Stockscom Report for Sunday Aug 10 2003

Publisher: Colin Alexander     Editor: Ken Wilson

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

 

Market Synopsis

 

The dog days of August are among us and with fewer active investors and lower trading volumes, the risk potential of adverse shifts increases as market moves tend to be more callous and abrupt. Certainly the Nasdaq fits in this category with uncommon weakness in the week just past. The Dow Jones and the S&P are more difficult to gauge given their own peculiar movements.

 

We pointed out last week that there were now Lindahl sell signals on the Dow and S&P while the Nasdaq teetered under the pressure of a double downside reversal and that all of these signals were coming on the oft-reliable weekly charts. Of the three, we observe that the Nasdaq was alone in unequivocally following the rule. The broad market as represented by the S&P 500 shed a little more than two points and this is perhaps a warning signal of a significant fall while the Dow managed to end the week with a gain and put into doubt the signal. However there is one caveat to the Dow's gain and that is that only 12 components of the Dow 30 actually finished the week in positive territory. The gain in the Dow Industrials owes much to the fact that the weight of any share in the index is directly related to its actual share price meaning that a more expensive share carries more weight than a cheaper share price.

 

For now there is no technical merit in buying any of these indexes and with the raft of improving economic indicators in the past two weeks, we'd be reluctant to sell short. In this past week, indications of improved productivity, increases in factory orders and higher retail sales have further helped to change sentiment. Given the $13 billion cut in federal taxes that is now beginning to show up in pay slips, reports on retail sales and consumer confidence should continue to be positive for now. However the weakness in states' and municipalities' finances will see their margin for maneuver limited and increase the possibility of tax increases to shoulder the burden.

 

California is undoubtedly the poster child for weakened states' finances with a budget deficit of $38 billion, which has lead to the unusual move to remove the governor via recall. But California is not alone in this department and other states are hurting from the jolt caused by substantially reduced tax receipts.

 

Besides taxes, there is the possibility that bond yields and oil prices also create roadblocks to an economic recovery in the short term. Ten-year bond yields have leaped to 4.3% from 3.1% in the past six weeks on the belief that recovery in the second half would be much stronger than first thought. But higher bond yields threaten the very pillar of strength that the economy has relied on for the past two years – a strong mortgage and housing market. The money taken out of mortgages has fueled consumer spending while new home purchases has prompted the purchase of durable goods in the form of furniture and appliances.

 

As for rising oil prices, analysts are still waiting for the flood of Iraqi crude to arrive on American shores. Sabotage to oil infrastructure has plagued the efforts of the army to bring Iraqi crude production back online and boost exports to produce much needed national income. Progress is slowly being made, however the price has remained stubbornly high and this is causing worries that any recovery will be short-lived or even weakened considerably.

 

We've been carefully watching the movement of the VIX volatility indicator, which has tended to give us signals of impending market movements. This week in an unusual move, the index peaked just shy of 26 before reversing the gains and finishing with a reversal. This closing reversal adds new doubt to a new drop in the broader index since the VIX moves in an inverse relationship to equity prices.

 

New Buy Recommendations:

 

Steelcloud (SCLD) – This company designs and manufactures small computers specifically designed for security purposes and with the renewed interest in anti-terrorist activities, they have benefited from significant defense contracts. Price made a new high for 2003 on Friday and appears set to break out further.

 

Crystallex (KRY) # – This gold miner has been granted the rights to the vast 10 million ounce Las Cristanas in Venezuela and with the rise in gold prices, it should see its stock price appreciate. As rightful owner of these proven reserves, they also become an interesting target for takeover by one of several competing gold companies wishing to increase reserves.

 

New Short Sales

None.

 

Stock Positions to Sell/Exit:

 

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.

 

We were stopped out of IMAX, FED and FNFG this week.

 

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	22.57	H
03/04/03	Firstfed Fin. Corp.	FED	30.55	36.00	SOLD
03/05/05	First Niagara Fin G	FNFG	12.59	14.75	SOLD
06/02/03	IMAX	IMAX #	7.74	7.95	SOLD
04/28/03	TransCanada Pipe	TRP #	15.85	18.23	H