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Continued strength for some discount retailers

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In yesterday's "market monitor" on OptionInvestor.com, I felt it was best for traders to try and book some profits in shares of TJX Cos. (NYSE:TJX) on the rally to the $33.85 level as that was our original bullish target from consolidation near $31 last week. Yesterday after the FOMC cut interest rates, retail stocks as depicted by the Retail Index (RLX.X) continued higher and finished the session strong. Today's continued strength by TJX and the Retail Index (RLX.X) should not go unnoticed and gives hint that there are some committed bulls to this sector.

Further "proof" of this might be performance in Office Depot (NYSE:ODP). Today's break above the $14.25 level has this stock trading a new 52-week high. We started "talking up" shares of ODP back in mid-July when the stock looked to have formed a "breakaway gap" at the $11.50 level. Monday, September 17th in the 09:00 EST update, we also felt ODP was a stock traders/investors might look to be buying on weakness. That day, shares of ODP opened at $11 and have never looked back. I posed the question... "What would Mr. Buffet be doing?" I think we found out.

Today, I'm going to be searching hard for some more "retail" stocks to be looking long. Yesterday, I though traders might want to add K Mart (NYSE:KM) to their bullish trade list at the $7.25 level. Stock could have some near-term upside to a rolling 200-day MA at $9.48. Stock offer's short-term trader's stop at $6.50 and longer-term investor's stop under $6.

Some sectors performed after Fed's rate cut

This is a reprint of yesterday's premierinvestor.net market wrap. Some of the observations and thoughts might be useful for OI and IS subscribers.

The broader market averages faired well after today's 50-basis point rate cut by the Fed, but some sectors didn't benefit as much as others.

Here's a quick snapshot I took from my trading screen right when the FOMC announced rate cuts. By sessions end there was enough market action to give hint of what is "in favor" and what may be "out of favor" as it relates to the effects of today's Fed rate cuts.

Major Indices and Averages when Fed cut rates

Strength -

Dow Industrials - The Dow Industrials (INDU) finished the session up 1.24% to 8,950 after trading just fractionally positive prior to the FOMC meeting. After the FOMC rate cut was announced, the Dow did dip into negative territory, but stormed back by sessions end. For those keeping track, shares of Wal- Mart (NYSE:WMT) has now gained roughly 12% since September 10th close and is atop the leader board of Dow gainers since that time frame.

S&P 500 - The SPX traded very much in step with the Dow Industrials. It too was showing fractional gains prior to the Fed rate cut, but by sessions end had tacked on a 1.2% gain to finish at 1,051. We'll note here that "information technology" make up just 15% of the SPX and lack of technology may be the difference between the S&P 500 and the NASDAQ today.

Retail - Retailing stocks acted quite well today. Prior to the FOMC rate cut, the S&P Retail Index (RLX.X) was trading higher by 1.6%, but by sessions end, the group tacked on further gains and finished up 3.27% at 787. Discount retailing giant Wal-Mart (NYSE:WMT) surged 4.5% to $52. In yesterday's wrap, we talked about the makeup of the Retailing Index (RLX.X) and noted WMT's heavy weighting in this index. Wal-Mart (WMT) is a component of the S&P 500 with a 2% weighting.

Airlines - The Airline Index (XAL.X) was having a good day prior to the FOMC rate cut and found some marginal gains afterward. The sector finished up 5.05% to 72.10. Still looks like a sector that could see some wild swings as more information trickles out from carriers. Many are reporting increased business in recent days, but discounting of tickets being used to bring in customers.

Banks - Both the BIX.X (more regional in components) and the BKX.X (regional/international) were trading right near the break- even level prior to the rate cuts. Tone of FOMC was that they're concerned about effects of terrorist attacks on economy and poised to do what it takes near-term in regards to further rate cuts should economic slowing continue. Banking sector can benefit from lowered discount rate and their margins spread due to lower borrowing cost from Fed. Stocks responded favorably. Risk remains "bad loans," but today's reaction looked bullish. Financials comprise roughly 14% of the S&P 500 Index.

Treasuries - Treasury bonds finished the day strong as YIELD across the various maturities all fell. The longer-end of the bond market and the 30-year ($TYX.X) saw its yield fall to 5.328%, which is the lowest level found since late March. Just 8 sessions ago, the YIELD on the 30-year was as high as 5.63%, but today's close at 5.32% gives hint that there is still a lot of money flowing into this bond and others.

Internet - Today's move in the CBOE Internet Index (INX.X) was interesting. Just prior to the FOMC, gains of 2.4% were found and by session's end they had grown to 3.29%, with a closing trade at 85.82. We're going to keep an eye on things here for some technology stock traders, but right now this doesn't make sense. First thought was that the group may have benefited on the though of growing ad spending, but I'm having trouble finding any "advertising" stocks showing much of a gain.

Weakness

NASDAQ Composite - While the NASDAQ Composite (COMPX) did manage to post gains by sessions end, there were some pockets of weakness worth noting. Prior to the FOMC announcement, the NASDAQ was up 0.71%, but by sessions end finished up just 0.80%. This may be disappointing to may technology stock investors, but does give some credence to the belief that some of the deeper cyclicals have to get their earning going to free up some information technology (IT) budgets. Without them, fund managers and institutional investors are going to be hard pressed to pump a lot of money into some technology related stocks.

Semiconductors - The Semiconductor Index (SOX.X) was one area that felt some selling pressure after today's FOMC meeting. Prior to the FOMC rate cuts we saw fractional losses of 1% turn into a loss of 3% at one point as the SOX dipped to a session low of 350. There seemed to be some "psychological support" at the 350 level as we did see some recovery from the lows (probably due to broader market averages turning higher). However, the closing bell found the SOX trading down 2.16% on the session at 354 and this gives hint that the group currently lacks interest, even with a 50-basis point rate cut.

Networking - Networking stocks finished pretty much in line with where they were trading right when the FOMC announced it's rate cut. The Networking Index (NWX.X) finished down 1.09% at 209 and looks to be suffering from the same type of disinterest as the semiconductors. Today's after-market warning from Nortel Networks (NYSE:NT) that it expects to post a $3.6 billion loss in the 3rd-quarter and shed an additional 20,000 employees through the sale of assets and layoffs, is further sign of the slowing taking place in this group. Shares of Nortel (NT) closed down 3.2% to $5.29 and sector bellwether Cisco Systems (NASDAQ:CSCO) fell 3.5% to close at $11.48.

Looking forward

I think there's still some "hope" for the NASDAQ near-term, but it should be evident that any gains there will most likely be in response to bullishness found in the Dow Industrials and S&P 500. Yes, there can be some "big gains" in some technology stocks when the shorts come in and cover, but those "big gains" don't come without some downside risk. When trading technology right now, I'd be looking relatively short-term or very long-term. If you're a "swing trader" and can't keep an eye on things, then it's best to trade lightly in technology. If you get a gain of more than 10%, then snug up that stop and be willing to take profits!

Part of the NASDAQ's "hope card" can be found in the Biotechnology Index (BTK.X). As I mentioned before, this group of stocks is less interest rate sensitive and seems to trade more on market psychology and various discoveries in the biotech world than anything. Fundamentals? Those are hard to find for many biotechs, thus my belief that the group is more of a pulse on market psychology. Technology fund managers may have thrown in the towel on "computer related" tech for the fourth quarter and could be concentrating on this sector for exposure to technology. I didn't mention the BTK.X as a "strength" sector above only because the group didn't really budge from the FOMC data. Still, the group managed to post a 1.9% gain and the 480-500 level still looks achievable near-term.

Currencies look to be in check and it looks as if the market has calmed down here. If our original thoughts that a weaker US$ was a sign of "market instability," then the recent strengthening of the US$ against major foreign currencies is a sign that many market participants are calming down.

The currency issue then plays into what we've seen in bonds. It's very difficult to actually track money flows as it relates to currencies, but relatively simple to see where money is flowing when it comes to bonds. Since the US$ started to regain some strength, we've seen lower YIELDS for many of the Treasury bonds. Right after trading resumed back on September 12th, we did see a flood of selling in the longer-end 30-year, but as we noted, there's been a lot of buyers come back in the past several sessions, that really started once the US$ started gaining back some strength. I think from here, equity bulls want to see some selling in the 30-year (riskiest end of the bond market) and the US$ to maintain current levels. If our past observations was that we saw selling in bonds, selling in US$ and selling in stocks, then equity bulls now want to see selling in bonds and a stable US$. What I think this type of action would then present is the buying of stocks. Yes, this may seem like simple logic, but we're just trying to isolate some variables and follow the money.

Jeff Bailey
Senior Market Technician
Option Investor

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