Stockscom Report for Sunday Feb 22 2004

Publisher: Colin Alexander     Editor: Ken Wilson

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

 

• The weakening structure of the major indexes

 

 

Market Synopsis

 

Broadly speaking, economic news this week still remained positive though one wouldn’t know it by looking at broad trends in either stocks or bonds. The three major stock indexes all finished in the red this past week, but by slim margins in total points. However, what the points don’t demonstrate is the vast negativity in price tendencies being constructed on the charts over the past four weeks. This negative shift in sentiment has all the makings of a downturn in the markets, but traders should exercise caution as there were other similar periods in the past year that were resolved by markets moving higher instead. The big question is, “Is this time different?” and we think it is. The Nasdaq market in particular appears weak and we anticipate losses in the index over the next few sessions.

 

Elsewhere in bonds, interest rate yields have rallied higher breaking through the downward trend begun in June 03 with a leg down to August. This has now become a counter-trend because once the bond began to be sold off, the intermediate trend was changed to downward. However, the charts changed on the first week of January with a weekly close above the horizontal line that had become the natural resistance level to further rises. The climb in bonds over the past few months tells us that the bond is quite popular and that long interest is driving both the prices higher and yields lower. Meanwhile most economic analysts are predicting a return to inflation since the economy is humming along both here and in a global sense and that a global recovery will generate significant demand for US products. The consequent increase in demand coupled with rising employment will mean that the Fed will be forced to raise interest rates.

 

But the market is telling us something different. Interest yields are still dropping as prices rise once more toward the highs reached in June. Whether we reach that particular point is anybody’s guess however the attractiveness of the low bond yields is winning fans from the competing equities and if we are to believe in lower bond yields, then we must acknowledge the concomitant lower inflation.

 

So our next question is, “who should we believe?” and the answer is - the market. For whatever reason, the market is telling us that yields are heading lower and so is inflation. This argument may change next week, next month or six months down the road, but until it does, it is not our place to argue with the market.

 

Even the metals markets are signaling global recovery with higher bond prices in direct conflict with the rise in base metal prices, which are usually a harbinger for increased economic activity. (Copper is often referred to as the metal with a PhD in economics) However, one could effectively argue that metal prices are not going up so much because of global recovery as they are because China is rapidly changing (in a development sense) and absorbing supply and because metal producers have stopped overproducing, turning excessive supplies into more measured production based on market forecasts of demand. These producers are now being rewarded with both higher prices of their product and higher share prices.

 

The strong US$ of late though battered metal prices at the end of the week. Gold sunk through its 100-day moving average – an unusual average in some respects often not paid attention to, however it’s worth remembering that this is one that Japanese investors pay much heed to. The last time the price of gold was below this average line was the first half of July. But for our purposes we will look closely at the intermediate trendline, which has been in place on the weekly chart since April 2003. This chart covering as it is a greater length of time makes it essentially a better indication of future trends. The lower channel line of support is situated at $390 today and still rising. Were the price to drop below this line, we would likely recommend investors exit from positions in gold. A move such as that would undoubtedly be used as a signal by many technicians to sell gold and whether we agree with the market or not, we abide by what it’s telling us. In longer-term weekly charts, we see that the price of gold could conceivably drop to 365-370 area and still be in a multi-year bull market. This 365-370 region represents the lower channel line of the trend dating from Dec 2001 until present day.

 

 

New Buy Recommendations:

 

Wal-Mart (WMT) - Normally we wouldn’t bother recommending new stocks in such an environment however, we feel compelled to mention three interesting stocks. The first is Wal-Mart whose chart persuades us that it is now beginning its next big step. On a monthly chart, we see that there was a steady rise in WMT from 1984 to 1993. Then it took a break for four years and was range bound. From 1997 until 2000, it rose steadily once more and since the beginning of 2000, it has once again become range bound albeit a large range of roughly $42-65. With Thursday’s and Friday’s moves, it has signaled its intention to break out once more from its dormancy and begin its next leg higher. The decisive final kick was Thursday’s gap higher, finally closing the gap that had occurred in November on the daily chart, on a closing basis. The fact that there was follow through on Friday only served to support the break on Thursday.

CyberOptics (CYBE) – CYBE released quarterly results on Thursday that beat estimates by more than 50% and consequently the stock jumped. This big gap higher pushed price to its highest level since early in 2001 and the charts suggest strongly that further gains are ahead.

 

King Pharmaceuticals (KG) – KG benefited from both strong quarterly results as well as increased ratings from two brokerages and price jumped to a level not seen in all of 2003. The steady rise over the past three months exploded on Thursday and signals new interest in this drug company.

 

New Short Sales

None.

 

Stock Positions to Sell/Exit:

 

Nanotechnology (NANX) was exited on Friday at its stop.

 

 

Portfolio Comments:

 

CHU – each passing week this stock appears stronger – the gaps on Jan 8, Jan 20 and Feb 13 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.

 

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	6.20		H
08/25/03	Bema Gold	BGO #	3.08	3.30		H
12/08/03	BHP	BHP	17.18	19.31		H
01/12/04	Beta Oil and Gas	BETA	3.25	2.76		H
09/29/03	China Unicom	CHU	8.18	12.75	10.49	B
05/12/03	Cott Corp	COT #	20.02	28.43	26.50	H
12/08/03	Inco	N #	35.70	36.70		H
12/08/03	Nanophase Tech.	NANX	7.64	11.85	10.00	SOLD
01/12/04	ON Semiconductor	ONNN	7.59	7.79	6.70	H
12/15/03	Overstock.com	OSTK	20.35	23.63	20.00	H
01/12/04	Sierra Wireless	SWIR #	21.95	26.87	22.50	H
11/03/03	Wheaton River	WHT #	2.36	2.80		H

 

New stops in BOLD

* Stop on a closing basis

** Buy if above entry price