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Durable Goods

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Orders for durable goods fell 0.6% in July, starting another weak quarter for manufacturing. Semiconductors posted a 26% drop, and computer orders fell 4.1%. That was offset by an 18.3% increase in orders for communications equipment, and a 3.8% increase in demand for autos.

Durable Goods Monthly Chart

The Semiconductor Index (SOX.X) is unaffected by the report, and is up 2.55%. That's because the market has decided to focus on some upbeat news from Cisco and Lucent, which are up 4.11% and 2.85% respectively. That makes networking the best sector of the morning, up 2.64%, follow closely by Internets and software.

91 of the Nasdaq-100 stocks are higher this morning, led by Qualcomm, IDEC Pharmaceutical, Veritas, and Gemstar. Computers and coffee make up the small list of losers, with Apple, Dell, and Starbucks posting declines, albeit small ones.

The Dow is a little more balanced, with 18 stocks advancing and 10 declining. Technology names IBM, Intel, and Microsoft are the strongest performers, and Coke, Caterpillar, and J.P. Morgan are the weakest, but none are down over $1.

While the internals look good, the broader indices are having trouble mounting any significant gains. The Dow is up 31, and the Nasdaq is higher by 26. Mild losses in banks, healthcare, drugs, and transports are diminishing gains from other sectors. Once the Cisco affect wears off, we'll see if technology stocks can hold on to their gains.

Jeffrey Canavan

Market, sector and stock, will biotech rock?

Yesterday's 4.29% gain in the biotechs may not be over. Some interesting developments took place and some market, sector and stock comparisons can put traders on the right side of the trade.

Here's a fairly "simple" technique that traders and investor can perform on their own to get a feeling for some fairly meaningful short-term shifts taking place in the biotech sector. Was today's move in the biotechs for real? Time will tell, but there's some signs that this might well be the group for bullish traders to be focusing on in coming weeks. Remember... the longer-term begins with the short-term.

Let's take a look at the Biotechnology Index's (BTK.X) relative strength versus the S&P 500. If we believe that the S&P 500 is a fairly accurate representation of the broader market, then bullish traders would want to see the group outperforming the S&P 500 Index or showing good relative strength. If the group is showing strength, then we can begin trying to pinpoint stocks in the group that look to be leaders in the group.

Relative Strength of Biotech vs. S&P 500

The "45" level is not a dollar price. It's simply a unit of measure by which to chart the relative strength of the BTK.X vs. the SPX. Relative strength is calculated by taking the BTK.X trading level and dividing it by the SPX trading level. Example could be today's closing prices. The BTK.X closed at 531.7 and the SPX closed at 1,162, therefore (531.7/1,162= .4575) We could multiply that result by 100 to get a chartable value of 45.75. That 45 level was enough to have our chart reversing a meaningful amount (3-box reversal) to 45 and get the relative strength chart back into a column of X's. We're now alert to a relative strength change in the biotech sector vs. the S&P 500. The can be VERY IMPORTANT for traders looking long the sector AND for traders holding short/put positions in the group.

Traders that are short/put some stocks in this group are now alert that there may be a change in posture taking place in the market toward the biotechs that is more bullish than bearish.

Now that we're alert to strengthening in the group, we must understand the future impact of MARKET direction. Relative strength MUST be understood! Just because a group of stocks is showing good relative strength DOESN'T mean it will show price appreciation. What if the BTK.X just sits here at 531 and the SPX dives lower from today's close of 1,162 to 1,000? Relative strength for the BTK.X would show strength, but the sector hasn't moved has it? The reason a trader should be looking long the group is this. Since the BTK.X is showing relative strength gains, what might the sector do if the SPX.X moves higher from 1,162 to 2,200? I'm thinking that a group that is just beginning to show strength might benefit the most on an upward move! That's where a bullish trader wants to be.

So why point this out? Today's shift in relative strength puts us on the alert that the biotechs may be a leader in the next market rally and a place where the odds of findings higher prices is greater than in some other parts of the market. Smart bulls usually try and concentrate on areas of the market where there is strength, while smart bears often avoid such areas of the market. This is key for traders that believe in the laws of supply and demand.

We know from trade/account management that we want to start with some "toe dipping" and perhaps take some partial positions. Again... the market environment is what I'd consider negative and if I'm looking long, I want to be partially positioned in a group just starting to show strength relative to the market.

OK... now that we've found one sector (there are others) of the market that is strong relative to the market, it makes sense that we begin looking for stocks that are strong RELATIVE to the sector! That's right! We've tackled the market/sector portion, now let's work down the scale and tackle the sector/stock portion. By default, if the sector is strengthening vs. the market, then finding a stock strong relative to the sector puts that stock in the upper echelon of stocks in the market.

I didn't "pick" today's new bullish play for the Net Bulls section on premierinvestor.net (Jon Farnloff did), so I'm going to critique that bullish play in shares of Techne Corporation (NASDAQ:TECH). This perhaps is the way every subscriber should "critique" any stock profile bullish/bearish on our play lists with the techniques we're trying to teach along the way. Let's take a look at the relative strength of Techne Corp. (TECH) vs. the BTK.X. One might argue that shares of TECH should also be considered "healthcare" as it relates to sector. This is a valid argument and may explain why the stock trades the way it does. The company does distribute products for both healthcare and biotech industry.

Relative strength Techne Corp. vs. Biotech Index

On the above chart, I've placed red horizontal bars at "resistance" levels where we saw a reversal lower in relative strength of TECH vs. the BTK.X. These "resistance" levels are where relative strength "buy signals" occur when the stock shows greater relative strength vs. the sector. From the left, we see that shares of TECH gave 6 different types of "buy signals" on relative strength as benchmarked back to other levels. Eventually (in mid/late May, red 5) TECH had given a relative strength "sell signal" and the gig was up. Any takers on a bet that the biotech sector started seeing weakness in late May or early June also?

Now what do we see? In late June/early July the relative strength chart whipped around (red 7 is first entry in month of July) near the 48 level on the chart. Make note of this as we will use this as a time reference on the actual point/figure chart for TECH. Since that time, shares of TECH have given four different levels of "buy signals" as it gets stronger vs. the BTK.X based on past history levels. This stock sure looks like a potential leader to me. Now, let's see if there is anything we can use in the actual point/figure chart of TECH that helps confirm what we're seeing in the relative strength chart. Remember!!! A stock can show improvement in relative strength if the index we're benchmarking against trades lower. I want to see something in the actual point/figure chart of TECH that tells me demand is in control of the stock! Jon Farnloff might be onto something here.

Techne Corp. Chart - $1 Box

Oh my! Triple top buy signal above bearish resistance. Relative strength strong vs. the sector and the SPX. Current bullish vertical count of $48. I think the stock's worth a shot for 1/2 position long. Should the SPX continue to decline, at least the stock has shown that it can hold up and at least stands a chance.

Now for today's play of the day on premierinvestor.net. Try using the above comments with shares of ImClone Systems (NASDAQ:IMCL). Don't load the boat in biotech, but understand what is taking place. If you get a chance, go back to the August 9th Market Wrap on premierinvestor.net. Understand the stock we were talking about (Geron Corporation, GERN). Understand what sector that stock belongs to (biotechnology). Understand the bearish resistance trend and what took place in GERN on break above $15.50 (quadruple top and breaking of bearish resistance.) Do you see some of the domino effects taking place?

Jeff Bailey
Senior Market Technician

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