Stockscom Report for Sunday May 16 2004

Publisher: Colin Alexander Editor: Ken Wilson

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

• Equities heading for bigger tumble

Market Synopsis

The contagion is spreading as weakness in foreign markets shapes the trading day and offers a glimpse at the week beginning. Across Europe and Asia, stock markets are floundering under geopolitical concerns, high oil prices and the potential for rising US interest rates. Overnight trading in the S&P 500 and Nasdaq has both indexes far lower than Friday’s close and poised to mark the start of another leg down.

Judging by the charts, this new leg down could take the Nasdaq Composite and the S&P 500 to their respective 40-week moving averages at 1822 and 1029. Without viable support at these levels, a further slide could take these averages down several more points to 1644 and 988 respectively where they might be supported by their 25-month moving averages. The key word here is “might” since there are several unknowns that have come to light only recently that could effect large changes in the strength of any global recovery. Primarily, a slowing Chinese economy could be a significant drag on global growth at least for the rest of 2004. But there is also tightening world oil supplies, scandal and inertia in Iraq drawing attention away from domestic issues, and a Chinese government eager to flex its military muscles, which has two hotspots in Hong Kong and Taiwan that are quickly becoming flashpoints for democracy

In this type of high-risk environment, one should never shun the use of large cash positions to protect one’s investment funds. Granted, this practice is not condoned by a mutual fund industry bent on ensuring that everyone’s dollars are fully invested all of the time, however the concept of timing the market has been proven to work and for those unwilling or unable to short sell stocks, then the only viable alternative is to preserve one’s investments through conversion to cash.

Many investors turn to bonds when stocks suffer but this may not be the best alternative this time around. With the potential for rising interest rates, the price of bonds has already begun to fall in the lead up period. The chart on the 30-yr US bonds is approaching the bottom of a long rising channel and bears watching for the possibility of failure along this line. As for treasury bills, the yield is already pricing in a rate increase at the Federal Reserve’s meeting in late June and this despite various comments from Fed members that they are in no hurry to raise interest rates. The US dollar is being supported by this theory of an interest rate increase, but studying the situation a little closer gives one pause to wonder. The Fed has repeatedly said that they are in absolutely no hurry to raise rates as price inflation is subdued and wage inflation is non-existent. We know they are keen not to let the economy falter in its slow recovery and then have to wrestle with the threat of deflation plus there is evidence already that a Chinese decreed slowdown in their own economy is having a negative effect on the premium paid for copper deliveries – a barometer of industrial metal prices and industrial production. Therefore it would make logical sense that the Fed chooses not to raise rates and two consequences of this would be declining interest rate yields and a lower US dollar.

New Buy Recommendations:

None.

New Short Sales

Citigroup (C)

General Motors (GM)

We are initiating short positions on both C and GM, which are being sold off as the potential for interest rate increases moves closer. Though GM is more known for their cars, the financing arm is the instrument, which generates a goodly percentage of corporate profit thus both are exposed negatively to higher interest rates. The chart for C is especially weak and the gap down last Monday due to settlement of Worldcom legal issues sent a strong signal to technicians. Weekly and monthly charts of C also indicate a lower share price is likely. In particular, the monthly chart shows price turning down at the top reached previously in 2000 and 2001.

As mentioned, GM derives a significant portion of profit from its financing activities and with higher interest rates, profits from this arm as well as profits from the sales of cars and trucks will be under pressure. The weekly chart tells us that the recent rise in price failed and on the monthly we now see an additional failed peak occurring at the beginning of this year, which corresponds with a previously failed peak in 2002.

Stock Positions to Sell/Exit:

We recommend selling positions in both Integrated Silicon (ISSI) and Perrigo (PRGO) due to the high risk in markets now.

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.

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
03/01/04	Consol Energy	CNX	27.50	28.06		H
04/08/04	Golden Star Res.	GSS #	6.88	4.43		H
04/26/04	Integrated Silicon	ISSI	17.15	14.43		SELL
04/26/04	Perrigo	PRGO	22.00	19.35		SELL
03/01/04	Suncor	SU #	26.25	24.96		SOLD 05/10/04
03/08/04	Transcanada Corp	TRP #	21.34	19.79		H
11/03/03	Wheaton River	WHT #	2.36	2.60		H

New stops in BOLD

* Stop on a closing basis

** Buy if above entry price