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Deflation

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As expected, Kmart (KM) posted a loss of 4 cents a share, but the company warned about "deflationary pricing conditions." To compete in the cutthroat discount retail environment, Kmart slashed prices on over 20,000 items by bringing back its blue light special.

Kmart Daily Chart

Today investors are slashing the price of Kmart stock by 58 cents, but is it a blue light special? The stock might be a bargain if it can hold at the blue lines, the 50-day day moving average and lower boundary of the ascending channel. This channel has supported the stock for most of this year, and tests of the lower boundary have eventually led to the stock moving higher to test the upper boundary, but could this time be different? One problem is that Kmart has lost its relative strength edge. Kmart has been outperforming the rest of the Retail Index (RLX) for all of 2001, but that trend came to an end in July. Kmart tried to get that edge back, but failed to get back above the trend line. Now that relative strength is once again declining, perhaps a better bargain can be found somewhere else.

Barnes and Noble Daily Chart

Maybe books are the place to be. Barnes and Noble (BKS) reported a breakeven quarter on a pro forma basis, thanks to strong sales from its video game retailing business that jumped 33%. If we look at actually earnings, the company lost $1.7 million in the second quarter, due mainly to costs associated with its online business. Investors are willing to look past the company's online business, and have the stock up $1.82 today. That puts it past resistance at $41.26. If volume doesn't pick up, the stock should fall back to test the previous resistance level at $41.26 once the earnings news wears off. If BKS can then manage to hold above that level, perhaps it could be bargain.

Jeffrey Canavan
Assistant Analyst
www.premierinvestor.net

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