Stockscom Report for Sunday June 13 2004

Publisher: Colin Alexander     Editor: Ken Wilson

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

 

 

 

Market Synopsis

 

Technical analysis works wonderfully once certain minimums are met. First and foremost among the minimum requirements is an identifiable trend. But unfortunately on a short-term basis, the markets are currently lacking in direction and forfeiting any trend. What we have instead is a market that is rangebound, caught in a band from which it rarely strays. This condition has the potential for whipsawing investors from positions as false breakouts become more numerous.

 

For a while before it was mostly easier with a trend that was more solid in the upward direction. Then a peak occurred in February that has yet to be surpassed and quickly we were able to identify that the trend had changed direction in the near term to begin a retracement. Eventually however it dipped to a point from which it has begun recovering, but here lies some of the confused elements.

 

The Nasdaq Composite dipped to a low on May 17, a low that exceeded that of the low on March 23 however, the Nasdaq-100, which comprises the largest 100 corporations on Nasdaq failed to duplicate this movement with its low of May 17 remaining above that of March 23. Moreover using technical analysis, one can identify a downward moving channel on the Composite index (where incidentally, we are actually turning down at the upper boundary) but meanwhile on the Nasdaq-100, the best analysis offers only a range in a sideways direction.

 

Likewise we assumed the Dow Jones to be the subject to a shallow sloping downward trend but this week’s price action in mid-week exceeded the upper boundary of said line found by lining up the previous few price peaks occurring as far back as February 19. This action undoubtedly whipsawed some traders who had prepared for a shift in direction once the upper boundary was reached. There was a similar condition on the S&P 500 where here too, the upper boundary of a slow downward sloping trend experienced price action this week that violated the upper boundary line.

 

Those investors trading on these price signals would have read this action to be a breakout, however price quickly tumbled inside the upper limit on Wednesday and finished the week very close to the trendline. Thus market players were given a rough ride this week as the potential to be closed out of a short trade was quite high when in fact it became apparent that the breakout might actually not be accurate at all. The whipsaw action thus becomes both costly and confusing.

 

One other signal that technicians had been closely monitoring for is part of Dow Theory, which states that a new low on the Dow Jones Industrials index must be confirmed by the Dow Transports index and the new low on May 17 on DJIA was not the date of a new low on the Dow Transports, which reached its most recent low on March 22. Further, this particular index had been rising as of late, yet on June 9 this week, it failed to surpass the previous high reached in March and has fallen away abruptly, putting into doubt whether it has the strength to complete a new high.

 

In assigning blame for this price action, one culprit is the anemic trading volumes that we’ve seen in the past couple of months. When market liquidity dries up, the bid/ask spreads become wider permitting a greater move in price than would normally be the case.

 

Other non-technical factors blamed for the lack of reliable trends include the often conflicting economic data. Recently the factory orders data has been lower than expected while the jobs data continues to be bullish. The latest bit of economic news occurred on Friday when Federal Reserve governor Poole made hawkish statements regarding interest rates that effectively guaranteed a faster response to interest rate hikes by the Fed if it were felt that inflation risks were getting out of hand. This immediately caused a rise in the US$ trading on global markets and overnight markets trading in the S&P futures fell. The rise in the US$ was coupled with a fall in the price of gold however, here again we have a situation which would seem illogical at first glance and consequently we proceed with caution. Higher inflation usually means that the price of gold rises, as gold is perceived as a hedge against inflation, a store of value against any fall in the value of assets.

 

Tuesday, this week, the monthly CPI figures will be released and without having the luxury of seeing the PPI numbers last week due to statistical problems with the Bureau of Labor Statistics computer systems, analysts will be forced to use the CPI for evaluation purposes. With the heightened interest in inflationary indications, this figure will be much anticipated and without the PPI, it will be a key factor in the decision-making surrounding the interest rates.

 

New Buy Recommendations:

 

None.

 

New Short Sales 

 

None.

 

Stock Positions to Sell/Exit:

 

None.

 

Portfolio Comments:

 

Consol Energy (CNX) – We believe that this share has resolved itself and is prepared to move toward higher ground now.

 

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

 

Gold stocks – The outlook for our gold stocks continues to be muddled. On June 7, GSS won their first court battle gaining permission to proceed with their offer to purchase IAG. The merger date between IAG and WHT was slated to be June 8 and this has now been delayed. The shareholders of IAG will have a chance to vote on the merger plan with WHT on June 29. Moreover, the Ontario Teachers Pension Plan has come out in favor of Coeur d’Alene in its battle to takeover WHT. Interestingly the OTPP has positions in all four of the players involved in this strange battle.

 

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

06/01/04

AES

AES

9.24

9.23

 

H

06/01/04

Capital Env’t Res

CERI #

4.98

5.12

 

H

03/01/04

Consol Energy

CNX

27.50

31.01

 

H

04/08/04

Golden Star Res.

GSS #

6.88

4.57

 

H

05/24/04

Inco

N #

31.03

32.25

 

H

05/24/04

Jetblue Airways

JBLU

28.66

27.10

 

H

05/24/04

Pan Amer Silver

PAAS

12.78

12.57

 

H

03/08/04

Transcanada Corp

TRP #

21.34

19.16

 

H

11/03/03

Wheaton River

WHT #

2.36

2.71

 

H

 

Short sales

 

Date of Entry

Name

Symbol

Entry Price

Current Price

Stop

Action Rating

05/17/04

Citigroup

C

45.02

47.35

 

H

05/17/04

General Motors

GM

43.55

48.06

48.50

H

 

New stops in BOLD

* Stop on a closing basis

** Buy if above entry price