Stockscom Report for Sunday Aug 24 2003

Publisher: Colin Alexander     Editor: Ken Wilson

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

 

Market Synopsis

 

August is a month like no other in terms of stock market action. It can be cruel or it can be kind and usually this is determined by the prevailing direction up until that point. For August can be a month of striking reversals. On Friday, we witnessed a most decidedly ominous reversal on all major indexes – a large outside reversal that may certainly be one of many small sell-offs that have occurred over the past five months only to be nullified once more days later by another upward thrust in prices. (Actually the outside reversal occurred in all but the Nasdaq index where it was a closing reversal.) But this one stands out in contrast to the others for this was a significant outside day unlike any seen since April 16 and while the previous example happened during the strong rally from the March lows, this one has occurred at a time when many analysts are expressing second thoughts about buying shares in many companies due to the widely held belief that share prices are overvalued at current levels.

 

For the week though, markets were noteworthy for having logged new highs in the case of the Nasdaq and the Dow Jones. And the S&P 500 was noteworthy for not achieving a new high as once more it fell apart just above the 1000 level, a level which has proved to be quite resistant. The reason for the failure this time was the financial sector, which comprises approximately 21% of the S&P index and more importantly the sub-sector composed of large banks, which dropped an average of 4.0% this week. This distribution of shares is undoubtedly a reaction to the fiasco with Freddie Mac and to the bond reversal of the past few weeks that has cost banks with mortgage exposure significant sums. Ironically with the spread in short and long term interest rates increasing of late, this is normally an environment that is conducive to higher profits for these same banks.

 

One important aspect of the sinking financial sector is that there is unlikely to be any near term breakout in the indexes as long as this particular sector is under severe pressure. Just a quick look at the Dow Jones component stocks, Citigroup and JP Morgan, tells us there's evidently something wrong with this group. Their charts look suspiciously weak with head and shoulders patterns having developed and they could represent an opportunity for a short sale.

 

For now, we only express caution concerning the large reversals from Friday and the failure of the S&P to reach a new high. While we monitor that situation, we prefer to look at the broader market as a stock-pickers habitat since there are still some situations, which present low risk opportunities for capital appreciation. The key here is “situations” because we feel that the story behind the stock is as important as the promising technical chart aspects.

 

New Buy Recommendations:

 

ABB (ABB) – ABB is the large Swiss engineering firm that is concentrated in matters related to electricity generation and transmission. With the recent blackout, early investigations are pointing to weaknesses and gaps in the capacities of the North American transmission grid. ABB is perfectly positioned to profit from the probable increase in transmission capacity. Technically, the stock has been breaking out this month and is currently making a new thrust higher after having retraced some recent gains.

 

Bema Gold (BGO #) – The Bema story is similar in many respects to the Crystallex story in that they have a large deposit which will either be mined by them or in a joint venture with others. The difference in risk with this company is that the final assay results won't be ready until September, however they have released many details of their drilling program already and it has proven to be quite spectacular garnering much deserved interest. Technically the stock appears poised to make another move to the upside having consolidated above the $2.00 level the past few sessions and testing the gap left open from August 13. Once the assay results are published, they could potentially become a takeover candidate for one of the majors.

 

China Unicom (CHU) – This story is all about China. Chinese consumption is rising at a sharp rate and a good portion of the domestic demand is for electronic goods and autos. The wireless phone market is no exception and China's is one of the fastest growing wireless markets in the world. Technically, the gap up and breakout on Friday was very significant setting a new high for 2003 and displaying the support present at the 40-week moving average on the weekly.

 

PFSweb Inc. (PFSW) – This company takes charge of outsourced business processes but what we really like is the fact that they managed a profit in their latest quarter of $0.03 per share and their book value is just above 1. Technically, price has been consolidating but is now due to break out further to the upside.

 

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.

 

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	23.26	H
08/11/03	Crystallex	KRY #	2.28	2.80	B
08/11/03	Steelcloud	SCLD	3.55	4.64	B
04/28/03	TransCanada Pipe	TRP #	15.85	17.62	H