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Publisher: Colin Alexander Editor: Ken Wilson (450-691-4617)
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Market Synopsis
Earnings will be front and center this week with seventeen of the thirty Dow Jones Industrials reporting while 291 of the 500 companies in the S&P 500 index are scheduled to release their quarterly earnings over the next two weeks. Thus for the next two weeks, investors’ collective attention will be directed towards individual company performance and not the lukewarm economic data, which has become the norm of late.
Much as we are in the midst of our hot summer season, investors and traders alike focus less on the markets and more on vacations and relaxation. The net result of this is the propensity of stocks to move little in general and sideways at best. Naturally, this description is applied to the general indexes and not to specific stocks. But surprisingly, this year we are noticing that buy signals are becoming commonplace in this normally slow period for stock markets and since stocks are usually predictive of economic conditions six months hence, it would appear that we are in line for a strong economic rebound around the end of 2005 or the beginning of 2006.
Unfortunately, from the vast number of economic reports that we receive or which are available on the internet, the common thread amongst them in a majority of cases is, paradoxically, a foretelling of worsening economic conditions and often we hear the dreaded R-word, recession. Something is terribly amiss here.
Though many analysts believe the theory that stock markets predict conditions six months to a year out, the most bearish among them have been left scrambling to arrive at an explanation, which fits their view. Certainly it is entirely possible that the stock market is wrong, but the number of signals is uncanny and points to a bullish scenario.
Perhaps this is even more shocking when contemplating the effect that higher energy prices have had on the economy. A normal reaction to an economic shock such as steeply higher fuel prices should see consumers retreating and lowering their discretionary spending on other items in order to afford the increased driving costs yet retailers have seen mild to very good increases in consumer spending. Retail spending, a good barometer for the consumer’s financial health, has remained strong despite the rise in the cost of fuel. Meanwhile many retailers stocks have seen solid gains since the beginning of the year though to be sure the biggest, Wal-Mart, is down approximately 6% this year. Taking a wider view of the sector, we see that retail has gained over 13% in 2005.
Skeptics will likely point to an increased use of credit cards and the high debt loads being carried by consumers, however it is worth noting that credit card delinquencies has been steadily improving over the past three quarters and at 4.03% overdue in the first quarter of 2005, they’re now at their lowest level in two years. Comparable delinquencies in personal loans and car loans as well as many other categories show similar improvements in 2005.
While we will continue to listen to these contrarian opinions, we will cautiously heed the stock charts and until sentiment changes and our interpretations of charts suggest the upside potential is weak, we will remain in the bullish camp.
Technically Speaking
This week we had the ND Composite and the S&P 500 cross into positive closes for the year. The DJ-30 has been the laggard for much of the past four months and continues to struggle against a backdrop of improving markets. Evidently, the largest capitalization stocks are experiencing a certain amount of headwinds as their stocks are not performing as strongly as those companies in the second tier and below. Case in point: if one compares the performance of the ND Composite to that of the ND-100, clearly we see that the ND-100 is lagging significantly the advance of the Composite. Similarly, the rise in the S&P 500 has been much greater than the OEX (S&P 100) representing the 100 largest cap stocks.
Not surprisingly, the S&P Midcap index and the Russell Small Cap index are near their respective highs for 2005. What we are witnessing is the substantial advantage in performance of these smaller market capitalizations and it should not be astonishing to learn that the stocks we’ve recommended tend to be in this latter group.
It is worth noting that the weekly charts of both the ND Composite and the S&P 500 signaled the beginning of a new leg higher this week and obviously we consider this to be very supportive of our recommendations and general bullishness.
*** Please note that SNHY is splitting 3:2 on Monday July 18/05
New Buy Recommendations:
Arena Pharmaceuticals (ARNA) – This drug company reached several milestones on its chart this week. It closed at the highest level in 18 months and is within a few cents of it Oct/03 high on the daily chart. More recently, this week’s price action was key for it advanced out of a two-month consolidation and managed this on significantly higher volume. Quarterly results are due out on Tuesday and it would appear that traders were attempting to get a jump on them.
MGI Pharma (MOGN) – Though it was never our intention to search out drug companies to recommend this week, the two that we chose were indeed in that particular sector. MGI benefited this week from excellent quarterly results showing very strong growth and the prospects of even better growth in the next few quarters as other drugs in their pipeline earn FDA approval. This week’s strong break above the 200-day moving average on increasing volume reversed a trend on the weekly chart toward lower prices that had been in affect since early 2004 and resulted in the development of a buy signal on the weekly chart with three high weekly closes.
New Short Sales
None.
Stock Positions to Sell/Exit:
None.
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
[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 |
|
|
Aleris International |
ARS |
22.65 |
21.04 |
|
SOLD |
|
|
Canadian Nat Res. |
CNQ *** |
28.47 |
39.78 |
|
B |
|
|
Captiva Software |
CPTV |
14.03 |
15.15 |
13.00 |
B |
|
|
|
GILD |
39.58 |
45.47 |
39.50 |
B |
|
|
Humana |
HUM |
36.30 |
41.03 |
36.75 |
B+ |
|
|
Nexen |
NXY |
33.76 |
33.72 |
|
B |
|
|
Novatel |
NGPS |
28.09 |
30.80 |
|
B+ |
|
|
Orckit Comm. |
ORCT |
27.09 |
28.27 |
|
B |
|
05/10/05 |
Pacificare Health |
PHS |
62.60 |
74.40 |
|
B |
|
05/31/05 |
Sun Hydraulics |
SNHY |
35.88 |
41.22 |
|
B+ |
|
03/08/04 |
Transcanada Corp |
TRP |
21.34 |
26.92 |
23.25 |
B |
New stops in BOLD
* Stop on a closing basis
** Buy if above entry price
*** Split-adjusted price