Stockscom Report for Sunday Oct 26 2003

Publisher: Colin Alexander     Editor: Ken Wilson

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

 

• Buy the rumor – sell the news
• Equity markets continue their ambiguity

 

Market Synopsis

 

Stock market indexes were hit by some headwinds this week with all three major indexes finishing the week in the red. It truly appears to be a case of “buy the rumor – sell the news” as many positive earnings reports continue to roll in. At last count there were over 300 companies in the S&P 500 that had reported earnings so far and of these companies, about 64% have surpassed their expectations, 23% have come in as expected, and 13% have announced lower than expected earnings. The overall average of earnings is 6% greater than expectations. Meanwhile the run up in the stock markets thus far in 2003 is as follows: S&P 500 +17%, Dow Jones +15%, and Nasdaq Composite +40%. Looking for a moment at the P/E ratio of the S&P, a measure that is representative for the broader market, it now resides at 29.78.

 

Now 29.78 as a P/E ratio would seem to be an expensive stock, in general, though not if the company's growth was in the neighborhood of 30% per year or more. P/E ratios come in all shapes and sizes and depending on the sector, an investor can expect a P/E of less than 10 or a P/E greater than 30. Much depends on the perception of the company's growth prospects and growth prospects of the sector itself. But the P/E ratio 29.78 belongs to the S&P 500 stock market index. This index is a group of 500 large companies supposedly representative of the general corporate environment and of all industries and yet it sports a P/E ratio just shy of 30 suggesting from a theoretical point of view that the general public can expect this group of companies to grow on the order of 30% per annum. That would seem to us to be a little far-fetched – perhaps if this were a group of nimble small-cap companies then the average of 30% growth might seem plausible, but as it is, it just appears hopeless.

 

Taking this week's theme of “buy the rumor – sell the news” another step, we could expect similar reaction (and more headwinds) to the release of the GDP figure on Thursday morning. This is the first estimate and revisions are usually substantial, but most pundits are expecting a number greater than 6% and we wouldn't argue with that. The most important aspect to keep in mind is that it's in the past! And in stock markets, you pay for what's in the future! With the fourth quarter being almost one month old already, we feel reasonably certain that growth will not be as robust as in the third quarter, due in no small part to the lack of new tax rebates, the drying up of the refinance market in mortgages, and the lower spending in military expenditure.

 

This is a busy week for economic data; not only do we have the first estimate of Q3 GDP on Thursday, we also have the Fed Reserve meeting to decide interest rates starting on Tuesday, durable goods reports, personal income and spending and a look at consumer confidence for the month of October.

 

Glancing at the charts of the major stock indexes, we have the feeling that Friday's comeback from deep losses was an anomaly and that the rebound only presented an opportunity to those not yet short, to get short of the indexes. On the S&P daily chart, there was a Lindahl sell signal on Wednesday that wasn't followed through on Thursday, but Friday's close confirmed the move with a close below the closing of Wednesday. The Nasdaq was more blunt with large drops on each of Wednesday, Thursday, and Friday ensuring that nobody could misinterpret the message. Microsoft was probably the loudest signal emanating from the Nasdaq with a very large gap down on Friday and a losing day, which saw its stock price drop $2.30

 

We made comments in Thursday's alert about our recommended shares. We were stopped out of DRIV and we modified our recommendations to buy, signaling that only TRP and BGO were worth buying at this point.

 

New Buy Recommendations:

 

None.

 

New Short Sales

None.

 

Stock Positions to Sell/Exit:

 

New stops have been added to the list while others have been modified. Those that have blanks, are being carried unstopped for now. Please see our complete list of stops in the table below.

 

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
09/29/03	AES	AES	7.50	8.14	unstopped	H
10/06/03	Align Tech	ALGN	13.46	14.62	12.00	H
08/25/03	Bema Gold	BGO #	2.15	3.37	unstopped	B
09/29/03	China Unicom	CHU	8.18	9.02	7.60	H
10/06/03	Citrix	CTXS	24.31	24.20	23.17 *	H
05/12/03	Cott Corp	COT #	20.02	25.63	22.98	H
10/06/03	CP Ships	TEU #	21.49	20.97	20.00	H
10/06/03	Digital River	DRIV	29.88		28.97 *	SOLD
09/08/03	Sapient	SAPE	3.72	5.25	4.75	H
04/28/03	TransCanada Pipe	TRP #	15.85	19.90	19.42	B

 

* Stop on a closing basis