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Stockscom Report for Sunday Dec 19 2004

Publisher: Colin Alexander Editor: Ken Wilson

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

• US dollar bouncing
• Equities falling into the year end

Market Synopsis

As the end of year quickly approaches, there are two principle issues that have been vying for the attention of investors these past few days; the US dollar and overbought equities.

The benign neglect of the US dollar by the present administration has caused tremendous losses versus other foreign currencies especially since the election in November. The re-election of George Bush was akin to a cold shower for foreign traders/investors already suspicious of the lack of viable deficit-solving programs. And the prospect of an even wider policy increasing pressure on the twin deficits was considered to be proof of a lack of fundamental understanding of economics. This policy, primarily the Administration’s effort to expand current tax breaks by making them permanent, has drawn the ire of critics both inside and outside the US.

The most immediate and visible effect of that disgust has been the remarkable drop in value of the US dollar, which has lost approximately 5% since the election and nearly 8% from the middle of October versus the common European currency, the euro. Part of this loss must be due to statements from countries such as Russia, China, and India, which openly expressed desires to reduce the amount of US dollars in their foreign reserves and commit greater proportions to their reserves in gold and other currencies, namely the euro.

Paradoxically, in spite of the falling dollar, long-term rates, as expressed by the US 30-year bond, have been virtually unchanged over the same mid-October to present day period. Similar abrupt changes in currency values usually have resulted in the affected country’s interest rate going up in a bid to attract capital. The US however has Asian central banks to thank for these banks continue to purchase large amounts of US treasuries ensuring that long rates remain low and thus they’re able to encourage American consumers to keep on spending.

Nowadays the dollar is no longer falling however, and there is a strong potential for some measure of rebound. Much like an elastic pulled too far in one direction, the currency is due to bounce back though we couldn’t say to what degree. Part of the reason for this bounce is the normal retracement that occurs after a solid move in one direction but part is end-of-year short covering by traders who have placed large bets on the direction of the US currency.

As for equities, the rally that began in the middle of August this year is rapidly running out of steam. Though we’ve seen some minor retracements, the predominant direction has been upward these past few months and despite the new index highs recently achieved, the telltale sign of fewer new yearly highs in individual stocks has sent out a warning shot. With the year end, there is often contrarian moves as traders close out positions to mark profits and prepare for the new year.

Technically Speaking

So despite the charts’ new highs, we suspect that a cooling off period has begun. The ND chart is the best example inasmuch as we clearly detect a double top over the past couple of weeks. On Balance Volume is edging lower and fast OBV will soon cross the slow OBV line signaling a lower price is in the offing. Stochastics are heavily overbought and both fast and slow MACD lines are pointed downward. The final indication will occur when the index drops below the 40-day moving average, a support line that has served it well since September, but that won’t occur until the index falls to 2070, which is well below the current level of 2135.

New Buy Recommendations:

Avaya (AV) – Though we hesitate to offer any buy recommendations at this time of the year and given the inherent weakness in the tech markets, Avaya, which was formerly owned by Lucent Technologies, appears strongly to be on the verge of a new breakout. This stock has traded in a broad $11-18 range throughout 2004, but last week signaled that the direction of least resistance is going to be up. Once this stock clears the previous 2004 high of $18.36, there should be a steady move to higher ground.

New Short Sales

None.

Stock Positions to Sell/Exit:

Ulticom (ULCM) – Chart action suggests an insidious bout of selling has begun though price has fortunately been steadfast in holding firm. We recommend selling as a safe alternative to playing some unknown retracement, which we cannot quantify at this point.

Portfolio Comments:

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
08/23/04	AES	AES	10.23	12.50	9.50	B
11/08/04	Cryptologic	CRYP #	18.58	20.80		B
12/13/04	Electronic Arts	ERTS	55.77	59.64		B
11/19/04	Essex Corp	KEYW	17.69	17.64		H
11/08/04	F5 Networks	FFIV	42.38	47.26		B
11/08/04	Ipsco	IPS #	31.69	41.13		B+
11/08/04	MFRI Inc	MFRI	7.41	8.80		B
08/09/04	Pan Amer Silver	PAAS #	13.40	16.11	15.00	H
09/27/04	Petro-Canada	PCZ #	50.90	50.34		H
11/05/04	Placer Dome	PDG #	22.12	18.60	18.00	H
11/08/04	Potash Corp	POT #	73.85	80.85		B
08/16/04	Suncor	SU #	28.50	33.35		B+
03/08/04	Transcanada Corp	TRP #	21.34	24.47	19.00	B+
09/20/04	Ulticom	ULCM	13.24	16.64	14.95	SELL
09/20/04	Vintage Petroleum	VPI	18.44	23.11		B+

New stops in BOLD

* Stop on a closing basis

** Buy if above entry price