Stockscom Report for Sunday May 21 2006

Publisher: Colin Alexander Editor: Ken Wilson (450-691-4617)

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

· Sharp sell off in equities this week

· Trend has turned bearish for most markets

Market Synopsis

Inflation was ostensibly the reason for the breakdown in stock prices this week as the prospects of a Federal Reserve losing control of speeding inflation stoked fear in investors. Once again, we saw that market sentiment was shaped by a rapidly developing profile of the new Fed Chairman Ben Bernanke and the perceived lack of conviction, which colors his actions. Some might say that sentiment exhibited a declining opinion of the Fed Chairman and to be sure, there is no shortage of observers that are willing to offer free advice to the Fed. As if to demonstrate this softness, the Fed this week reminded everyone that future interest rate decisions would be driven by the economic data that the FOMC has at its disposal when it assembles, which incidentally, is scheduled for June 28.

The first piece of inflation data was the PPI or wholesale inflation figure, which matched expectations and thus had little effect on stocks. However the next day, the CPI or consumer inflation was released and although large increases were expected and measured in the energy and food categories, the core rate, which strips out those two categories, was still surprisingly strong at 0.3%. Consequently, the now data-dependant Federal Reserve must consider the potential for an upward swing in the inflation rate and this conflicts with Joe Q. Public’s previous view that the economy was slowing already and required less need for policy to cool down the economy. Raising the overnight interest rate another quarter point to 5.25% could have a strong dampening effect on the economy and when combined with indicators such as the declining Leading Economic Indicators (LEI), there is reason to believe such moves would be severe enough to overshoot and to trigger a recession.

Regardless whether the Fed hikes the interest rate at the next meeting, there are certainly sufficient indications that the propensity for economic growth has decreased appreciably. Notwithstanding the Conference Board’s LEI, which has been a reliable predictor of conditions six to nine months in the future over the years, the trend of late has been a steady decline in the housing industry - the major source for the growth of the past couple of years. Not only did housing offer consumers a chance to refinance and monetize the gains in value of their rapidly appreciating homes, it gave others the chance to purchase homes that were normally far out of their reach given the standard measures of family income to purchase price ratios. Now with an inventory of unsold housing measuring several months and still growing and an increasing number of bankruptcies due to the inability to pay interest charges on mortgages, there is a mounting threat of a crisis in housing. Even if we were to disregard the problems that falling house prices entail, the number of people working in housing such as the paper pushers (sales agents, loan officers, lawyers, etc.) and the construction workers will undoubtedly decline and that represents a very real increase in unemployment.

Technically Speaking

The threat of a downturn that we alluded to last week became very real over the past few days. With only two exceptions our stop-losses applied in the last newsletter were all hit and caused us to be largely out of the market when Friday came around.

The major indexes look uniformly bearish and although the Dow Jones remains the sole index to resist crashing through its April low, it is no longer bound by the upward trendline that had guided it higher from the October lows.

As for Nasdaq, the ND-100 could fall to the 1537 area and remain bound by the upward trend marking lows from mid-2003 but considering that October is often the month for lows and that the Presidential cycle classifies 2006 as the year in which a significant low is made, we wouldn’t expect a test of that region until later this year.

The S&P 500 found support at the 200-day moving average and avoided going negative for the year by a hair but previous dips in the value of the index triggered tests of the 40-week moving average and therefore we consider the potential for a test of 1231 a very real possibility.

Despite being exited from some stocks that look relatively healthy, this is a bear market for now and there are only two strategies possible in a bear market – short or on the sidelines. Virtually all stocks decline in this environment and there is neither reason nor logic to initiating new long positions at this point. Given the volume of the slide this week, we would not recommend any short positions either for there is a strong potential for a rebound, however in future newsletters, that may not be the case.

New Buy Recommendations (in order of preference):

None.

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.

N.B. There are no longer restrictions on foreign stocks held in Canadian retirement savings accounts.

Date of Entry	Name	Symbol	Entry Price	Current Price	Stop	Action Rating
03/27/06	Anadigics	ANAD	6.85	7.64	7.64	SOLD
11/14/05	Birch Mtn Resour.	BMD	6.65	8.20	7.98	SOLD
02/21/06	Cdn Natural Res	CNQ	58.00	53.00	53.00	SOLD
03/20/06	LSI Logic	LSI	11.25	10.00	10.00	SOLD
01/09/06	Nuvelo Inc.	NUVO	12.95	15.00	15.00	SOLD
11/07/05	Redback Networks	RBAK	11.78	23.00	18.00	B
03/20/06	RTI Int’l Metals	RTI	47.70	61.00	61.00	SOLD
01/09/06	Seabridge Gold	SA	9.49	10.25	10.25	SOLD
01/09/06	Sierra Wireless	SWIR	13.60	17.85	17.85	SOLD
04/10/06	Silver Wheaton	SLW	11.06	9.06		SOLD
05/08/06	Sunopta Inc	STKL	11.18	9.62	9.62	SOLD
01/05/06	TGC Industries	TGE	14.50	11.79	11.79	SOLD
11/14/05	Tom Online	TOMO	20.66	24.26	24.30	SOLD
03/08/04	Transcanada Corp	TRP	21.34	28.98	28.00	B
01/05/06	US Global Invest	GROW	21.18	21.50	21.50	SOLD

New stops in BOLD

* Stop on a closing basis

** Buy if above entry price

*** Split-adjusted price