News
"A Vital Source for the CANSLIM Investor" 

Volume 6, Issue 8 - $7.95 
Sunday, August 3rd, 2003 | 2:56 PM

Dow 9,153.97 -79.83 (-0.86%) | Nasdaq 1,715.62 -19.40 (-1.12%) | S&P 500 980.15 -10.16 (-1.03%)

S&P 500 Index and NYSE Financial Index Violate 50-Day Moving Averages
by Kenneth J. Gruneisen, Registered Investment Advisor, Source Capital Group, Inc. Members NASD/SIPC

Our July issue headline reminded investors of financial stocks’ importance in the present rally, and the cover story featured a chart of the NYSE Financial Index breaking a steep 3-month upward trend line and retracing some of the steep previous rise.  At the time, this important group was just about to make a stand, rather than break below its 50-day line.  It ultimately pressed on to new highs, as did many financial stocks.  Just above prior highs the group ran into resistance and was turned back from its July 14^th high, which marked the extent of the rise.  We see the chart giving the appearance of a more-lengthy basing period now.   

Note that the Friday, August 1^st decline marked the first close under the 50-day line for the NYSE Financial Index since March 31^st, however the March dip was a quickly repaired violation after the broader market had already turned up convincingly.  Now, as the Dow Industrials and S&P 500 Index have been building on two-month bases, we might look at the June lows (see green line) as the next important testing point to watch for the NYSE Financial Index to find support, especially if there is going to be a lot of hope for the broad market rally’s sustainability and not a more serious market downturn. 

The break under the 50-day moving average line for the financials coincides interestingly with the same such technical violation in the bellwether S&P 500 Index, which adds more emphasis on just how important the financial issues are to the overall market’s outlook.  Chart-wise, the lows hit by the Dow Industrials, S&P 500 Index, NYSE Financial Index, and many other indices and individual issues intra-day on July 1^st are clearly the most important of the recent lows to keep an eye on.   

Readers may recall the important clearing of intermediate-term chart highs on most of the major indices’ charts in May.  Our June issue (CLICK HERE) showed charts of the Nasdaq Composite and S&P 500 Index, which had cleared their December ’02 highs.  Those prior highs are the old resistance that would be expected to provide a more meaningful level of support. In the event the market makes a deeper correction, rather than holding above the threshold of the July 1^st lows, we will be looking at the December ’02 and January ’03 closing highs again more closely as a key support area.  I’ve figured that a drop back to those levels would amount to a 2.4% drop for the Dow Industrials, a 4.3% drop for the S&P 500, and for the Nasdaq it would be a 13.3% correction from the present level. 

In recent days we have also seen some decent looking leaders breaking under their 50-day lines. In the generic drug group that list includes, Eon Labs, Inc. (ELAB), Watson Pharmaceuticals Inc. (WPI), and Taro Pharmaceutical Industries Ltd. (TARO), while its larger Israeli peer, Teva Pharmaceutical Industries Ltd. (TEVA) is also testing near its 50-day line.  The same is also true in certain health services issues such as Anthem, Inc. (ATH), which slammed through its 50-day line last week.  AdvancePCS (ADVP) was another leader in the group coming under pressure. And Oxford Health Plans, Inc. (OHP) negated its recent breakout, rolling back into its prior base.

These medical groups are still an important source of market leaders, despite the action noted above.  Be watchful, and in the event of a more serious pullback, be sure to move to reduce exposure.   Renewed strength in the group would be a more encouraging sign to wait for before embarking upon any new purchases.

One other important area that is going to be an essential part of the bigger picture is the Retail sector.  In recent weeks the Retail - Clothing/Shoe group has provided an increasing number of issues making the new 52-week highs list.  Some of the better looking retail leaders include Pacific Sunwear of California, Inc (PSUN), Hot Topic, Inc. (HOTT), Christopher & Banks Corp (CBK), Aeropostale, Inc (ARO), Chico's FAS, Inc (CHS), Coach, Inc (COH), Abercrombie & Fitch Co (ANF), Urban Outfitters, Inc (URBN), Jos. A. Bank Clothiers (JOSB), Finish Line, Inc (FINL), and Casual Male Retail Group (CMRG).

The ability to understand and interpret basic price/volume action on a chart is one of the most important skills an investor can possess.  Sure, there are those who obsess about EPS, RS, P/E, Accumulation/Distribution, beta, or any combination of other ratings provided by various publishers, each in a different range of numbers, letters, stars, or preferred colors of the rainbow.  And that is before even thinking about getting into all of the different moving averages, oscillators, and clever barometers that have been developed.  

In recent days I have found myself involved in a number of discussions concerning the various rankings and figures used by investors to evaluate stocks.  The wide array of information available seems to be responsible for creating a lot more confusion and uncertainty, which is ironic!   Meanwhile, a lot of the uncertainty can be removed with a definitive understanding and commitment to technical analysis.  Read the charts!

I am recalling a discussion about stock analysis that I once had with a great market technician.  We were talking, and later almost arguing about a stock that he said was a “buy”.  I can’t even recall the stock right now, but whatever it was, I am sure I had a different opinion.  And so, as I began to counter him with arguments, I said, “Well, that’s your opinion!”

Then I heard him respond with something extremely interesting, and that I later realized to be rather profound.  It really struck me as preposterous at first, as it seemed that my friend was trying to cleverly shift responsibility for his own opinion away from himself.  He said, “That’s what the chart says!”

I taunted him and said, “Oh, so now it is not your opinion, but you’re telling me that the stock’s chart has whispered something in your ear and told you what to do.  If I buy this stock for one of my clients and it turns out you are wrong, what would I say, ‘Mr. Jones, I’m very sorry, but the chart lied to our firm’s technical analyst?’” 

My friend went on and on explaining how the charts were “talking to him”, and he insisted that was essentially the case with technical analysis.  He would not have been one to heartily acknowledge having much if anything to do with the stock in question being considered a “buy”.  No.  With him it was always, “The chart says this right here, and it says so very clearly right here”, but it was definitely not a place where he felt he had any business offering his opinion.  Profound?  Maybe!

I hope that sharing this conversation has an impact on those of you who have not yet gained an appreciation for the art of technical analysis.  It helps us stay objective, meaning we don’t have to take the blame personally whenever something bad happens.  In other words, don’t get too emotional, you didn’t do anything wrong.  Losses are a real part of this business, and successful investors always follow rules to keep the losses small. 

Does this objectivity also mean that we don’t get to claim the fame when something good happens and we land a huge winner?  No!  When you’ve done the right thing, and followed sound trading tactics, you can feel free toot your horn and celebrate your successes.   Though maybe you’ll want to remember a favorite quote I’ve frequently heard from James Taulman, “It is not about the fame, it is all about the fortune.” 

The Present Market Stance

They were referred to as the “Summer Doldrums” long before this year.  For the S&P 500 Index and Dow Industrials, have earned that cliché description based on their present position.  The past two months have turned out to be a rather flat period for these major averages, while the tech-heavy Nasdaq has been able to make even more headway.  Rather than guess about stocks and formulate opinions on whether the market might retreat and be a better buy in October, let’s take our cues from the overall action in the major indices.  Beyond that, on a case-by-case basis each stock you own or consider should be evaluated based on its chart.  As a great trader, Mark Douglas, once said, “Trade what you see, not what you believe”.

Kenneth J. Gruneisen - A Registered Investment Advisor & Registered Principal, Ken manages a Source Capital Group (Member NASD,SIPC) branch office and offers personalized assistance. Investors with a significant financial interest in equities may inquire about opening an account by calling 1-888-237-8399 or emailing to kgruneisen@sourcegrp.com Comments contained in the body of this report are technical opinions only and are not necessarily those of Source Capital Group, Inc. The material herein has been obtained from sources believed to be reliable and accurate, however, its accuracy and completeness cannot be guaranteed. Our firm, employees, and customers may effect transactions, including transactions contrary to any recommendation herein, or have positions in the securities mentioned herein or options with respect thereto. Any recommendation contained in this report may not be suitable for all investors and it is not to be deemed an offer or solicitation on our part with respect to the purchase or sale of any securities. Source Capital Group, Inc. is a NASD/SIPC member firm. Further information is always available upon request. If you know anyone that may have an interest in receiving this or any of our other reports, please call our office locally at (954) 785-1990 or (888) 237-8399 or email kgruneisen@sourcegrp.com

Anything can happen. We know that...especially since...for the most part, we remain range-bound. BUT...I have several things you must definitely pay attention to.  Let's start with Thursday's action. I have taught you in the past that reversals, both negative and positive are most often meaningful. Well, on Thursday, the market had every chance to break out of its 2 month trading range. In fact, on an intra-day basis, the DOW actually did. Then, out of nowhere, the market was sold off hard. That type of negative reversal almost always leads to near-term weakness.  By the way, the new mantra of the bulls on every sell-off is that it was a mistake by a firm that sold off too many shares. Yet it is never a mistake when the market is going up.

More importantly, on Friday, the S&P 500 broke below...and more importantly closed below its 50 day moving average for the first time since March 14th.(show chart) The good news is that this moving average is now in an uptrend  while in the past, it was declining. The bad news is that it counts.

To make you think a bit harder, it is also worrisome that breakouts are becoming few and far between. Maybe it is just a matter of a much-needed consolidation of recent gains. Time will tell.

The EBAY factor worries me. As you know, EBAY and the INTERNETS were one of the two groups that led the market off the lows. EBAY gapped down on its recent earnings and has shown only distribution since. 

FINANCIALS are acting like the south end of a north-bound mule. Followers of my commentary know I am a big proponent of watching the action in BANKS,BROKERAGES,S&L's. I have never seen a market act poorly when FINANCIALS are in gear. Let's take a look at what happened in the past couple of weeks...and yes, it is about the bond market.

 CITIGROUP breaks support as well as its 50 day average.

JP MORGAN does the same.

WASHINGTON MUTUAL does a bungee jump.

Take a gander at LEHMAN and BEAR STEARNS.

The XLF (ETF for FINANCIALS) tops on heavy volume.

Another point I want to make is that the amount of stocks and sectors that are rolling over is now picking up...but I see this is a function of how many stocks and sectors were in good shape. You just can't keep the high levels we experienced forever.

Before I talk about the positives, let's review support levels. Breakdowns occur below S&P 974, DOW 8970 and a 1675 NASDAQ. A closing break on all three will lead to a correction of intermediate-term consequence. You also had better keep an eye on the SEMIS. So far, the SEMIS are holding like a rock...but a break below 373 will only make matters worse. As I have told you a thousand times, the SEMIS have been a fabulous leading indicator of the direction of the market.

BUT...all these negatives should not change your gameplan much. As I have been saying, continue to keep your foot off the pedal until more breakouts occur or major averages break out again...and yes, the major averages are not far from breakout points. That's how tight the trading range has been. If no breakouts occur, you have nothing to do. If stocks you are holding break support, you get taken out. The good news is that there still remains a decent number of stocks that are potentially playable. You just have to play them a little bit lighter at this juncture.

Recent names include IRF, CRAY,FTE,PWER

Gary Kaltbaum is an investment advisor with over $100 million under management. For over 18 years he has specialized in identifying and trading growth stocks in the intermediate-term time frame. He can be heard nightly on his nationally syndicated radio show "Investors Edge" on over 50 radio stations and at the Investors Edge website. Listen to live or archived shows here. He has been featured on the FOX News Channel and is regularly quoted by by CNBC, the Wall Street Journal, Dow Jones News, Reuters, and Bloomberg.

     August is here, and with summer more than half over, fall is just around the corner. Soon the leaves will be turning and the days will be getting noticeably shorter.  The market has been experiencing the “Summer Doldrums”, but the indecisive action in the major indices, like the seasons, may soon be changing.

     In mid-July we had the pleasure of presenting one of our CANSLIM.net seminars to an investment group in Chicago.  Even though the weather was absolutely beautiful outside, on that Saturday morning we still had a decent number of folks willing to sit indoors for a few hours to learn about CANSLIM, our web site, and the services we offer.  We also found the residents of the windy city’s western suburbs to be very friendly and helpful to us often-lost Southerners in a rental car with a dinky little spare tire (which we used to get back to the airport).  I thank the people we met for their kindness, as it was every bit appreciated.

     Last month I spoke of some improvements that we were making to the website and services offered. As you may know, paying members can now log into a secure home page and access all of our proprietary reports and publications. This packaged service is now known as a “CANSLIM.net StockNews Membership”, and even though most of you may have only subscribed to our monthly newsletter, CANSLIM.net News, as a bonus you are now able to access all of our other pay features at no additional cost. This new “CANSLIM.net StockNews Membership” will soon be priced at $199.00 a year, but for a limited time anyone new can still sign-up for just $79.00 and be grand-fathered in on this enhanced level of service.   If your subscription is about to expire you may want to renew before the new rates go into effect.

     Also, You may have realized that we have expanded our editorial staff recently, and these  “CANSLIM Experts” have been a great help in contributing to our publications and reports.

      Finally, as always, your feedback is important to us and we encourage you to communicate any questions, comments or suggestions that you may have about our services. With your input we can continue to grow and improve our unique offerings to be able to help you better implement CANSLIM.  Here’s to a prosperous month!

James Taulman
Managing Editor, COO
CANSLIM.net, Inc.