Stockscom Report for Sunday July 20 2003

Publisher: Colin Alexander     Editor: Ken Wilson

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

 

Market Synopsis

 

Equity markets are telling us in no uncertain terms that at least for the short term, the dominant direction for prices will be downward. The proof for this direction lies in the charts, which show a marked preference right now for distribution not accumulation. Money invested in equities is generally being taken off the table and stored in money market funds or bond-related instruments. Friday's rebound higher was accomplished on much lower volumes possibly attributed to early summer departures or vacations so that a renewed slide early in the week would not be unexpected.

 

Currently looking at weekly charts of the S&P 500, we see the completion of a Lindahl sell signal coupled with a double top at 1015. This is hardly surprising given that the summer doldrums are upon us and it is the middle of July – a time of year notable for peaks in stock indexes. The Dow Jones and Nasdaq have fared much better of late and while there has been no sell signal as blatant as the one formed by the price bars on the S&P, other chart indicators are confirming the diagnosis that the bulls' party is over for now.

 

Economic data released this past week didn't cause much of a change in investors' views for although durable goods manufacturing rebounded a little stronger from the month before, year over year comparisons have numbers that show shrinkage. Therefore until the sign extends further, there is no reason as yet to believe that we are seeing the much-anticipated recovery in manufacturing. And perhaps more importantly, the industrial capacity figure didn't budge from May's figure. We continue to attach much weight to the capacity numbers feeling that it's simplicity surpasses the complexities of other data describing very succinctly whether or not recovery in manufacturing is truly occurring. With over a quarter of the nation's industrial capacity shuttered right now, one quickly understands why expansion in manufacturing won't necessarily lead to an economic boom and too, why capital expenditure for equipment has been slow to increase.

 

What was important this week was Alan Greenspan's semiannual testimony on Capital Hill, which stated clearly for everyone to hear, that the financial wheels will be staying well greased from now until well down the road or at least the next twelve months. Basically, he implied that Federal Reserve overnight interest rates would remain at or below current levels regardless how strong the recovery might appear. He wrote off the idea that long treasuries would be bought in an unusually aggressive move to ward off deflation though admitted later that there was still a chance that such action could occur even as interest rates were cut further from the current rate of 1.00%. And he accepted that the Bush Administration's fiscal policies of massive tax cuts combined with the loose monetary policies of the Fed meant that a huge financial stimulus would be generated. The possibility that inflation results would be deliberately ignored in a war to be waged against deflation.

 

The big question is, how does that affect investors? This massive monetary and fiscal stimulus coupled with low interest rates almost guarantees that another stock market bubble occurs along with a continuation of the already begun bond bubble, which took a breather this week. All this free and easy money will most certainly find its way into stocks and bonds, but the key will be to watch what the Fed does and pull out just as the Fed prepares to pull the plug on the bubble. In the case of bonds, this won't happen until businesses begin to ramp up spending and the Fed no longer needs to rely on mortgage refinancings to ensure consumer spending, which has been the only economic leg to stand on for the past two years. As for stocks, it will most likely result in more bull rallies over the short/intermediate terms and a stockpickers market over the long term that rewards few and punishes several.

 

New Buy Recommendations:

 

None. Market risk is far too great at this time for any new forays into buying shares.

 

New Short Sales

None.

 

Stock Positions to Sell/Exit:

 

We had applied some stops to some of our holdings in previous reports in anticipation of increased volatility. Three stocks were exited this week upon hitting their respective stops. The drop in price of natural gas affected ECA and EGN these past few weeks while LCI was struck by a bout of selling on Thursday and Friday of this week.

 

TRP – We managed to stay in this trade but only by the thinnest of margins. At this point, the retracement appears to have completed its move and the share price is now recovering. We will keep the stop however at $17.40.

 

IMAX – We want to apply a stop of 7.95 on this stock to prevent any unnecessary losses.

 

 

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
05/12/03	Cott Corp	COT #	20.02	22.33	B
03/05/05	Encana	ECA #	33.66	35.50	SOLD
03/04/03	Energen Corp.	EGN	30.68	31.60	SOLD
03/04/03	Firstfed Fin. Corp.	FED	30.55	37.41	B
03/05/05	First Niagara Fin G	FNFG	12.59	15.24	B
06/02/03	IMAX	IMAX #	7.74	8.37	H
04/21/03	LCI	LCI	13.60	18.74	SOLD
04/28/03	TransCanada Pipe	TRP #	15.85	17.87	H