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Stockscom Report for Sunday Mar 13 2005

Publisher: Colin Alexander Editor: Ken Wilson

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

• Nasdaq anniversary
• Sell signal in Nasdaq

Market Synopsis

This week was notable for it was the fifth anniversary this week that the Nasdaq index reached its peak of 5,132. On March 10, 2000 fueled by an unparalleled boom in internet stocks, the Nasdaq Composite index topped out at 5,132 amid calls for a new paradigm, a new realm for stocks, etc. but in fact this was simply another bubble waiting to be burst. On Friday of this past week, the Nasdaq closed just short of 2042 or 60% lower than that this once dominant figure. Back in 2000, many analysts were convinced that it was only a matter of months or a few short years at best that the Nasdaq index would surpass the Dow Jones Industrials in total points and certainly given its meteoric rise, they had a right to think so.

Fast-forward to today and there are still some analysts who believe that Nasdaq 5000 is not only doable but probable in the very near future. History though tells us that this is far from likely. The Crash of 1929 is arguably the best and most recent example of a giant bubble bursting. At its peak, the Dow attained an unthinkable (for the time) level of 386. The bottom came in 1932, almost three full years later at just above 40 points. In roughly similar chart action to the Nasdaq, it proceeded to gain a whopping 382% (!) over almost five years to the beginning of 1937 before cracking once more and dropping to the 93 point level in 1942. All told it wasn’t until 1954 that the Dow finally zoomed past the previous high of 386 reached 25 years before.

History is replete with other examples of boom and bust cycles, bubbles that were born from unusual economic conditions of the time and all terminate in ignominious fashion. And even today, there are two important bubbles affecting the economy: the price of oil and the price of housing.

The price of oil is determined by supply and demand on world markets. Taken as one unit or organization, OPEC is the largest supplier of crude oil to importing countries and essentially has the ability to lever the price on world markets. Other non-OPEC producers such as Russia and Norway are able to supply large amounts of crude to fill various countries’ needs but limited by their production capacities, they have little effect on prices. The US is the largest consumer of crude oil (approximately 20 million BPD) and imports huge volumes each day. Despite the media’s attention on the price of oil and the resultant discussion on whether we are quickly depleting this resource, the volume of crude oil stocks in the US is actually 7.8% greater than it was at this time last year. But the price was near the $37 per barrel mark or about 32% less than it is at current prices. Investing in bubbles is easy as long as price keeps going higher but when the carousel stops turning and risk rises to unbearable levels, it’s time to disembark.

Technically Speaking

Last week we discussed the Dow Theory-related signal in the Dow Jones to buy the index but with a lack of follow through this week, we are inclined now to believe that the signal was a fake-out and should be disregarded.

More importantly, on this the fifth anniversary of Nasdaq’s historic peak, Friday’s close was notable for having completed both a Lindahl sell signal on the daily chart as well as the weekly chart. The sell signal coming on both charts is likely to be a very reliable indicator of where the Nasdaq is heading in the next few weeks and we would be very cautious of advancing any recommendations to buy tech stocks while this is in effect. There are many short candidates in the tech sector but only Microsoft stands out as one whose signal to sell short came through on Friday. Other Nasdaq members being actively sold currently include RIMM, EBAY and YHOO but none of these had explicit sell signals at the close of Friday. As we prefer to short a pool of stocks and not one at a time, we refrain for the moment from recommending any shorts.

New Buy Recommendations:

None.

New Short Sales

None.

Stock Positions to Sell/Exit:

Trident Microsystems (TRID) – At this point we don’t feel that holding this stock is worth the risk involved especially if we are to assume that the Nasdaq will succumb to downward pressure. Granted that this stock could effectively rise still further on the basis of their products but the risk/reward ratio has been significantly weakened over the past few weeks.

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.

Please take note that the following clause is being removed under the assumption that the aforementioned federal budget in Canada will be accepted into law. From the budget date forward, there are no longer restrictions on foreign stocks held in Canadian retirement accounts. Furthermore we will no longer mark stocks with # to indicate such.
[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
01/31/05	Air T Inc	AIRT	17.63	17.41		H
02/08/05	Applix	APLX	7.01	7.19		B
02/08/05	Ascential Software	ASCL	16.00	15.70		H
01/24/05	Checkfree Corp	CKFR	38.43	41.37		H
01/24/05	Cleveland-Cliffs	CLF	60.41	73.94		B
01/24/05	Cryptologic	CRYP	23.67	32.63		B
01/24/05	Encana	ECA	57.40	67.06		SOLD
01/10/05	Immucor	BLUD	26.59	31.78		B
02/14/05	Ipsco	IPS	51.33	57.15		B+
01/31/05	Massey Energy	MEE	37.00	42.50		SOLD
02/14/05	Meridian Gold	MDG	20.12	18.63		H
03/07/05	Ngas Resources	NGAS	6.19	5.72		SOLD
02/28/05	Perficient Inc.	PRFT	8.74	8.06		SOLD
03/08/04	Transcanada Corp	TRP	21.34	24.68	23.25	B
01/24/05	Trident Microsys.	TRID	18.05	18.48	16.85	SELL
02/14/05	Western Silver Crp	WTZ	10.50	10.86		B

New stops in BOLD

* Stop on a closing basis

** Buy if above entry price