Stockscom Report for Sunday Nov 23 2003

Publisher: Colin Alexander     Editor: Ken Wilson

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

 

• New China trade war
• Nasdaq's bull rally is over

 

Market Synopsis

 

There were two monumental events that occurred this week and neither had anything to do with economic statistics. The first was the eruption of another trade war – this time with China and the second was the Nasdaq index falling through the upward-pointing trendline. Perhaps it is of greater significance that these events occurred on the same day!

 

The first event, the initiation of a new trade war with China, is bearish for equities on many levels. In broad terms, the federal government invoked a rule that was written into the agreement that brought China into the WTO, allowing for temporary controls to be imposed on imports affecting industries that were severely displaced by the new cheaper competition. The logic, if there's any at all, was to allow these industries enough time to better structure themselves in order to compete. The reality is that this move only buys time for the industries for if they were truly serious about competition, they would have already restructured to better face the music.

 

Once again the Bush Administration fails to live up to its promise of being a true force for freer trade in the world. The US government spins an awfully good story about allowing the free market forces to decide how markets will be divided, but in truth, this Administration only has eyes for the next election and pays lip service to any honest attempts to open up markets and lowering barriers to trade.

 

The problem here stems from the decline in US manufacturing, which is a process that has been developing over several generations. As productivity grows through applied technology, responsive organizational structures and improved worker health and environments, the labor requirements are reduced. One needs only to look at the railroad, automobile or telephone industries with their long histories to understand these concepts on productivity. In all likelihood the losses in manufacturing would have been much greater had it not been for the innovativeness located here that is the root behind new industries, which eventually absorb much of the labor no longer required by the older industries (or at least the ones that survive).

 

Now many manufacturing jobs are located in southern states that are considered key states for President Bush or where he could be vulnerable in the election campaign. Too, the textile manufacturing industry is just one more industry that finds a sympathetic ear in the Bush Administration for their protectionist rants. Add these two parts together and one develops a recipe for success in 2004. But we are forced to ask, is this the approach the self-confessed flag-bearer for free trade and democracy should take on this matter of principle? We believe it's not.

 

In March of 2002, the Bush Administration imposed tariffs on several types of imported steel that were seen as damaging the domestic steel industry. Much like the textile industry, the steel industry is highly inefficient utilizing outdated equipment that cannot compete with the modern mills located in other countries, often in the Far East. The WTO recently ruled in favor of the plaintiff countries lined up against these tariffs and this was in response to the appeal launched by the US in the face of the original decision. Ultimately, these tariffs have hurt American consumers and companies because the higher final prices paid either hit the wallets of the American consumer or reduced the profits for the end-user companies. Coincidentally, the imposition of steel tariffs occurred at the same time as stock markets peaked in 2002 after a bull rally that lasted six months. Now this time we have a textile import quota system that essentially mimics the effects of the steel tariffs and we have a bull rally that has endured roughly twelve months. On the exact same day that the Bush Administration imposed these new textile import quotas, the Nasdaq stock market closed below the upward moving trendline.

 

The trendline that we speak of has been in charge of the rally since the month of March 2003. On Tuesday, the Nasdaq Composite closed at 1882 and it repeated this close on Thursday. While one close below the line might be considered an estimation error on the part of the chart drawer, the second close confirms the first. This rally is now officially over and the line of least resistance is downward. As if to confirm this, GE on Friday, had a very large outside down day that has seriously endangered the bullish gap left open from Monday and put into doubt the likelihood of a new rally beginning. In the meantime, MSFT, which gapped down on Oct 24, has continued to slowly lose ground and would be an excellent short candidate on any retracement higher. When the two largest cap companies commence a slide, the others are sure to follow.

 

One caveat to this new bearish scenario is that this is a holiday-shortened week and stock markets have an unusual habit of gaining in the lead up to a holiday. 

 

New Buy Recommendations:

 

None. Gold shares should benefit on a move above $400, which seems imminent. Additions to stock positions could be executed at that time.

 

There are many new stops applied. Please check the chart below.

 

New Short Sales

None.

 

Stock Positions to Sell/Exit:

 

We were exited from the ALGN trade this week at the stop mentioned.

 

Without recommending this evening, we would mention that we are monitoring CHU and SAPE closely as the general tech sector is suffering. Truly this is a stock pickers market and the upside at this point for the indexes and more specifically the Nasdaq seems minimal. When the likes of MSFT and IBM have charts that are effectively short sale potentials, there is little hope for the majority of tech stocks.

 

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
11/13/03	ABB	ABB	6.14	6.15		B
09/29/03	AES	AES	7.50	8.15	7.41	H
10/06/03	Align Tech	ALGN	13.46	16.88	15.50	SOLD
08/25/03	Bema Gold	BGO #	3.08	4.08		B
11/10/03	BP Prudhoe Bay	BPT	23.11	23.33		H
09/29/03	China Unicom	CHU	8.18	8.97	8.00	H
10/06/03	Citrix	CTXS	24.31	24.89		SOLD
05/12/03	Cott Corp	COT #	20.02	25.75	24.90	H
11/03/03	Ivanhoe Energy	IVAN #	4.99	5.80	3.75	H
09/08/03	Sapient	SAPE	3.72	5.28	4.75	H
04/28/03	TransCanada Pipe	TRP #	15.85	21.67	20.38	B+
11/03/03	Wheaton River	WHT #	2.36	2.69		B

 

New stops in BOLD

* Stop on a closing basis

** Buy if above entry price