The NASDAQ Breakout Succeeds

Cover short positions and see the new buy list

We got out of stocks and set up a small short position when the evidence strongly suggested a double top and failure in the NASDAQ index and a continuing breakdown in the Russell, in small-cap stocks generally, and a very serious deterioration in stocks like Coca-Cola and Disney.

We appeared to be faced with essentially three possible scenarios:

1. It seemed that the multitude of small cap stocks in established bear markets would finally drag down the rest of the market; or

2. The previous market leaders like Coca-Cola and Disney would roll over and taken the entire market down;

3. There could be a rotation allowing for the best and strongest stocks to keep on going and a recovery in selected small-cap stocks that were washed out even as some of the previous market leaders either started going sideways or established their own proprietary bear markets.

It is the third scenario that appears to be coming through. Although it is always possible that there might be a whipsaw, the probabilities favor buying selected stocks within the list of the performing best. If one or two of them double, it makes up for a lot of mistakes in the ones that don't.

You will notice that many of our old favorites have returned liked Sun Microsystems and Texas Instruments. We are also taking a gulp to buy Microsoft. Sometimes people say they want to find the next Microsoft. Well, the answer really seems to be that Microsoft itself is already the next Microsoft. One possibility is that they may split into two or three different divisions, which could deliver the opportunity to own stock in any one of three powerhouses.

There are certain stocks that we really do not care to own here, such as Dell and Compaq. They have not been acting well and may not be among the leaders in the near further. We have also dropped many medical stocks. We do not see buying oils on the grounds that the latest run in petroleum cannot be trusted to last. There is however, a case to buy BP Amoco on a setback. This company is a potential powerhouse.

We still see no case for owning the likes of KO and DIS any more, but they may not deliver worthwhile profits from short sales either. The really big money is made in stocks that go up, ideally by many times.

This could now be a timely moment to buy strong stocks on the assumption that we are just ending a consolidation and that we may be starting a new leg up. Essentially the market as measured by the indexes has made almost no upward progress since January 8. On that day cash S&P was at 1275 and it is now at 1293. Cash NASDAQ was at 2131 and is now at 2146. In the meantime, however, there has been a huge shift in the respective strength of individual stocks.

Below is a newly recommend list of stocks to buy where they are showing strength on all technical counts and which are expected also to have fundamentals sound enough to warrant buying here. There are also buy signals for Yahoo and America Online but we prefer to stand aside at current levels, despite our respect for these two leading companies (unlike many Internet stocks).

Applied Micro Circuit (AMCC) $44.38
Ascend Communications (ASND) $87.31
Carnival Cruise Lines (CCL) $49.08
EMC (EMC) $128.63
Flextronics (FLEXF) $52.69
Johnson & Johnson (JNJ) $93.00
Linear Tech Corp (LLTC) $55.39
LSI Logic (LSI) $32.25
Nokia (NKOA) $159.00
Northern Telecom (NT) $63.28 #
Newbridge Networks (NN) $33.13 #
Microsoft (MST) $92.69
Pinnacle Systems (PALE) $46.50
Quest Communications (QWST) $74.50
Seagram (VO) $51.50 #
Security First (SONE) $81.13
Solectron (SLR) $49.63
Staples (SPLS) $33.56
Sun Microsystems (SUNW) $126.19
Texas Instruments (TXN) $103.36

In addition we recommend the following Closed End Funds, based on the assumption that Third World economic downturns are not going to last forever and that their stocks are now showing superb technical strength:

Emerging Mexico Fund (MEF) $7.56
Fidelity Adv Korea (FAK) $6.50
India Fund (IFN) $9.38
Japan OTC Equity Fund (JOF) $7.86
Korea Fund (KF) $10.50

Stocks marked # are eligible for Canadian RSP funds. Otherwise there is a 20pc restriction on foreign stocks held in these accounts.

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