Stockscom Report for Sunday Sep 28 2003

Publisher: Colin Alexander     Editor: Ken Wilson

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

 

• Markets continue to be weak – use stops!
• US$ dropping – maybe not yet, but count on it

 

Market Synopsis

 

Last week we were nervous, this week is no different. Everyone trading equities asks the same question. Has the massive bull rally of 2003 come to an abrupt end? Possibly, even probably, but there is seemingly no limit to the efforts of the bulls to sustain a rally. As for an entrenched rally such as this one, the reluctance to believe is legendary and one only needs to look back a few short years to the year, 2000 for examples. Certainly this is another bubble, one that has been nurtured by the Fed Reserve's easy money and a widely held belief in economic recovery, but at some point the bubble is burst by a combination of stretched valuations and false assumptions.

 

For traders, the problem is often the same after each bull-run. At which point does the investor cash-out and either move to the sidelines and/or begin shorting stocks? In other words, where is the optimum point for market timers to end their participation at the long end? In our particular case, we assigned protective stops to many of our shares and in many cases last week, they were hit and an exit resulted. Of course, stops are a double-edged sword; upon exit, the investor is safe on the sidelines having survived through the protection of the stop but at the same time, in a minority of situations, the investor is unfortunately stopped out at the precise time that he/she should be in the trade.

 

Now trying to optimize the exit is never easy and especially when dealing with a strong bullish rally. Often an additional leg up can occur long after traders have been convinced of certain chart failure. Thus the retracements are unpredictable and often endure longer periods than one would think possible.

 

But at this juncture in time, the technicals are simply representing the prevalent view that there is a mix of overvaluation and a hint of doubt surrounding the economic recovery. That stocks are overvalued is perhaps the easiest to understand. If we were to believe that Nasdaq stocks were priced at fair-value in the spring and that an economic recovery would aid them, it would be quite an exaggeration to believe that a 50% average increase in market capitalization was warranted.

 

As for the economic recovery, the government's statistics have repeatedly demonstrated broad economic indicators that have improved in the past few months. Certainly the recovery has been jobless as numerous commentators were quick to point out, but this in itself is not that unusual and it's always worth remembering that at around 6.0%, unemployment isn't the nightmare that it's professed to be. Having stated that, analysts are concerned now that these statistics are skewed. For example the amount of military spending in the second quarter was much greater and accounted for an unusually high 1.7% of the total 3.3% increase in GDP. And now in this, the third quarter, we see that durable goods orders for August have dropped considerably thus causing new worries for policymakers. The question remains unanswered: Has not all this fiscal and monetary stimulus achieved anything?

 

The US$ will continue its slide despite comments from some that Japan will revert to its old practices of buying US$ and printing more yen to pay for them. The Dubai agreement was another watershed agreement covering currencies and while MOF officials and government ministers from Japan will suggest that intervention is still a tool at their disposal, it is highly unlikely to be used. If it were to be deployed, it would have been manifest in the 111.00 – 112.00 range. There has been no evidence of Japanese intervention in the past week and barring a sudden collapse in the US$, there will not be action on the part of the Japanese authorities.

 

Looking at the charts, the damage wrought by the moves lower last week has left the S&P 500 and the Dow below their 40-day moving averages. The Nasdaq Composite is trading slightly above its 40-day, however the Nasdaq-100 is now below. Though marking an upward trendline is somewhat ambiguous on the Dow and S&P charts, the Nasdaq index is much cleaner and we see that this trend has yet to be broken. Were the index to fall another 20-30 points from this point, the trendline would surely be broken. Indications of money flows into and out of the equity indexes suggests that we will see the trendline broken very soon unless a reversal in that flow occurs.

 

 

 

New Buy Recommendations:

 

CHU – We were stopped out of CHU but this is one case where we should still be in. The increase in share volume that began in early September is extraordinary and this week was no exception. With this increase in volume, it is a safe bet that institutions are building positions and that is pushing up the price. So in this rare instance, we recommend buying once more CHU.

 

AES – We held this stock earlier this year and now it appears poised to begin another leg up. The past three sessions showed how firm the support was at or around $7.00 and with Friday's move, it proved that a stock that won't go further down, must go up.

 

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.

 

Our complete list of stops is now part of the table below.

 

We were exited from ABB, CHU, PFSW, and SCLD during the week due to stops being hit.

 

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	Stop	Action Rating
08/25/03	ABB	ABB	5.43	5.88	5.50	SOLD
08/25/03	Bema Gold	BGO #	2.15	2.54		H
08/25/03	China Unicom	CHU	7.63	8.00	7.45	SOLD
05/12/03	Cott Corp	COT #	20.02	22.98	23.32	H
08/25/03	PFSweb Inc	PFSW	1.64	2.47	2.20	SOLD
09/08/03	Sapient	SAPE	3.72	3.80	3.40	H
08/11/03	Steelcloud	SCLD	3.55	4.51	4.15	SOLD
04/28/03	TransCanada Pipe	TRP #	15.85	18.38	17.40	H