investment and recognize the importance of preservation of capital.

While this market has surprised us on more than one occasion during the current rally, it does appear to be reaching the end of its line. Since the one-day reversal on Friday June 6^th, two of the three indexes have moved slightly higher but on substantially lower volumes and closing price levels have remained below the top of the price range of that Friday. This price/volume action often is a prelude to a move lower in price. The VIX volatility indicator also agrees with these assumptions as recent action shows it beginning a move higher – it has an inverse relationship to prices. For the past several weeks, VIX has been flattening, but now the moving averages have caught up and it is poised now to break above its 25- and 40-day moving averages – a signal of lower prices.

 

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
04/21/03	AES	AES	4.43	7.97	B
05/12/03	Cott Corp	COT #	20.02	21.47	B
03/05/05	Encana	ECA #	33.66	38.55	B
03/04/03	Energen Corp.	EGN	30.68	34.05	B
03/04/03	Firstfed Fin. Corp.	FED	30.55	34.25	B
03/05/05	First Niagara Fin G	FNFG	12.59	13.20	B
06/02/03	IMAX	IMAX #	7.74	7.40	B+
04/21/03	LCI	LCI	13.60	21.35	B
04/28/03	TransCanada Pipe	TRP #	15.85	18.75	B