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Is Morris about to roll\?

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It's been just over four months since the terrorist attacks on the United States and it has been awhile since we talked about the Dow Industrials components. We've mentioned several analogies in the past regarding America's largest publicly traded companies that tend to represent the broader U.S. economy. Here's a quick look at the Dow 30 components and what a portfolio might look like if an investor would have invested approximately $30,000 in the Dow Industrials ($1,000 in each stock) on what some might feel the worst day to have invested (September 10, 2001).

Dow Hypothetical Portfolio - Sorted by % gain since Sept. 10

Seventeen of the 30 Dow components currently show a gain from their September 10th close. There has certainly bee the "haves and the have nots" since we started this exercise not too long after the terrorist attacks.

Today I'm doing something a little different. I've added a column to the right of the portfolio and placed the current bullish or bearish vertical counts of each stock as derived from their point and figure charts. Those with "red arrows" by them are stocks where a vertical count had been achieved. It should be noted that bullish and bearish vertical counts are not etched in stone as difinitive targets. They can be used to help assess longer-term price potential. Some vertical counts are NEVER met, while some can be exceeded.

There are a couple of things I'm pulling from this type of observation. The main thing is trying to identify some stocks with some favorable longer-term risk/reward ratios at current levels. The "risk" is based from the point/figure chart and where a buy/sell signal may occur that would negative the current vertical count.

The other day, I got an interesting e-mail regarding a "longer- term bearish play." One stock I see on the list that may offer a favorable risk/reward bearish play is shares of Philip Morris (NYSE:MO) $49.47. The stock has recently rallied after giving a sell signal at $45 and breaking its longer-term upward trend that was put in place back in August of 2000.

Philip Morris Chart - $1 box interval

I think shares of Philip Morris (NYSE:MO) may be a little "toppy" and the higher YIELDS we are seeing in the Treasury market may be taking some of the shine off of Philip Morris' dividend YIELD. The stock has been a safe haven for investors the past couple of years and the stock did achieve a bullish vertical count dating back to August of 2000. A bear looking for a rather lower risk (stop at $52) and high potential return (bearish count of $38) may want to take a look at MO. It's not necessarily and "exciting" stock to trade, but may be suitable for those that can't watch the markets on an hourly/daily basis. A trade at $52 would negate the current bearish vertical count.

There are perhaps some things we can all take away from this type of trade or "bearish" outlook on MO. One that thinks this is a "defensive" stock may draw the conclusion that defensive stocks are perhaps coming out of favor. If that's the case, then perhaps the market is becoming more offensive and looking for growth stocks, not value. A trader/investor that puts together the scenario for higher Treasury YIELDS making MO less attractive, may then begin thinking that Treasuries will see selling.

We can then go on and on down the chain of why Treasuries may see selling. The broader market equity bull is thinking of economic growth and the end to Fed easing as the economy revives.

Since "big MO" DIVERGED markedly from the MARKET during the MARKET decline, then perhaps its time for the tables to turn and see MO decline as the economy and perhaps the stock market revives.

Jeff Bailey
Senior Market Technician
Option Investor

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