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Inflation remains tame at consumer level

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This morning's report from the Labor Department showed the consumer price index rose just 0.1% in July, which was slightly below economists' forecast for a 0.2% gain.

Cheaper prices for clothing (-1%) and airfares (-1.3%) were offset by a jump in healthcare/medical costs (+0.7%).

In a separate report the Commerce Department said housing starts fell about -3% in July to a seasonally adjusted annual pace of 1.649 million, which was below economists' forecast for a 1.67 million rate. June's housing starts were revised higher to 1.695 million from 1.672 million.

Builders started construction on approximately 1.321 million single-family homes in July, down about -2% from June's rate.

Meanwhile, new building permits, which tend to be a forward looking construction indicator, were essentially unchanged at a seasonally adjusted annual rate of 1.698 million.

So far in 2002, housing starts are running about 4% ahead of last year's pace. In 2001, 1.603 million new homes were started.

Yesterday, Freddie Mac (NYSE:FRE) $63.71 reported that the average 30-year mortgage fell to 6.22% last week. Homebuilders said their monthly market index fell back to 57 in August from 61 in July, but was still well above the breakeven 50 mark and an indication that builders face strong demand.

Later today at 09:45 AM EST, August consumer sentiment will be released. Economists' are looking for a reading of 89.0.

Stock futures have been week this morning and the economic data did see futures edge fractionally lower. Currently, S&P futures (sp02u) are down 8 points at 922.50, NASDAQ futures (nd02u) are down 14 points at 975 and Dow futures (dj02u) are off 62 points at 8,745.

Fair value for the S&P 500 today is $0.46. That price will not change during the day. HL Camp & Company has their computers set for program buying at $2.22 and set for selling at $-1.66. Fair value for the NASDAQ-100 today is $1.90.

Updated look at the NYSE Composite

One of my "key stocks" in the Dow Industrials that I felt might be a leader to the upside and perhaps give us a heads up to a potential market rally like that found late last year has shares of Wal-Mart (NYSE:WMT) $54.71 on the move and well above its first "buy signal" off the bottom at $49. While I view the stock unnatractive at current levels for bullish entry points, I'm now on the alert for broader market strength to perhaps build.

As discussed recently, the NYSE Bullish % ($BPNYA) from www.stockcharts.com reversed back higher and into "bull confirmed" status on Monday.

Now I will be monitoring the NYSE Composite ($NYA.X) 500.02 for correlation dating back to its October/November time frames. Here's a quick look at the NYSE and either the similarity or DIVERGENCE from last fall's trading.

This heightened alert also has me looking for bullish technicals in other stocks that are listed on the NYSE with 1,2 or 3-letters in their stock symbols and monitoring the sector bullish % charts from Dorsey/Wright and Associates at www.dorseywright.com.

NYSE Composite Chart - Daily Interval

With NYSE listed Wal-Mart (NYSE:WMT) making a nice move out of a base and looking like it's a leading stock and the NYSE Bullish % ($BPNYA) recently reversing higher, I'm on heightened alert for a bullish move in the broader equity markets. Just as we used "history" to try and identify WMT as a leading stock, we're seeing a potential repeat of history as it relates to last fall's rally from the September lows.

I've tried to outline what took place back on October 18th, after Wal-Mart (WMT) shot higher from its lows, then NYSE Bullish % reversed up to 32% bullish from 26%. Funny, but just this past Monday (August 12th) the NYSE Bullish % ($BPNYA) reversed up from 26% bullish to 32% bullish.

Now the NYSE is set to test its trending lower 50-day MA, very similar perhaps to its 10/26/01 test.

While I was too quick to pull the plug on a bullish trade in Wal- Mart (WMT) $54.71 from $45.01 (market monitor bullish profile) and the eventual "double-top buy signal" at $49, I'm now on heightened bullish alert for the broader equity markets.

Is it a coincidence that WMT has shot higher and looks to lead, a similar lagging reversal up in the broader NYSE Bullish %, right when the NYSE Composite ($NYA.X) looks to test its 50-day MA?

I'm not certain, but I don't think all of this is a coincidence. Was there one shred of good economic news coming out after the September 11th terrorist attacks as it relates to the economy? No, the "evidence" didn't really reveal itself until April, when the first-quarter GDP data showed a surge. Unfortunately for new bulls that waited for that GDP data to show up, most of our bullish % indicators were all "overbought" and starting to flash "bear alert" signals.

Only recently, similar to last October, do we see the internals as depicted by the bullish % charts begin to improve, from "oversold" levels.

All we want to monitor for is "likeness" to the past or DIVERGENCE from the past.

As Wal-Mart (WMT) was a "key stock" that I tied to the September/October bottom, I look at WMT trading some $5 higher (10%) than its "buy signal" at $49 on July 29th.

IBM Chart - $1 box

Quick review. I profiled biotech sector bellwether Amgen (NASDAQ:AMGN) $47.69 as bearish back at $45, stock is higher. I profiled discount retailer Wal-Mart (WMT) $54.71 as bullish at $45 then $49 at first "buy signal," but chickened out at $47.

Now I see IBM flashing several "buy signals" ($71, $73 and $75). I've said before that institutions first "flock" to the sector bellwethers for exposure, and as bullishness builds, the second tier and third tier stocks find buyers as the bellwether get more pricey and extended from bases.

Yesterday I detailed bullishness in shares of drug stock Forest Labs (NYSE:FRX) $73.24. Other sector bellwethers are Merck (NYSE:MRK) $50.58 and Pfizer (PFE) $33.59. However, FRX is the only stock between the three that currently trades above trend.

The point I'm trying to make here is that IBM (computer), WMT (retail), AMGN (biotech), FRX (drug) are all flashing bullish signals.

Respectively, Dorsey/Wright and Associates has corresponding sectors to each of the above mentioned sector bellwether stocks as "computer bullish %" (bear confirmed) at 21.9% (low is 18%) and needs reading of 24% to turn "bull alert".

Dorsey's "retail bullish %" is (bull alert) at 32%, "biotech bullish %" as (bull confirmed) 34% and "drug bullish %" as "bull alert" 36%.

Remember though. When Wal-Mart (WMT) first gave its "buy signal" at $49 on July 29, and would have contributed positively to the retail sector bullish %, the sector was still "bear confirmed," at 20%, but did turn "bull alert" the next day on July 30 at 26% and now builds to 32% bullish.

Over the years, I've found the sector bellwethers are often the FIRST to lead in a MARKET or SECTOR move and usually the LAST to fall once weakness takes place.

Right now, it sure looks like some of the bigger sector dogs are beginning to bark, and they may have a bear heading for higher ground.

Dorsey/Wright and Associates has a point and figure charting website. You can sign up for a free 2-week trial and get access to the various sector bullish % charts. Their website link is http://www.dorseywright.com.

If they ask you how you heard about them PLEASE tell them we sent you there. I've tried to get publication access to these sector bullish % charts, but have had a very tough time convincing Tom Dorsey and Watson Wright to allow periodic posting of these charts.

Subscribers continue to ask for books to read on point and figure charting. We've placed Tom Dorsey's book "Point and Figure Charting" in our bookstore. I consider it a MUST read if you are an option trader or stock investor. Check out our bookstore and look for the gray haired guy with a big smile on the book cover.

Also check out the "Bailey's Basics" portion of the website and articles "Understanding Risk is Key," or "The Bullish Vertical Count," or "The Bearish Vertical Count."

If you signed up for an annual subscription at OptionInvestor.com and got your free gift offer earlier this year, break out your point and figure CD and review pages 51-61. Heck! IBM was a test case in that example.

Jeff Bailey
Senior Market Technician
Option Investor


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