Stockscom Report for Sunday May 9 2004

Publisher: Colin Alexander Editor: Ken Wilson

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

• Equities heading for bigger tumble

Market Synopsis

We had divergent opinions on the current state of the economy this week with raw data such as the April employment report, released on Friday, offering a very rosy view of the future in stark contrast to a rather somber forecast that came from the stock market. As we closed out the week, price action saw the Nasdaq dip, for the second time in as many weeks, below its 200-day moving average. Both the Dow Jones and the S&P closed well above their respective 200-day lines but are showing broad weakness that could easily translate into failure at these very important resistance levels. On Friday, volume was unusually light on the Nasdaq market while heavy on NYSE, so much so that NYSE topped the tech giant in one of those rare occasions. Nasdaq trading has been surprisingly light all week long suggesting that trading of speculative issues is being reduced. We had expected the volumes to be light in the days leading up to the April employment report but we were surprised at Friday’s volume. Breadth on both exchanges was decidedly bearish with NYSE showing an extreme advancers:decliners ratio of 1:12.

Now all three markets show signs of a willingness to test the March lows reached just a few weeks ago and a strong potential for these lows to fail as resistance points. When the stock market commences to lose in such a pattern, the risk of holding equities is similar to an exercise in catching falling knives – an event that is much safer to watch from the relative safety of the sidelines.

There was no shelter in bonds or in precious metals either, which turned down as the US dollar strengthened in response to the solid economic news. Thus all types of financial investments suffered in the wake of news of economic recovery leading many to wonder how this could happen. The fall in equities on the Dow is particularly pronounced in financial stocks or interest-rate sensitive issues such as the banks, Citigroup and J P Morgan, and companies that have significant financial arms such as GM and GE, all of which finished Friday below their respective 200-day moving averages. The threat of higher interest rates brought on by an improving economy that’s beginning to fire on all cylinders has the potential to slow down considerably much of this economic activity. An American consumer already heavily in debt and carrying much of this debt in adjustable rates would quickly be in distress under higher interest rates. Moreover we are approaching the mid-year point of 2004 when the last of the tax cuts will have been implemented and the mortgage-refinancing boom will have ended reducing the chances for an increase in the amount of discretionary income for spending.

Safe havens were hard to find by week’s end with the exception being cash. The chart for bonds was particularly bearish after Friday’s trade having broken out of an upward trend in place since January 2000. Therefore, despite the fall in precious metals and in particular gold stocks, we still consider it to be a worthy hedge against all of this potential risk in financial instruments.

Analysts are predicting a rate increase in June and indeed the treasury bill is now pricing in a 98% certainty of a quarter point gain, but with the price of bonds dropping, lending rates are already increasing, which will undoubtedly add new stress to those consumers with adjustable rates and could conceivably lead to tighter household budgets.

New Buy Recommendations:

None.

New Short Sales

None.

Stock Positions to Sell/Exit:

We sold Align Technology, Overstock.com and IVillage due to the losses sustained and to the presence of technical risk elements. And we were exited from our Wal-Mart position at the stop.

We recommend selling the position in Suncor (SU) as it appears to have topped out and now looks more like a short candidate than a long. There is much more crude oil in inventories than last year at this time and it may only be a matter of time before the price of crude starts to recognize that dynamic. To be sure, inventories of unleaded gas are well below those of 12 months ago but unless there is a sustained price at these levels or higher, a condition we feel is unlikely, the price of the share could drop substantially.

Portfolio Comments:

Consol Energy (CNX) – We are watching this share price carefully for though they mostly mine coal, the share price is acting in ambiguous fashion as if it were unsure whether to be bought or sold.

Transcanada (TRP) – This is another energy firm that we are paying close attention to given the weakness in all energy stocks.

Integrated Silicon Solutions (ISSI) – Technically this stock was beaten up last week but we don’t wish to exit just yet. Fundamentally, the company is strong with large increases in revenue and net income forecast for this year. We would prefer to keep a close watch over this as it dipped a bit below its 200-day moving average last week.

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
04/19/04	Align Tech	ALGN	22.09	17.67		SOLD 05/03/04
03/01/04	Consol Energy	CNX	27.50	27.80		H
04/08/04	Golden Star Res.	GSS #	6.88	4.27		H
04/26/04	Integrated Silicon	ISSI	17.15	15.14		H
04/12/04	IVillage	IVIL	8.36	6.28		SOLD 05/03/04
04/20/04	Overstock.com	OSTK	36.04	37.24		SOLD 05/03/04
04/26/04	Perrigo	PRGO	22.00	21.19		H
03/01/04	Suncor	SU #	26.25	24.96		SELL
03/08/04	Transcanada Corp	TRP #	21.34	19.86		H
23/02/04	Wal-Mart	WMT	59.44	57.00	56.00	SOLD 05/04/04
11/03/03	Wheaton River	WHT #	2.36	2.37		H

New stops in BOLD

* Stop on a closing basis

** Buy if above entry price