News
"A Vital Source for the CANSLIM Investor" 

Volume 6, Issue 7 - $7.95 
Tuesday, July 1st, 2003 | 6:56 PM

_Dow 9,040.95 +55.51 (+0.62%) | Nasdaq 1,640.06 +17.26 (+1.06%) | S&P 500 982.31 +7.81 (+0.80%)

Medical and Financial Issues Have an Important Role in the Broad Rally 
by Kenneth J. Gruneisen, Registered Investment Advisor, Source Capital Group, Inc. Members NASD/SIPC

The major indices’ recent action has been bullish, and since their upturn in March they have consistently rallied on higher volume and pulled back on lighter volume. Only a couple of days have shown any signs of higher volume distributional selling on the part of large institutional investors.  While many top rated stocks have already managed to break out and make significant advances, more definitive leadership has emerged in certain areas of the market. 

But over the past month or more the major indices have not been able to add to their recent gains.  Many of the best leaders are in the process of building new bases after having already rallied substantially.  Of course, we want to keep a watch on companies that are able to sustain and extend their recent gains.  We should look for the right chances to latch onto these leaders on normal pullbacks. Also we want to keep looking for new leaders to break out on volume, and aim to pick up these stocks before they are too extended from a reasonable buy point. 

A cynical person might start thinking that there is probably something more than meets the eye going on while drug companies are forking over huge contributions to help to finance the upcoming election.  Certainly, one key area of interest on the upside in the market of late has included companies standing to benefit the most from the government’s plans to provide prescription drugs and other benefits to seniors and others who can’t afford healthcare. The Medical – Generic Drugs group has been ranked in the top ten of IBD’s 197 Industry Group Rankings for more than three months now, while the Biomed/Biotech, and Genetics groups have also moved into the top ten more recently.  And in the Monday, June 30^th Investor’s Business Daily (on page B4) the Medical category was highlighted as the group with the most stocks reaching new 52-week highs.  Medical –Wholesale drugs/supply stocks also were highlighted as one of the groups with the greatest percentage of stocks making new highs.  HMOs and Nursing Homes have also been moving up.

Note, however, that these medical issues have not all run up simply on speculation.  In fact, in almost all of the strongest cases there is a clear and direct correlation between recent quarterly earnings results and stock prices.  In other words, earnings have been trending up while the stock prices have also risen.  Sure, there are factors we can point to that would argue for a continuation of this recent leadership, such as the widely noted large population of aging baby boomers among others. Still, in the realm of healthcare, a huge wave of government subsidized spending appears to be not far around the corner.  As a result, leadership in these stocks may be expected to continue into the summer months. 

Another group we have often mentioned as a gauge for the market’s overall outlook are financial stocks.  Interest rate sensitive areas of the equity market are particularly prone to weakness if investors sense an end to the Fed’s easing cycle.  Right now there is very little room left for rates to drop, which begs the question as to how soon they might begin rising.  And amid growing talk of deflation, the forward view of our economic growth prospects is creating even more worries.  Rising loan payment delinquencies and both personal and corporate bankruptcies are causes for increasing concern among the influential financial sector.  It is important for the present rally that bank and brokerage issues do not suffer any significant setbacks.  

In the accompanying chart you can see that the NYSE Financial Index has broken a relatively steep upward trendline (see green line) but is still above its 50-day moving average.  An ordinary 33% retracement of the March-June rally in the NYSE Financials would bring the index near 548, while further deterioration chart-wise from that point could become a more serious problem as to the broad-market rally’s sustainability.  

For the second quarter that ended June 30th, 2003 the Dow, S&P 500, and Nasdaq ended up +12%, +15%, and +21% respectively. This was recognized as the best quarter for stocks in four and a half years.  Industry groups that were the pace setters for the period included a variety of tech sectors and many biotechs, medical stocks (generic drugs, heathcare), wireless telecom, internet content/commerce, and numerous banks and other financials. Leadership in these areas gives smart traders a few hints about what areas of the market are in still favor. However, progress has been harder to come by in the past month.

Notice that positive breadth on the NYSE and Nasdaq allowed their Advance/Decline lines to march steadily higher during the course of the rally from the March 12th low to the June 17th peak. While the major indices have been consolidating in recent weeks, notice that there has been a flattening out of the Advance/Decline lines.

At the time of this writing I am noticing oversized weakness in a large handful of stocks that includes names that those of us who regularly monitor the new highs list should recognize. Discussions on various trading tactics lately overheard are more and more centered on whether to and when to buy stocks that are forming second-stage or even later-stage bases. In an ideal case, you would make a well-timed purchase right as a stock is breaking out, but what about the less than perfect cases? Again and again we hear questions popping up about what the leaders are doing, and in many cases these stocks are well-past their optimum buy points. It is certainly important to keep an eye on the top performing issues in leading areas of the market, and take your trading clues from their behavior.

Assuming you want to stay within reasonable trading guidelines, here are a few pointers about buying stocks that have already risen substantially:

- Don’t be afraid to consider buying a high-ranked stock that has doubled or tripled in the past year, as it might be a company experiencing fantastic demand for its new products or services, and it could have the underlying earnings growth to justify the price strength and continue its advance.

- Beware of stocks that have quickly risen five-fold or more in just a six-month to a year timeframe. Sure, these stocks are exciting and could always go a bit further, but after such an advance it is probably safe to say you have missed the opportunity to make any "easy money". Besides, such a situation can be particularly vulnerable to a steep drop on profit taking, which is all the more reason to buy stocks right in the first place. That means choosing those with at least a 5 or 6 week long base and within 5-10% of the previous highs.

- When you are buying a stock on weakness, as in all cases, you must pick a point where you plan to bail out and take a loss in the event the stock fails. If you’re smart, you’ll look for a key reversal day and for a volume driven upswing to begin. This will commonly be the case when stocks are bouncing off of their 50-day moving averages or other important technical support levels.

- Averaging down and buying more stock to lower your cost basis is generally not advised. Get your initial position bought at the right time in a strong leader first, then be willing to average up as things are going your way and you get additional "buy signals" after ordinary time basing.

- Don’t spend time making excuses for buying a lagging stock. Wait for the proof of institutional buying in the form of heavier volume price gains. Don’t try to read more into a situation or ever get the feeling that your stock is getting picked on, or make guesses about an upcoming press release that will create some action.

- Sometimes the best stocks just keep on sprinting, so if you decide to chase a really tempting and exceptional looking issue it might still work out okay. This is especially true when the overall market current is also helping you. Always be prepared to suffer the consequences and walk away with only a small amount of damage.

____________________________________

Below are some high-ranked issues that have been among the most frequently asked about stocks from CANSLIM.net members in recent days. You may even notice that some of these companies were mentioned in previous issues of CANSLIM.net News. Take time to read the following comments and study the charts carefully, and of course, use a sound trading discipline if you are putting your dollars on the line in any of these cases. Note that this period of "Summer Doldrums" may also be a good time to think about locking in sizeable gains if you were fortunate enough to have picked these stocks up earlier.

Regeneration Technologies Inc. (RTIX $12.96) – Has not seen any really bad down days on heavy volume. On a pullback towards its 50-day average at $11.39 it may be worth considering.
http://stockcharts.com/def/servlet/SC.web?c=rtix,uu[m,a]daclyyay[pb50!b200][vc60][iUb14!La12,26,9]&pref=G

Synovis Life Technologies (SYNO $19.01) – seeing more worrisome distributional action in the past two weeks. It is still well above its 50-day line at $17.13
http://stockcharts.com/def/servlet/SC.web?c=syno,uu[m,a]daclyyay[pb50!b200][vc60][iUb14!La12,26,9]&pref=G

KVH Industries, Inc. (KVHI $22.62) - wild and whippy intra-day action in the past several days shows uncertainty in the stock’s action, which can be a warning flag. Recently survived a test of its 50-day line (presently at $19.33)
http://stockcharts.com/def/servlet/SC.web?c=kvhi,uu[m,a]daclyyay[pb50!b200][vc60][iUb14!La12,26,9]&pref=G

John B. Sanfilippo & Son, Inc. (JBSS $15.85) – has been getting hit with more worrisome distributional action, and it is already below its 50-day line at $17.05. Critical support lies in the $14 area where additional downside testing may soon be seen.
http://stockcharts.com/def/servlet/SC.web?c=jbss,uu[m,a]daclyyay[pb50!b200][vc60][iUb14!La12,26,9]&pref=G

FindWhat.com (FWHT $18.41) – seemingly due to pullback more after its recent major breakout on 6/18. Its 50-day line is at $13.60. Use caution if you are chasing this stock, and buying initial positions at this level is not advised.
http://stockcharts.com/def/servlet/SC.web?c=fwht,uu[m,a]daclyyay[pb50!b200][vc60][iUb14!La12,26,9]&pref=G

Nam Tai Electronics, Inc. (NTE $40.46) – after six days of gains on above average volume this one was due for a pullback. A chance to pick it up in the mid-$30’s could be a worthwhile opportunity. Its 50-day line is at $31.19, and it appears unlikely to break it anytime soon.
http://stockcharts.com/def/servlet/SC.web?c=nte,uu[m,a]daclyyay[pb50!b200][vc60][iUb14!La12,26,9]&pref=G

Central European Distribution Corp. (CEDC $19.00) – Chart-wise, the past few days of high-volume weakness (piercing the 50-day line at $20.76) suggests that a more worrisome technical breakdown is taking place. Wait for meaningful high-volume behind gains that can repair this or otherwise steer clear of it.
http://stockcharts.com/def/servlet/SC.web?c=cedc,uu[m,a]daclyyay[pb50!b200][vc60][iUb14!La12,26,9]&pref=G

Kenneth J. Gruneisen - A Registered Investment Advisor & Registered Principal, Ken manages a Source Capital Group (Member NASD,SIPC) branch office and offers personalized assistance. Investors with a significant financial interest in equities may inquire about opening an account by calling 1-888-237-8399 or emailing to kgruneisen@sourcegrp.com Comments contained in the body of this report are technical opinions only and are not necessarily those of Source Capital Group, Inc. The material herein has been obtained from sources believed to be reliable and accurate, however, its accuracy and completeness cannot be guaranteed. Our firm, employees, and customers may effect transactions, including transactions contrary to any recommendation herein, or have positions in the securities mentioned herein or options with respect thereto. Any recommendation contained in this report may not be suitable for all investors and it is not to be deemed an offer or solicitation on our part with respect to the purchase or sale of any securities. Source Capital Group, Inc. is a NASD/SIPC member firm. Further information is always available upon request. If you know anyone that may have an interest in receiving this or any of our other reports, please call our office locally at (954) 785-1990 or (888) 237-8399 or email kgruneisen@sourcegrp.com

Here we aim to give you insight on the best ideas our experts feel are worthy of a closer look right now. When you are looking for the most suitable purchase candidates under the guidelines outlined by O'Neil in "How to Make Money in Stocks", always concentrate on high-ranked, fundamentally and technically strong issues. Please note that CANSLIM.net has received no compensation whatsoever from any of the companies featured below, and this report is not to be considered investment advice or a recommendation to buy or sell securities.  These stocks may not be suitable for all investors, and you should always conduct the analysis necessary to make an informed buy and/or sell decision.

Profile: Avid Technology, Inc. is the world leader in digital nonlinear media creation, management and distribution solutions, enabling film, video, audio, animation, games, and broadcast news professionals to work more efficiently, productively and creatively. It develops, markets, sells and supports a wide range of software and hardware for digital media production, management and distribution. 

What to Look For and Look Out For: The volume is drying up on pullbacks towards its upward sloping trend line.  Look for a breakout above recent triple tops at $38-38.15, especially with volume 50% above average as a buying signal.  Any weakness below $32.50-33 with increasing volume should be treated with caution.  The company is scheduled to announce earnings on July 17th, and in the days prior to the announcement the trading may offer clues as to what one might expect going forward.

Technical Analysis: After breaking out of a 5-month base at $28 the stock is now forming a new flat base between $32-38.  It is currently in the 5th week, and volume action has been excellent.  On pullbacks there has been decreasing volume, and up days have come with increasing volume.

Profile: Exactech, Inc. designs, manufactures, markets and distributes orthopaedic implant devices, including knee and hip joint replacement systems, bone allograft materials, surgical instrumentation and bone cement and accessories, primarily used by medical specialists for musculoskeletal surgical procedures. The Company's orthopaedic implant products are used to replace joints that have deteriorated as a result of injury or diseases such as arthritis. Its revenues are principally derived from sales of its knee and hip replacement systems. In the first quarter of 2002, the Company entered into a distribution agreement with Link America, Inc. and its parent company, Waldemar Link GmbH & Co. (Link), a German manufacturer of joint replacement systems, to distribute Link's orthopaedic products in the United States. Link implants compliment the Company's total joint systems by expanding clinical indications beyond the design scope of its products.

What to Look For and Look Out For:  Stocks with so few shares outstanding can be counted on to be volatile at times, and this can make for some tricky investing.  Study how EXAC has done since it was featured in the November 2002 issue and you will likely notice how its December 4-5th weakness and break of its 50-day line was soon followed by a test of its 200-day moving average.  At this point, and on any dip back towards an upward trend line drawn connecting the March and May low closes it might still be considered a decent buying opportunity.

Technical Analysis: In late-April there was a sprint higher on five consecutive days of above average volume, and through May and June there was some retesting done in the $12 range that coincides perfectly with previous resistance in this area.  Now it is in the tenth week of a “base on top of a base” pattern and it has yet to clear highs from just a few days where it traded over $16, however there may be very little if any resistance there.  

Technical Analysis: On 6/26/03 it broke out on high volume from a near 8-week basing pattern that featured a couple of important characteristics.  These include tests at its 50-day moving average line, and a high volume reversal on 6/5/03.  That was followed by a volume dry up, and later the breakout. 

Profile:  Boston Communications Group, Inc. delivers prepaid and postpaid billing, ATM recharge, mobile commerce and other payment services to approximately 70 wireless carriers and resellers, including five of the top six national carriers. First quarter financials were announced on April16th, wherein revenues for the period ending March 31, 2003 rose 53% to $23.1 million.  Earnings per share for the quarter were $0.21 compared with $.03 in 1Q '02.  Also, the company raised guidance for 2003 earnings to $.78 - $.80 from $.54 -$.58.

What to Look for and What to Look Out For:   In light of strengthening company guidance, there is potential for a positive earnings surprise on July 16^th, when it is due to report its next quarterly financial comparison.  Pay particular attention to volume patterns, and use caution if BCGI again drops below its 50-day moving average (presently $16.84).  A widely-reported high level of short interest could lead to another short squeeze, with eventual buying to cover (even if it is on price weakness) should provide price support.

Technical Analysis:  BCGI is forming the right side of a 14-week base-on-base pattern that is supported by strong institutional buying.  Monday’s $0.57 drop came on the lightest volume in the last 5 weeks.  Currently it is trading slightly above the midpoint between support ($15) and resistance ($18.80) levels.  Average daily volume has been steadily increasing in recent months on up days as well as down days.  An improvement in the up-down volume ratio above 1.0 would be bullish. 

Other Notes:

BROKERAGE stocks have come under pressure. This will need to be watched closely as they are a strong proxy for the market. So far, they have pulled back to support.

BIOTECHS are still tracing out a top...but so far, just a normal correction. They will also have to be watched as they were one of the groups leading the market up. HOMEBUILDERS likewise.

SENTIMENT still stinks...but as you know, has not been a factor as of yet. Bearish advisors are down to 17% and get this...AAII does the same type of survey...these are individuals...and they are down to 8% bearish and over 70% bullish. Just food for thought.

Regardless of this correction, there are a few stocks breaking out on a daily basis. These stocks right now are mostly in small and mid-cap land.

I would expect a little upward bias this week because of the end of quarter as well as holiday coming up but next week could be an issue. I am looking at important near-term support that you need to watch. 973 on the S&P 500 ($SPX.X), 1598 Nasdaq ($COMPQ) and 8940 Dow ($INDU.X). A break of these levels could lead down to their respective 50-day averages.

Until next time,

Gary Kaltbaum

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Gary Kaltbaum is an investment advisor with over $100 million under management. For over 18 years he has specialized in identifying and trading growth stocks in the intermediate-term time frame. He can be heard nightly on his nationally syndicated radio show "Investors Edge" on over 50 radio stations and at the Investors Edge website. He has been featured on the FOX News Channel and is regularly quoted by by CNBC, the Wall Street Journal, Dow Jones News, Reuters, and Bloomberg.

Visit the library and search for Investor’s Business Daily papers dated Thursday, March 13, 2003, and Tuesday, March 18, 2003.  Also, get the new Third Edition of the book “How To Make Money In Stocks”, by William J. O’Neil. 

    - Have the front page of both newspapers open to the section in the bottom where it says “The Big Picture”.

    - Have pages 64 and 65 open in the book “How To Make Money In Stocks”. Look at the paragraph titled “How You Can Spot Stock Market Bottoms”.

We see the March 12, 2003 information in the paper dated March 13^th.  Look in the General Market & Sectors section, and see that the major averages moved higher on larger than average volume after falling below some of the previous day’s lows.  On the front page column “The Big Picture” there is a box titled “Market Pulse”. In here you will see the Current outlook for the market, which says “First day of a new attempted rally. Buyers should wait for a follow-through of 2% or more in heavier volume.” If you look at page 64 in the book How To Make Money In Stocks, it mentions how an attempted rally begins when a major average closes higher after a decline from earlier in the day or the day before. It goes to then say that starting on the fourth day of the attempted rally, look for one of the major averages to “follow through”. In other words, you want to see one of the major averages move up for a booming 2% gain or more on heavier volume than the day before. The most powerful follow-throughs usually occur on the fourth to seventh days of the rally.  

Now go to the paper dated March 18^th in the General Market & Sectors. In all four of the big charts you will clearly see how the averages moved higher on higher volume than the previous day. Not only that, under the paragraph titled “Today’s General Market Highlights”, the very first sentence says “Market follows through with gains of 2% or more on heavier volume four days into the latest rally attempt. The trend is now up, clearing the way for investors to buy leading stocks as they break out of sound price bases”. Apart from that, it shows how clearly NASDAQ shoots above its 200-day average! Now, go to the front page of the same paper and look at the Market Pulse under the Big Picture how it clearly tells us “Current outlook: Market confirms attempted rally with gains of more than 2% in heavier trading.”  

I am sure that after you have reviewed this information you are wondering why you did not take advantage of this rally!  The bottom line is that we are currently in a confirmed rally, and it may be wise to invest your money whenever the market experiences a dip.  The good news is that we have an opportunity when the market gives back some of its recent gains to give ourselves another chance. 

I would like to mention to you what I am currently doing for my Roth IRA via an Automatic Investment Plan, which could be something you may wish to do if you qualify. I am investing some of my money in the Munder Net Net fund. Yes, I know it was one of those famous funds that went down the drain and lost a lot money for investors during the tech meltdown; but this fund has actually been offering a nice return since a lot of the well know tech names have been slowly but surely coming back. The truth is that technology is not going to disappear! Children are practically born with a laptop in their hands these days! While you can connect to the Internet in coffee houses like Starbucks, a wide variety of businesses are now serving a target market that has become world wide!  

The Munder Net Net fund, (ticker symbol: MNNAX for the A shares), is currently selling at approximately $14.10 per share. Hey, where can you obtain some of the great names of this great technological revolution all wrapped up in one for that price?  I find this to be a great addition to almost any portfolio, and I am not saying that all of your investment dollars should be invested in this fund.  For an aggressive long-term investor, right now is a great opportunity to get on board and deploy some of your investment dollars so that you can own an interest in some of the great companies like Yahoo!, DoubleClick, VeriSign, eBay, E*Trade, Hotels.com and more. This fund offers a higher risk, but at the same time it may offer a greater return.  This fund has a minimum initial investment of $2,500 for retail accounts and  $500 for retirement accounts, while $50 monthly is the minimum for Automatic Investment Plans.  It is a perfect opportunity for you to invest in the great advances in technology that at the same time might offer your portfolio the boost it needs.

Please feel free to contact me so that we can evaluate your financial situation and identify the most suitable opportunities available to you, pointing you in the right direction to reach your financial goals.

Soraya Nasrallah, obtained her Series 7 license in 1992, and has served in the capacity of Sales Assistant, Head of Operations Department, and Stockbroker.  Contact Soraya Nasrallah via email at snasrallah@sourcegrp.com or by phone at (954)785-1990 for assistance you with your portfolio. She will be pleased to offer ideas that suit your investment needs, and she can help you achieve the gains you have been searching for.  Miss Nasrallah will soon introduce a new 12-month educational program called StockWiz News! specifically created for teenagers and novice investors, incorporating stock market basics with CANSLIM in a colorful and picturesque format. It is the perfect gift for those who just don’t know much about the world of stocks and investing! Comments contained in the body of this report are technical opinions only and are not necessarily those of Source Capital Group, Inc. The material herein has been obtained from sources believed to be reliable and accurate, however, its accuracy and completeness cannot be guaranteed. Our firm, employees, and customers may effect transactions, including transactions contrary to any recommendation herein, or have positions in the securities mentioned herein or options with respect thereto. Any recommendation contained in this report may not be suitable for all investors and it is not to be deemed an offer or solicitation on our part with respect to the purchase or sale of any securities. Source Capital Group, Inc. is a NASD/SIPC member firm.

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