Stockscom Report for Sunday Feb 1 2004

Publisher: Colin Alexander     Editor: Ken Wilson

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

 

• “January” effect to be positive on 2004
• GDP lower than expected

 

 

Market Synopsis

 

The end of January has arrived and the three major indexes all finished on the positive side but under considerably greater weakness than at the beginning of the month. When the year began, the indexes were in the middle of a rally moving prices well above the predominant trendline, a trend that has been in place now since April. Now, however, the prices are falling toward the trendline and in the case of the Nasdaq, this is the third time that prices have fallen below that line. The latter two instances occurred in November and December and these small but significant failures are early warning signals of the greater weakness to come in the tech-heavy index. We should expect nothing less given the duration of the current rally, which has not been visited once by a significant corrective phase.

 

As for the Dow and S&P, they’re both clinging to their respective 25-day moving averages albeit on different sides. The Dow is hugging the underside of its 25-day MA while the S&P 500, the strongest of all three, is cruising just above its own 25-day line.

 

What we are left with after studying these charts is the knowledge that the current short-term trend in each is down or sideways at best and that the longer-term trends remain intact. Until a sustained movement below the respective 40-day moving average occurs, there is no technical breakdown and therefore no opportunity for short sales. And with January finishing in positive territory, there is a strong likelihood of a positive end to 2004.

 

Friday morning’s release of GDP was cause for disappoint in some circles for while the expectations were for an increase in the neighborhood of 4.8%, the first estimate proved to be somewhat less stellar at 4.0%. Looking closer at the breakdown, we see that there has been an uncomfortable tumble in durable goods after the extraordinary results of Q2 (+17.7%) and Q3 (+28%) to the current +0.9%, a drop in government consumption (most of which increased in Q2 both on the federal spending side and from national defense spending). Support for higher GDP came in business spending, which was slower than Q3 but still remained strong nonetheless. As always we take all of this under consideration for the very material revisions always follow but we are left to wonder how, in an election year, will the government boost spending to ensure good growth in GDP or will they risk taking no action and hope that business spending improves enough to take up the slack, for the electorate will have three more quarters of GDP results before the need to decide.

 

This coming Friday will see all analysts watching the unemployment figures for January after the very unexpected mediocre results of 1,000 jobs created in December. These results will also affect future interest rate decisions for the Federal Reserve has made no secret that they’re looking for recovery in the jobs market before ruling that the economy is indeed on the mend. Hints of an interest rate increase were in the official Fed release on Wednesday when they dropped the “rates will remain low for a considerable period” statement. While many analysts immediately considered the possibility of rate hikes in the near future, we tend to believe that this subtle change is simply a warning for the market and not a sign of impending change.

 

Too, it is more than a little interesting that rate cuts were on the minds of the members of the European Central Bank. If interest rates are cut in the EU, we could see the emergence of a competitive devaluation of currencies. The appreciation of the euro currency has been quite sudden and with yen being sold by the Bank of Japan to resist its own appreciation, the pressure has been on European exports to bear the brunt of a currency revaluation among the three largest trading units. If the Europeans decided to lower their interest rates with the express purpose of lowering the intense upward pressure on the euro, the chances would be good that more investment dollars will flow into areas, which resist devaluation and the immediate beneficiaries of such a plan would be gold and silver producers. Thus, despite recent pressure on gold prices, we consider that holding these shares remains a good proxy for risk elements in the investment world.

 

New Buy Recommendations:

 

None.

 

New Short Sales

None.

 

Stock Positions to Sell/Exit:

 

We sold our position in TRP at the stop. It is worth mentioning that technical downside risk remains heavy on TRP despite any fundamental support for current prices.

 

CPHD – Cepheid announced results that were weaker than expected and future earnings lower than previously forecasted. The chart technicals broke the back on this one and we see no prolonged upside beyond a weak bounce off lows made.

 

CNX – Consol Energy released its quarterly results this week and while the losses were not entirely unexpected, the stock sold off and analysts downgraded it. The technical case for continuing to hold at this point is weak at best and while a continuation of Friday’s bounce is a strong possibility, there appears to be little likelihood of a return to the peaks for quite some time.

 

 

Portfolio Comments:

 

CHU – each passing week this stock appears stronger – the gaps on Jan 8 and on Tuesday this past week are the keys to its strength.

 

ABB – the selling has appeared to have stopped and it’s now much stronger technically than it’s been in awhile.

 

SCLD – this share has struggled and while we have considered on many occasions to close the position, there is evidently some investment money coming in and as a consequence, we keep it for now.

 

BGO, WHT – the retracement in the price of gold was inevitable as it’s moved in inverse relation to the US dollar for a very long time now. The dollar was vastly oversold and last week saw its first significant rebound in a few weeks, a move that was needed to bring some health back into the market. The potential for an interest rate cut from the European Central Bank could incite further US dollar strength in the short term, however the longer term trend is down and the monetary stimulus being created by the Fed assures the US administration of success in lowering the value of its dollar.

 

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	5.83		H
09/29/03	AES	AES	7.50	9.76	9.00	H
08/25/03	Bema Gold	BGO #	3.08	3.00		H
12/08/03	BHP	BHP	17.18	17.10		H
01/12/04	Beta Oil and Gas	BETA	3.25	2.99		B++
01/12/04	Cepheid	CPHD	13.02	10.10		SELL
09/29/03	China Unicom	CHU	8.18	11.60	10.00	H
12/08/03	Consol Energy	CNX	22.75	23.10		SELL
05/12/03	Cott Corp	COT #	20.02	27.93	26.00	H
12/08/03	Inco	N #	35.70	37.43		H
12/08/03	Nanophase Tech.	NANX	7.64	12.96		H
01/12/04	ON Semiconductor	ONNN	7.59	7.00		H
12/15/03	Overstock.com	OSTK	20.35	18.91		H
01/12/04	Red Hat Inc	RHAT	21.10	19.30		H
01/12/04	Sierra Wireless	SWIR #	21.95	27.14		B
12/01/03	Steelcloud	SCLD	5.05	3.83		H
04/28/03	TransCanada Pipe	TRP #	15.85	20.65	20.65	EXIT
11/03/03	Wheaton River	WHT #	2.36	2.61		H

 

New stops in BOLD

* Stop on a closing basis

** Buy if above entry price