Inauspicious Undertone

Traders,

Three is a magic number, yes it is, it's a magic number. Somewhere in the ancient, mystic trinity, you get three as a magic number. The past and the present and the future, Faith hope and charity, The heart and the brain and the body, Give you three as a magic number. -- Jeff Buckley, Three Is A Magic Number

Our current position:

Weak Market, Increased Risk To Buyers

In this week's edition you will find:

• Where We Are
• What Was Important About Last Week
• What We Are Watching For This Week
• A Word On Discipline

The following sections can now be found on our home site:

• The Growth Stock Landscape
• What We Like - What We Have
• This Week's Scans

Where We Are:

Taking a look at the overall markets:

The market does whatever it wants, whenever it wants.

We won’t make any claims to whether or not our little bull market off the 2003 lows is over, but what we can say is that this market is weak.

With further deterioration in price action on the major indexes, we have confirming volume indications illustrating seller dominance.

Price and volume are all we need to tell us not to buy into this market.

We won’t guess where the downside ends, but what this market has going for right now is the fact that volume in general has been on the light side.

Where, or if, institutional muscle decides to step in and defend the long side is an X-factor.

Going forward, we’re looking to see what sectors hold up, fall a part, or consolidate.

Relatively strong pockets in the market can be found in the semiconductors, broker dealers, and energy. We place a lot of weight in the success of the semis and BD’s as overall market strength correlates positively with them. If the semis should breakout to new highs they will still face significant overhead resistance.

Weakness in banks continues to be a clear concern for the overall market.

Recent selling in retail and homebuilders has led the action down, and has shown no signs of turn around.

We also take note of the fact that the S&P 500, Nasdaq, and Russell 2000 have made a distinct three drives higher in moves off the 2003 lows. Three moves in a direction has served as a profound statement throughout the history of the market. It marks significant tops and bottoms, and it also makes a strong statement when the pattern doesn’t hold.

Just as the stock market has carved out three humps, oil traders note that the price of crude has demonstrated unusual strength by taking out its three drives to the upside. Look at the weekly chart from to 2004 to observe this.

We do not use this observation as an invitation to go short, but as an undertone for what might be in the works.

Meanwhile, despite weakness in the broader market, out portfolio remains strong.

Technically speaking: The Dow Industrial Average ($INDU), -1.53%, is now trading below its 50 and 200 day moving averages and is in the process of forming a bearish right shoulder.

The S&P 500 ($SPX), -1.20%, slipped below its 50-day moving average, though remains above its 200-day average. The index has made an ominous three moves since rallying off it 2003 lows.

Nasdaq ($COMPQ), -0.69%, is also trading below its 50-day moving average and has made triple top.

Russell 2000 ($RUT), -0.59%, is trading below its 50-day average and above its 200-day average. The index has made a similar three drives higher with the S&P 500.

Volume in general has been light, though what must not be ignored is the three days of distribution apiece for the major indexes over the past two weeks. Three or four distribution days within two weeks goes in hand with a weak market environment that may lead to further selling.

New Highs - New Lows established bearish divergence to the major indexes several weeks ago as the indicator failed to keep pace with the market to the upside. The number of New Lows has gradually picked up the pace over the past two weeks as the number of New Highs tapered off.

The Advance/Decline Line kept trend with the overall market for the week, and is confirming a weak market.

Investors Intelligence continues to report a large number of money managers as bullish, which is considered a bad sign. This report tends to express the opinions of the wrong way crowd.

The VIX continues to move higher as it reflects heightened fear among OEX options traders.

Key chart action for the week:

Charts courtesy of Stockcharts.com

The 10-year Note Holdr (TLT) cruised above its 50-day moving average as it holds an upward channel towards new highs for the year.

The U.S. Dollar Index ($DXC) and the The Gold Miners Index ($XAU) both lost ground for the week. These two vehicles typically trade inversely to one another, as the Dollar Index is trading within a two year lower base, and the Miners half way between the year’s lows and two year’s ago high.

The Dow Jones AIG Commodity Index ($DJAIG) is now consolidating just below the year’s high, and poised to breakout again.

Consumer Cyclicals ($CYC) and Consumer Staples ($CMR) both lost ground for the week, as the Staples maintain a base formation, and the Cyclicals technically weaker a lower low has been cut into its price action.

The Semiconductor Index ($SOX) has been more resilient to market downside pressure, and is trading above its 50-day and 200-day averages. If the index should breakout to new highs it faces a heavy resistance level at the 500 level.

Banks ($BKX) have been hit with heavy selling and continue to form a right shoulder, Broker Dealers ($XBD) continue to exhibit relative strength in the market, as the index pulled back slightly and continues to trade above its 50-day and 200-day averages.

Retail ($RLX) traded lower for the third week in a row and has erased gains made since breaking out to new highs seven weeks ago.

Internet stocks ($IIX) continued to slide and are also forming a bearish right shoulder.

Healthcare ($HCX) took it on the chin with the rest of the market and moved below its 50-day average. The index has turned bearish as it pierced the lower line of an upward channel.

Biotech ($BTK) is consolidating just below the years high. The index is technically bullish.

REIT's ($DJR) were little changed for the week, though have established technical weakness as its 50-day average now serves as resistance.

Homebuilders ($DJUSHB) continued to slide lower, as the index is parked on key support at its recent breakout level.

Transportation ($TRAN) moved lower with the overall market, and trying to establish support on its 50-day moving average.

Airlines ($XAL) continue to consolidate in a potential lower base.

Defense ($DFX) continued to demonstrate its relative strength with only a modesxt decline for the week.

Energy ($IXE) lost only slight ground for the week as it trades in pullback mode.

Basic Materials ($A1BSC) is now trading below its 50-day and 200-day averages as it formed a bearish lower low in its price action for the year.

Utilities ($UTY) bucked the overall market trend and moved modestly higher for the week.

The top 10 industry groups from the 6 month RS screen are:

• SEMICONDUCTOR-INTGRTD
• INTERNET INFO PROVIDER
• HEALTHCARE INFO SVCS
• SEMICONDUCTOR-SPECIALI
• DATA STORAGE DEVICES
• DRUG MANUFACTURERS OTH
• DEPARTMENT STORES
• HEAVY CONSTRUCTION
• SEMICONDUCTOR EQUIP MA
• TECHNICAL SERVICES

What Was Important About Last Week

STOCKS:

• There was little in the way of earnings related news to report for the week, and certainly no market movers. This is typical of late summer.

ECONOMY:

• U.S. home sales fell 2.6% for July, to an annualized rate of 7.16 million units. This was a bigger drop than what economists were looking for.
• New home sales were up 6.5% in July, beating economists expectations.
• Durable goods orders fell 4.9% in July, for the biggest drop in 18 months. This is worse than what economists were looking for.
• The price of crude oil hit a new high of $68 per barrel.
• The University of Michigan’s consumer sentiment index fell to 89.1 in August, a steep decline from July’s 96.5 reading, and worse than economists expected.

What We Are Watching For This Week:

Key earnings releases:

• MONDAY: Joy Global Inc. (JOYG).
• TUESDAY: FuelCell Energy, Inc. (FCEL).
• WEDNESDAY: Tiffany & Co. (TIF).
• THURSDAY: Ciena Corporation (CIEN), Corinthian Colleges (COCO), H&R Block, Inc. (HRB).
• FRIDAY: none

On the economic front we have potential market movers with:

• MONDAY: none
• TUESDAY: Consumer Confidence, Factory Orders, FOMC Minutes
• WEDNESDAY: Chain Deflator-Prel., GDP-Prel., Chicago PMI
• THURSDAY: Auto Sales, Truck Sales, Initial Claims, Personal Income, Personal Spending, Construction Spending, ISM Index.
• FRIDAY: Average Workweek, Hourly Earnings, Nonfarm Payrolls, Unemployment Rate.

The Following Sections Are Now On Our Home Site:

• The Growth Stock Landscape
• What We Like - What We Have
• This Week's Scans: • SETUPS • BREAKOUTS • BASE BUILDING • SHORTS

This Week's Word On Discipline:

"I think the guys who are really controlling their emotions ... are going to win." -- Tiger Woods

A Fog Of Reason

Traders,

The sun struggles up another beautiful day

And I felt glad in my own suspicious way

Despite the contradiction and confusion

Felt tragic without reason

There’s malice and there’s magic in every season

-- Elvis Costello, The Other Side of Summer

Our current position:

BUYER'S EDGE INTACT

In this week's edition you will find:

• Where We Are
• What Was Important About Last Week
• What We Are Watching For This
• Week A Word On Discipline

The following sections can now be found on our home site:

• The Growth Stock Landscape
• What We Like - What We Have
• This Week's Scans

Where We Are:

Taking a look at the overall markets:

This past week, like many weeks in the month of August, was marked by lighter volume and sluggish price action. Price and volume being our major indicators, we didn’t have much to go on.

In the bigger picture, our analysis methods continue to suggest the broader market is taking a rest before resuming its up trend.

Our methods have nothing to do with opinions.

Despite several minor signals that the market is due to correct, we have not witnessed heavy sellers step up with significant deterioration from key sectors. Until we see this, we’re going to keep our green flag hoisted in anticipation of new highs.

Strong market environments always have their worry areas, and we always take note of them. These areas could potentially lead to a market that deteriorates, but proof of that must be seen in the price action for us to take action.

Price pattern analysis portrays The S&P 500 and Nasdaq making an ominous three moves higher. Maybe it’s just a coincidence, but the market has tended to play out in threes throughout its history.

The Dow, S&P 100, and Nasdq 100 have failed to breakout to new highs with the major indexes. These stocks represent the biggest market caps in t he market.

The technical condition of the banking sector is bearish. A head and shoulders pattern on the weekly chart is a clear concern.

Retail stocks are in technical jeopardy after breaking out to new highs and falling back into its base.

Markets led by energy are often in their last stage of a cycle. But guessing just when that cycle is over is a game we won’t play.

New Highs – New Lows have shown significant bearish divergence over the past weeks. If market breadth won't confirm new highs in the indexes, it indicates the indexes have not been well supported.

Investors Intelligence tells us a high number of money managers are bulls. This is historically bad.

The Volatility Index (VIX) is coming off historical lows. We look at the indicator from a historical perspective, not a swing trading one, and are believers that it will revert to its mean as fear and lower prices creep back into the market.

We have no idea what will happen in the next weeks, or months for that matter. August tends to be slow, but when the institutional money mangers return from their vacations we expect to get a stronger indication sentiment.

We always want to be on the side of the institutions. We do this by measuring volume, not their analysis. The last thing we want to do is take their professional advice, but the first thing we want is to be on the same side of the market as them. The two are not always the same.

This market may be sagging, but our portfolio remains in good shape.

Technically speaking: The Dow Industrial Average ($INDU), -0.39%, and The S&P 500 ($SPX), -0.87%, consolidated for the week and are parked on their 50 day moving averages.

Nasdaq ($COMPQ), -0.99%, had an orderly decline and is also above its 50 day moving average.

Russell 2000 ($RUT), -1.13%, continued its slide and is just under its 50 day moving average.

Volume indications gave us no bias as all three of the major indexes shared one day of accumulation and one day of distribution.

New Highs - New Lows have portrayed a bearish environment over the past month, with the ratio failing to keep pace to the upside momentum of the major indexes.

The Advance/Decline Line showed bullish divergence for the week.

Investors Intelligence continues to give a bearish signal with the number of bullish money managers dominating the bears by a ratio of 2.55.

Key chart action for the week: Charts courtesy of Stockcharts.com

The 10-year Note Holdr (TLT) made modest gains for the week as it holds withn its 15 month up trend.

The U.S. Dollar Index ($DXC) bounced back after 6 weeks of declines. The index is poised to breakout to a 15 month high. Whether or not such a move would stick will be critical from a technical perspective.

The Gold Miners Index ($XAU) lost ground and remain in technical limbo.

The Dow Jones AIG Commodity Index ($DJAIG) has pulled back after breaking out last week. The trend is up, but the instrument has little room on the downside before turning technically bearish.

Consumer Cyclicals ($CYC) were in better favor with traders than Consumer Staples ($CMR), with the prior in better position to make new highs.

The Semiconductor Index ($SOX) continued to pull back in orderly fashion. Next support zone will be the 50-day moving average in the 452 area.

Banks ($BKX) quietly edged up for the week, though hold a bearish technical pattern. Future action here will likely weigh in heavily for the overall market. Bulls are looking for a move above 101.98 which would negate a head and shoulders pattern in the works.

Broker Dealers ($XBD) have been holding up well during an overall market pullback.

Retail ($RLX) has sunk back into its base and is trading just below its 50-day moving average. While individual leaders from the group look as though they have topped, we won’t turn negative on the sector without a clearer move below the 50 day average.

Internet ($IIX) pulled back to its 50 day average and are in technical limbo.

Healthcare ($HCX) slid lower for the week and closed just below its 50-day average. The secotr is showing good relative strength against the overall market, though has not provided much clarity from a technical perspective.

Biotech ($BTK) puled back for the week though remains in an uptrend since breaking out 6 weeks ago.

REIT's ($DJR) lost ground for the week and are trading below its 50-day average. From a technical perspective the index is on the cusp of turning from bullish to neutral. The 230 area will serve as a critical support decision.

Homebuilders ($DJUSHB) also moved lower, though remain in an upward channel.

Transportation ($TRAN) pulled back for the week with heavy distribution.

Airlines ($XAL) were positive on the week and continue to form what may later be recognized as a lower base.

Defense ($DFX) hit an all time high for the week.

Energy ($IXE) tumbled for the week. The sector has had a huge run up, with a heavy pullback not necessarily alarming.

Basis Materials ($A1BSC) traded lower for the week and is in technical limbo.

Utilities ($UTY) were little changed for the week and are trading just below the 50-day average.

The top 10 industry groups from the 6 month RS screen are:

• INTERNET INFO PROVIDER
• SEMICONDUCTOR-INTGRTD
• HEALTHCARE INFO SVCS
• DEPARTMENT STORES
• SEMICONDUCTOR EQUIP MA
• DATA STORAGE DEVICES
• TECHNICAL SERVICES
• SEMICONDUCTOR-SPECIALI
• INDUSTRIAL EQUIP WHOLE
• SEMICONDUCTOR-BROAD LI

What Was Important About Last Week

STOCKS:

• Hewlett Packard (HPQ) said it earned 36 cents a share, as it beat a Wall Street's consensus forecast of 31 cents.
• The world's biggest retailer, Wal-Mart Stores (WMT), reported disappointing second-quarter numbers and said it had a dim outlook going forward. High gasoline prices were thought to be hurting business.
• The No. 2 U.S. home-improvement retailer, Home Depot (HD), posted second-quarter profits up 14%, as it beat forecasts. The company raised its earnings forecast for the year.
• The No. 2 U.S. home-improvement retailer, Lowes (LOW) reported earnings up 20% in the quarter. This was better than Wall Street forecasts, and the company guided higher for the third-quarter.

ECONOMY:

• The Labor Department's consumer price index was up 0.5% in July, this is its biggest gain since April, and due largely to a 6.1% increase in gasoline prices.
• The producer price index rose 1% in July, for the biggest gain since last October. This is double what economists expected.

What We Are Watching For This Week:

Key earnings releases:

• MONDAY: none
• TUESDAY: Williams-Sonoma (WSM)
• WEDNESDAY: Dollar Tree Stores (DLTR), Michaels Stores (MIK), PetroChina Company Limited (PTR)
• THURSDAY: Chico's FAS, Inc. (CHS), Hormel Foods Corporation (HRL), Smithfield Foods (SFD), Toll Brothers (TOL)
• FRIDAY: none

On the economic front we have potential market movers with:

• MONDAY: none
• TUESDAY: Existing Home Sales
• WEDNESDAY: Durable Orders, New Home Sales
• THURSDAY: Initial Claims, Help-Wanted Index
• FRIDAY: Mich Sentiment-Rev.

The Following Sections Are Now On Our Home Site:

• The Growth Stock Landscape
• What We Like - What We Have
• This Week's Scans: SETUPS, BREAKOUTS, BASE BUILDING, SHORTS

This Week's Word On Discipline:

“Simulated disorder postulates perfect discipline; simulated fear postulates courage; simulated weakness postulates strength. “ -- Lao Tzu

Free From Decision

Traders,

I had a lot of good intentions Sit around for fifty years and then collect a pension, Started seeing the road to hell and just where it starts. But my life is more than a vision The sweetest part is acting after making a decision I started seeing the whole as a sum of its parts. -- The Indigo Girls, Hammer & Nail

Our current position:

BUYER'S EDGE INTACT

In this week's edition you will find:

• Where We Are
• What Was Important About Last Week
• What We Are Watching For This Week
• A Word On Discipline

The following sections can now be found on our home site:

• The Growth Stock Landscape
• What We Like - What We Have
• This Week's Scans

Where We Are:

Taking a look at the overall markets:

At this juncture we’re believers the overall market averages are pulling back, not selling off.

Our major indicators of price and volume have given subtle evidence that we could expect something deeper than a pullback, but it would be premature to make that call.

The music goes on. The market might go up, and the market might go down.

While many stock market news letters go out of their way to impress their audience with ever more complicated and theoretical notions as to what the market will do, we here at The Growth Stock Report keep it simple, and stick to what works.

We do nothing more or less than execute a strategy that has worked for us.

This market environment has been a tough one if you’ve been buying technology, and a kind one if you’ve been long energy.

History has taught us that markets led by energy are often in their last stage of a cycle that will top out and lead to an overall move lower.

Higher energy costs have historically led to recessions.

The stock market has historically served as a leading indicator for the economy, and we don’t see any reason why this trend would change.

While we recognize the difficulty in timing the broad market averages, we make our money by selecting individual stocks and only acting when conditions are in our favor.

Our portfolio has been doing well for us. Until we begin to see evidence to suggest the markets could deteriorate, we’re simply going to believe our money will grow.

We let the market make our decisions for us. Of course we don't expect to on the right side of things all the time, but through experience we've learned not to be burdened by whatever we've bought or sold, but libereated.

Once we've commited to a position we stick to it until our rules tell us to get out. This is what has kept us profitable, and this is what frees us.

Technically speaking:

The Dow Industrial Average ($INDU), +0.40%, continues to trade in a tight, 4-week range as it lags the other indexes with its reluctance to breakout. The Dow is currently on its 20-day average, and above its 50 and 200-day averages.

The S&P 500 ($SPX), +0.32%, drifted sideways as it trades on its 20-day average, and above its 50 and 200-day averages.

Nasdaq ($COMPQ), -0.96%, sold off below its 20-day average, while trading above its 50 and 200-day averages.

Russell 2000 ($RUT), -0.42%, also sold off below its 20-day average, while trading above its 50 and 200-day averages.

Volume for each of the major averages gave us one heavy distribution and one light accumulation day. Technology experienced the most selling with the Nasdaq 100 notching in 2 distribution days.

New Highs - New Lows continue to portray bearish divergence as the numbers have, so far, failed to make new highs in step with the major indexes.

The Advance/Decline Line remains flat with bearish divergence to the S&P 500.

Investors Intelligence reported the number of Bulls increasing with the number of Bears decreasing. This contrarians’ indicator continues to warn of a “shakeout” in the market.

Key chart action for the week:

Charts courtesy of Stockcharts.com

The 10-year Note Holdr (TLT) found support at its 200-day moving average and took out last week’s high.

The U.S. Dollar Index ($DXC) sold off for the week and is currently positioned between its 50day and 200-day averages. Meanwhile, The Gold Miners Index ($XAU) trended up for the week and is above all of its major averages

The Dow Jones Commodity Index ($DJAIG) broke out for the week. This vehicle tracks all commodities including energy, grains, metals, and softs (cotton, sugar etc.).

Consumer Staples ($CMR) held an edge in relative strength over the Consumer Cyclicals ($CYC). Staples continue to flirt with breakout levels, while Cyclicals face overhead resistance.

The Semiconductor Index ($SOX) sold off for the week. The 500 level remains a pivotal level going forward.

Banks ($BKX) went sideways for the week and continue to trade below the 50 and 200-day averages. The index is vulnerable to further selling.

Broker Dealers ($XBD) remain technically strong above the 20-day average, and poised to breakout to new highs.

Retail ($RLX) managed a modest gain for the week as it trades in pullback mode after breaking out of a multi month base.

Internet stocks ($IIX) sold off with the rest of the tech sector and are showing relative weakness to the overall market with overhead resistance to reckon with.

Telecom ($XTC) hit new highs for the year as it holds a steady trend up.

Healthcare ($HCX) continues to hold high levels after breaking out to new highs last week. The sector is sluggish, though bullish as it trades just above its 20-day average.

Biotech ($BTK) pulled back for the week as it cools off from an impressive upside run from the past 6 weeks.

REIT's ($DJR) were hit with selling Monday, though regained much of the ground lost for the week in a four day rally. The index is technically bullish, though vulnerable if Monday’s low of 232.66 is taken out.

Homebuilders ($DJUSHB) are consolidating just below the 50-day average. This group is also technically bullish, though vulnerable to selling.

Transportation ($TRAN) posted a modest gain, and is setup to breakout. Whether or not it actually produces a legitimate breakout is yet to be seen, and will weigh in heavily for the direction of the overall market.

Airlines ($XAL) lost ground for the week and remain “triangled” in a possible lower base. The index has been bogged down over the past couple of years, though is showing encouraging action after shaking off negative news.

Defense ($DFX) sold off modestly, though its uptrend still intact.

Energy ($IXE) zoomed to another new high.

Basis Materials ($A1BSC) were a hot spot for the week as this index pushed above last week’s high. There is significant overhead resistance to be dealt with, though this vehicle is trending above all its major averages.

Utilities ($UTY) consolidated for most of the week, though its uptrend very much intact at this juncture.

The top 10 industry groups from the 6 month RS screen are:

• INTERNET INFO PROVIDER
• TECHNICAL SERVICES
• HEAVY CONSTRUCTION
• INDUSTRIAL EQUIP WHOLE
• SEMICONDUCTOR-INTGRTD
• SEMICONDUCTOR EQUIP MA
• DEPARTMENT STORES
• SEMICONDUCTOR-SPECIALI
• GROCERY STORES
• SEMICONDUCTOR-BROAD LI

What Was Important About Last Week

STOCKS:

• Dell Computer (DELL) reported earnings of $1.02 billion in the second quarter, up 28% from a year ago, with revenue up 15% to $13.43 billion. The market pounded the stock with analysts looking for $13.7 billion in sales. This is the second disappointment in three quarters from Dell.
• Auto-parts makers Delphi (DPH) and Visteon (VC) hefty losses for the second-quarter.
• Nortel Networks (NT) reported second-quarter profits up almost 300% from a year ago and gave a strong forecast for the year.
• Cisco Systems (CSCO) announced earnings of $1.54 billion for its fiscal fourth quarter, up 12% from a year ago.
• The world's biggest steelmaker Mittal Steel (MT) said it earned $1.1 billion in the second quarter, down 15% from a year ago. Mittal also cut its forecast for third-quarter earnings.

ECONOMY:

• The Fed raised its target for the federal funds rate target to 3.5% There have been 10 increases since June 2004.
• The Labor Department said the productivity of nonfarm businesses increased to an annual rate of 2.2% for the second quarter. This is down from a 3.2% rate in the first quarter and well below the three year average.
• Retail sales were up 1.8% last month, but fell short of economists' forecasts. The highlight of the report was autos and auto parts sales which increased 6.7% in the month for the biggest since October 2001.
• The Commerce Department reported the U.S. imported $58.8 billion more in goods and services than it exported in June, beating economists' forecasts. This is the third-widest monthly trade gap on record.

What We Are Watching For This Week:

Key earnings releases:

• MONDAY: Agilent Technologies Inc. (A), Goldcorp (GG).
• TUESDAY: Abercrombie & Fitch Co. (ANF), American Eagle Outfitters Inc (AEOS), Applied Materials (AMAT), Deere & Company (DE), Hewlett-Packard (HPQ), Home Depot Inc (HD), Staples, Inc. (SPLS), Wal-Mart Stores Inc. (WMT).
• WEDNESDAY: BEA Systems (BEAS), Network Appliance (NTAP).
• THURSDAY: Gap Inc. (GPS), JDS Uniphase Corporation (JDSU), Marvell Semiconductor, Inc (MRVL).
• FRIDAY: CDC Corporation (CHINA).

On the economic front we have potential market movers with:

• MONDAY: NY Empire State Index
• TUESDAY: Building Permits, Core CPI, CPI, Housing Starts, Capacity Utilization, Industrial Production
• WEDNESDAY: Core PPI, PPI, Initial Claims, Leading Indicators, Philadelphia Fed
• THURSDAY: Initial Claims, Leading Indicators, Philadelphia Fed
• FRIDAY: none

The Following Sections Are Now On Our Home Site:

• The Growth Stock Landscape
• What We Like - What We Have
• This Week's Scans: SETUPS BREAKOUTS BASE BUILDING SHORTS

This Week's Word On Discipline:

“The discipline of desire is the background of character.” -- John Locke

The Heavies

Traders,

Up in the Gold Hotel

The money hits the table

The heavies all are there

That's why the deal's goin' down

Beautiful women all dressed in

Diamonds and sable

Down upon the street

Beside a garbage heap

A Mariachi band begins to play.

-- Neil Young, Eldorado

Our current position:

BUYER'S EDGE INTACT

In this week's edition you will find:

• Where We Are
• What Was Important About Last Week
• What We Are Watching For This Week
• A Word On Discipline

The following sections can now be found on our home site:

• The Growth Stock Landscape
• What We Like - What We Have
• This Week's Scans

Where We Are:

We can come up with several good reasons why the market averages should sell off, though it’s our key indicators of price and volume that keep our green flag hoisted.

The market does not behave like a trained dog, or keep time like the clock on your computer. The market does whatever it wants, whenever it wants.

Sellers held the edge for the week, though their cause did not have much muscle behind it.

While modest losses were posted on the Dow, S&P 500, and Nasdaq, the Russell 2000 fell 2.5% as it dropped below its 20-day average.

The Russell has been acting as a leader for the past couple of months, and we’re watching it as a potential leader down. Technically this small cap index is comfortably above the base it launched from as well as its 50-day average.

Leadership from Energy remains strong, while leadership from Homebuilders and REITs took a tumble after Friday’s employment data gave cause to interest rate fears.

Tech stocks remain sluggish. While the Naz hit a new high, it failed to close strong.

Banks have deteriorated significantly. This is a clear and bad sign for the overall market.

Growth Stocks as a group failed to post a healthy number of highs, and we saw heavy distribution in Apparel Store stocks in response to a retail sales report.

It has been weeks since Growth Stocks have shown this kind of weakness.

Despite all of the negatives, the market won’t fall apart until heavy sellers push it there. These heavies are the institutions. We have no idea when or if this will occur, so we continue to go by our motto of trading what is and not what should be.

We are definitely encouraged by select Growth Stocks setting up, and will continue to trade accordingly. These situations are discussed on our home site.

Taking a look at the overall markets:

The S&P 500 ($SPX) , -o.63%, and Nasdaq ($COMPQ), -o.32%, hit fresh highs before declining to their 20-day moving averages, while The Dow Industrial Average ($INDU), -0.78%, remains technically the weakest of the major indexes as it failed to make a new high.

Russell 2000 ($RUT) , -2.50%, has been hardest hit, though remains well above its base breakout level.

Despite price declines on the major indexes, Volume Indications showed only one day of distribution on the Nasdaq, with the Dow posting two days of accumulation, and the S&P 500 having one day a piece of accumulation.

New Highs -New Lows continues to reflect weakness in the major indexes with bearish divergence.

The Advance/Decline Line held bearish divergence throughout the week.

Investors Intelligence reports an abundance of Bullish advisors over Bearish advisors. This contrarian indicator has been giving a warning sign for weeks now. While we never like to go with the crowd and have faith in the indicator, accurately timing signals from this is no science.

Meanwhile the CBOE OEX Volatility Index (VIX) has pushed off historical lows. This indicator has been bearish and stagnant for months. We suspect it will in fact correct to historical averages at some point in the future, reflecting fear and lower prices in the major indexes.

Key chart action for the week:

Charts courtesy of Stockcharts.com

The 10-year Note Holdr (TLT) continued to trend down and is parked just north of 91, which is in the area of its 200-day moving average and a trend-line.

The U.S. Dollar Index ($DXC) moved and closed below its 50-day moving average, while the Gold Miners Index ($XAU) pushed north of its 200-day moving average and a down trend-line. In the long run (months from now) we’re leaning for gold to win this classic tug of war.

The Dow Jones Commodity Index ($DJAIG) moved closer towards its March high and is poised to breakout.

Consumer Cyclicals ($CYC) held a modest edge in relative strength over the Consumer Staples ($CMR). Both indexes are set up for potential breakouts.

The Semiconductor Index ($SOX) moved higher before turning around to post a loss for the week. With the index at 471, we see the 500 level as a major decision zone where a key trend-line awaits.

Banks ($BKX) are looking ugly as the index continues to deteriorate and is trading below all of its major moving averages. A clear negative for the overall market.

Broker Dealers ($XBD) staged a second week of orderly price decline. This is a market leader and is so far showing no signs of serious trouble.

Retail ($RLX) was hammered on the heels of a poorly received sales report for the industry. The trend is still technically up, though the momentum behind the move may not be over.

Internet stocks ($IIX) poked higher for the week though remain lackluster.

Healthcare ($HCX) hit a fresh high for the week though closed in negative territory. The trend has been up over the past three weeks, but the moves are less than impressive. We currently favor healthcare stocks, though are seeing a mixed picture from individual stocks and want to be selective with them.

Pharmaceuticals ($DRG) continue to trade in a range, though the index is edging its way up in base formation which would be encouraging.

Biotech ($BTK) hit a new high and is in consolidation mode. The sector made a nice move of late, and so far it’s sticking.

REIT's ($DJR) were pounded Friday. The index is currently trend up and at its 50-day moving average. The 50 is very important going forward. At this juncture we don’t want to be owners of REITS if the 50-day average isn’t respected. Hit and run!

Homebuilders ($DJUSHB) were also hit with heavy distribution. Just as with the REITs, we want to see how it behaves around its 50-day average.

Transportation ($TRAN) gave back recent gains, though remains poised to breakout.

Airlines ($XAL) were hit and are now trading below their 50-day average. The index continues to grind out what may later be deemed a lower base. The action here is slow.

Defense ($DFX) had a modest pullback for the week.

Energy ($IXE) charged to another new high.

Basis Materials ($A1BSC) rose slightly, with much in the way of overhead resistance to be dealt with.

Utilities ($UTY) lost ground and the index is now below its 20-day average.

The top 10 industry groups from the 6 month RS screen are:

1. TECHNICAL SERVICES
2. SEMICONDUCTOR EQUIP MA
3. SEMICONDUCTOR-INTGRTD
4. INTERNET INFO PROVIDER
5. SEMICONDUCTOR-SPECIALI
6. GROCERY STORES
7. SEMICONDUCTOR-BROAD LI
8. HEAVY CONSTRUCTION
9. INTERNET SERVICE PROVI
10. DATA STORAGE DEVICES

What Was Important About Last Week

STOCKS:

• Procter & Gamble (PG) reported earnings up 9% from a year earlier as it beat Wall Street estimates by one cent. The stock declined for the week.
• Comcast (CMCSK) announced second-quarter earnings up 64% from a year ago, due in part to demand for on-demand video and high-speed Internet service.
• Unilever (UL) posted second-quarter profits down 27% from a year ago, due largely to a write-down of its SlimFast franchise.

ECONOMY:

• Nonfarm jobs were up 207,000 for July, topping economists' forecasts.
• Hourly wages posted their biggest gain in a year.
• The jobless rate came in at 5% for its lowest reading since September of 2001.
• The price of crude oil hit a new high and closed above $62 a barrel.
• The Institute for Supply Management’s factory index rose to 56.6 in July, its second straight gain, and its highest level since December. Economists were looking for a smaller gain.
• The Commerce Department U.S. said construction activity slowed in June as home construction declined for the spring.
• Retail sales in stores open a year ago, rose 3.7% from a year ago. This was a smaller gain than expected.
• Jobless claims fell 1,000 to 312,000 in the week ended July 30. The 4-week average fell 2,250 to 316,750. This is the lowest since February, and a 4-year low.

What We Are Watching For This Week:

Key earnings releases:

• MONDAY: Cimarex Energy Co. (XEC), ENERGY PARTNERS LTD (EPL), Dynegy Inc. (DYN), Fluor Corporation (FLR), Sonus Networks (SONS), Harmony Gold Mining (HMY), LAMAR ADVERTISING CO (LAMR).
• TUESDAY: Alliance Gaming Corp. (AGI), Berry Petroleum Company (BRY), Cisco Systems (CSCO), Clear Channel Communications (CCU), Coinstar, Inc (CSTR), EchoStar Communications Corp. (DISH), King Pharmaceuticals (KG), Sun Hydraulics (SNHY), Walt Disney (DIS).
• WEDNESDAY: China Mobile (CHL), Federated Department Stores Inc. (FD).
• THURSDAY: Dell, Inc. (DELL), DreamWorks Animation SKG, Inc. (DWK), Kohl's (KSS), RED ROBIN GOURMET BURGERS INC (RRGB), Target Corporation (TGT), Urban Outfitters (URBN).
• FRIDAY: Petrobras (PBR).

On the economic front we have potential market movers with:

• MONDAY: none
• TUESDAY: Productivity-Prel, Wholesale Inventories, FOMC policy announcement.
• WEDNESDAY: Treasury Budget
• THURSDAY: Initial Claims, Retail Sales, Retail Sales ex-auto, Business Inventories.
• FRIDAY: Export Prices ex-ag, Import Prices ex-oil, Trade Balance, Mich Sentiment-Prel..

The Following Sections Are Now On Our Home Site:

• The Growth Stock Landscape
• What We Like - What We Have
• This Week's Scans:
• SETUPS • BREAKOUTS • BASE BUILDING • SHORTS

This Week's Word On Discipline:

“There will have to be rigid and iron discipline before we achieve anything great and enduring, and that discipline will not come by mere academic argument and appeal to reason and logic. Discipline is learnt in the school of adversity.”

-- Mohandas Gandhi