Stockscom Report for Sunday July 16 2006

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

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· Powder keg in Middle East exploding

Market Synopsis

The prospect of a long entrenched war in the Middle East undermined any possible benefit equities might receive from quarterly earnings this week. The markets most immediate concern was of Israel now fighting on a second fiercer front at the border between Israel and Lebanon. Thus stock markets around the world are left to deal with Iran’s questionable nuclear ambitions, N Korea’s missile testing, war in Iraq and Afghanistan, and Israel battling on two fronts.

It’s little wonder that N Korean President-for-life Kim Jong II lights up a few rockets given that he’d literally fallen off the global radar screen. To the outside world, his own private war (notwithstanding the effects felt by rightfully-worried Japanese) is equivalent to comic relief when viewing world affairs in a larger sense. Fortunately for the West, the Chinese and the Russians have finally gotten impatient with his petty arrogance and are demonstrating a little contempt for his inane dalliances. As a result, a unanimous UN Security Council resolution to impose weapons-related sanctions against N Korea passed today. Unsurprisingly, N Korea rejected this decision however there is now less chance of rogue actions on their part given that the silent support from China and Russia has all but disappeared.

So it’s back to the Middle East for more foreign affairs wrangling. Chinese and Russian efforts to expand their influence in the region and limit the sphere of influence exerted by the US, has them no doubt prepared to indirectly aid Arab factions in the various on-going conflicts. Iran, perhaps out of fear of being classified as an outcast and losing its valuable ally in China, has agreed today that Western incentives to halt its nuclear program were an acceptable basis for negotiating in order to avoid facing a similar UN Security Council resolution incorporating some level of punishment.

Strangely perhaps, the always-excitable Iranian leader, President Mahmud Ahmadi-Nejad, has had little to say about the Israeli attacks on Hezbollah in Lebanon though the supreme leader, Ayatollah Ali Khamenei, did. Today the Ayatollah ruled out disarming Hezbollah despite the strong evidence of Iranian weapons in the response originating from Hezbollah in Lebanon. Iran continues to make threats of entering this war if Israel invades Syria believing that the US is hamstrung by Iraq and would be in no shape to send troops. Naturally, the US government downplays any allegations that troops are spread too thinly. More importantly, the mere fact that the Lebanese government, Syria and Iran sit idly by while their Arab brethren are under siege speaks volumes about their support of Hezbollah in Lebanon and in a larger picture, support for Arab people everywhere.

The situation, as they say, is fluid.

All of this geopolitical dancing has sowed confusion and contempt for equities and as a result gold has steadily risen to $663 and oil to above $77 and virtually all else is subject to “For Sale” signs. Investors are voting with their wallets and exiting positions.

Next week begins a two-week period where the majority of S&P 500 companies publish their quarterly results but investors will be equally interested in company forecasts for the rest of the year. Even if results and forecasts were solidly positive, recovery in share prices probably wouldn’t truly start until some resolution of these conflicts was evident.

Technically Speaking

The major indexes succumbed to relatively heavy selling forces through this past week. Once the report of increased hostilities in the Middle East was confirmed, there were no more buyers to be found under these circumstances. Selling was widespread and except for some pockets of good news as well as the energy and metals sectors, no stock was immune to the selling spree.

The S&P 500 and the DJ-30 interestingly did not violate their respective June lows and this is now the key level for us to watch. (The Nasdaq did slip through support at this level but we had certainly prepared for this eventuality given its extreme weakness vis-à-vis the broader indexes.) On Friday afternoon, there was certain reluctance on the part of traders to go home short for the weekend and as a result, a significant amount of short covering left indexes leaning higher at the close. It is debatable whether this minor rebound might continue in trading tomorrow. Nevertheless, we would emphasize that as long as the June lows are not violated, there is the possibility of a strong rebound in share prices though we hasten to add that the likelihood of large cap tech stocks sharing in the action in the same proportion is somewhere between nil and non-existent.

New Buy Recommendations (in order of preference):

None.

New Short Sales

None.

Stock Positions to Sell/Exit:

Titanium Metals (TIE) and Zumiez Inc (ZUMZ) – We were exited from these stocks on the slide that affected all stocks this week. Though both appeared to recover on Friday –TIE more than ZUMZ – they are nonetheless temporarily broken and their charts are now in need of repair for those bullishly inclined.

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
07/03/06	Seabridge Gold	SA	12.11	12.30	10.00	B+
07/03/06	Titanium Metals	TIE	34.50	29.50	29.50	SOLD
07/03/06	Zumiez Inc	ZUMZ	38.00	32.00	32.00	SOLD

Short Sales:

Date of Entry	Name	Symbol	Entry Price	Current Price	Stop	Action Rating
07/10/06	Ebay	EBAY	26.92	25.58	29.00	S
07/10/06	Getty Images Inc	GYI	57.60	53.03	58.50	S
07/10/06	Laureate Education	LAUR	42.34	41.48	46.00	S+

New stops in BOLD

* Stop on a closing basis

** Buy if above entry price

*** Split-adjusted price