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Stockscom Report for Sunday Aug 22 2004

Publisher: Colin Alexander Editor: Ken Wilson

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

• Oil price remains high

Market Synopsis

The first revision of second quarter GDP is due on Friday and already there is unusually strong interest in the number. The shocking trade deficit in June amounted to the heretofore unheard of, $55.8 billion due in large part to the goods export component, which sank a record 5.9%. With the expected downward revision to GDP the debate will be rekindled as to whether the economy is truly recovering. In previous reports, the lower US dollar had begun to make its presence felt and this export component was growing steadily, increasing at a much faster clip than imports. But the most recent data puts the recovery in doubt and implies that the global economy, lacking in domestic demand, is too heavily dependent on a robust American consumer.

Meanwhile the consumer is watching their disposable income fall in the face of higher energy prices. Crude oil neared the $50 per barrel level last week and backed away but lower inventories in the weekly API / DOE reports signified the likelihood that new attempts at taking crude over this level are imminent.

With the Federal Reserve seemingly ready to hike interest rates another quarter point in September in their ongoing effort to normalize negative real interest rates and inflation in commodity pricing especially as it pertains to crude oil, there is a very real chance that this confluence of events could drive consumer spending far below current levels for the rest of the year and in the process force GDP below expectations to the point where we start discussing recession.

Technically speaking

Markets rebounded last week from very oversold conditions and though the indexes did not take out the most recent highs, there is strong potential for that to happen this week. Technically, with oil continuing to mark new highs, the ability of equities to rise in spite of that price action meant there was a moderately strong bullish trend in place over the short term. For Nasdaq, the most recent high was near the 1900 level however the 40-day moving average is now located at 1885 and could be the resisting factor to further moves up especially if oil prices continue to exert pressure on the markets.

The Dow Jones index currently resides just below its 40-day moving average thus Monday’s trade will be important to witness whether it can pass through that resistance and it will provide us with a better gauge of the strength of this rally. Likewise, the S&P also finds itself on the doorstep of the 40-day moving average and perhaps more importantly, only 1% from its most recent high.

One consideration that should not be ignored is that the equities have quickly moved from oversold conditions to a near-term overbought condition. And while indicators such as OBV are mildly bullish, others such as MACD are ambiguous at best. Much of the blame for this can be laid squarely on the anemic trading volumes that have characterized the market through the past few months.

Analyzing weekly charts and by consequence taking a longer-term view, both the tech and broader markets remain in a downward trend as they have since the beginning of 2004. While this latest week suggests a potential rally beginning, markets would need to move significantly higher before we could consider them to have truly reversed.

New Buy Recommendations:

AES (AES) – This energy company has been steadily moving higher of late and part of the reason was undoubtedly the strong quarterly results released at the end of July. We presume that this stock will take out the high from July, which is only a few cents higher. Our indicators tell us that any resistance offered by that previous high will fall quickly as a new bullish rally takes shape.

New Short Sales

None.

Stock Positions to Sell/Exit:

None.

Portfolio Comments:

Transcanada (TRP) – This energy firm is appearing much stronger and we would consider this as a possible add-to and this in spite of a current price below the original price of purchase. A move closing the gap left on Apr 13 at $21.18 would be a conclusive sign to add to this position.

Gold stocks – IAG announced a merger with the international assets of Gold Fields (GFI) and this has finally put to rest the uncertainty of GSS (and to some extent WHT). Gold is still trending higher and the US$ is under immense pressure after the unexpectedly larger trade deficit of $55 billion. This data coupled with the weak inflation data and the employment report is likely to contain the US$.

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
06/28/04	Accenture	ACN	27.41	26.05		H
04/08/04	Golden Star Res.	GSS #	6.88	4.93		H
06/28/04	Microsoft	MSFT	28.60	27.20		H
08/09/04	Pan Amer Silver	PAAS #	13.40	14.91		B
08/09/04	Southern Co.	SO	29.83	29.66		H
08/16/04	Suncor	SU #	28.50	28.25		H
03/08/04	Transcanada Corp	TRP #	21.34	21.01	19.00	H

Short sales

Date of Entry	Name	Symbol	Entry Price	Current Price	Stop	Action Rating
08/09/04	Alcoa	AA	29.95	32.00	32.00	BOUGHT
05/17/04	Citigroup	C	45.02	46.00	46.00	BOUGHT
05/17/04	General Motors	GM	43.55	41.33	43.50	H

New stops in BOLD

* Stop on a closing basis

** Buy if above entry price