Old Economy Falters Despite a Bullish Economic Report

The Consumer Price Index (CPI), a closely-watched economic indicator, was released today, and most market watchers were pleased. For the fourth month in a row, the CPI rose a measly 0.2 percent, which virtually guarantees that the Federal Reserve will stand pat on interest rates at its August 22 FOMC meeting.

Reacting favorably to the benign CPI report, the Nasdaq Composite Index (COMPX) shot up 37 points in early trading. However, sellers set in to spoil the party by late afternoon. When it was all said and done, the COMPX only managed a gain of 9.54 points, or 0.25 percent, to close at 3,861.20. Again, the tech-heavy index experienced resistance at its 200-dma of 3,941.

As for the older economy issues (issues that have at least past puberty), they didn't do as well. The Dow Jones Industrial Average (INDU) initially rose 20 points, thanks to the CPI report, to reach an intraday high of 11,089. However, sellers soon invaded this market, too, forcing the INDU down to its eventual close of 11,008.39, with a loss of 58.61 points for the day.

Leading the INDU down to the psychologically important 11,000 level were its retail and financial components, though namely its retail components. Reacting to a number of analyst downgrades, Home Depot (HD) dropped $2.50 to $51.00. Analysts cited concerns that the company is at the bottom of end of its growth curve and that slowing in consumer spending will hurt the bottom line of the home improvement giant. Home Depot has lost 16 percent of its value this week alone.

Adding insult to injury, another INDU retailing component, Wal-Mart (WMT), was handed a downgrade by Donaldson Lufkin & Jenrette, which dropped the world's largest retailer $1.88 to $49.69.

In other market activity, the broader-market S&P 500 (SPX) closed down 4.58 points to 1,479.85, while the small-market Russell 2000 Index (RUT) bucked the downtrend by added 2.81 points to 512.74.

In other market news, the semiconductors continue to bask in the glowing remarks made by Morgan Stanley, the microchips another very strong day. The Philadelphia Semiconductor Index (SOX) closed up for a fourth straight day, gaining 12.85 points to 1,073.37.

The semis' gains must have been the biotechs' loss. The AMEX Biotechnology Index (BTK) fell again amid patent concerns. The BTK dropped another 8.36 points to close 652.39. Among the big losers was IVAX Corporation (IVX), whose shares dropped by $4.75 to close at $25 (keep in mind, this thing tanked over $12 yesterday).

Petroleum issues continued to show strength, as the AMEX Oil Index (XOI) reached a 50-point gain from its July 26 low. The Index pushed through resistance at 514 and closed up 7.04 points to 517.06. If the index can move strongly through the next resistance of 520, then the rally may well extend to the 540 level.

Other sectors displaying decent strength today were the healthcare and pharmaceutical sectors. With the investment pendulum swinging back in its direction, the AMEX Pharmaceutical Index (DRG) continued its upward trend and closed up 4.24 points to 394.28, while the S&P Healthcare Index (HCX) closed up 6.51 points to 814.14.

In stock news, Hewlett Packard Corporation (HWP) was down for almost the entire session, but the rally mildly on earnings expectations to close at $111.50 up $0.50. This will be an interesting issue to watch tomorrow as the company reported earnings of $.99 per share, which shot analysts estimates of $.85 cleanly out of the water. After hours trading saw Hewlett-Packard traded as high at $126.

Announcing earnings late yesterday was Lycos Incorporated (LCOS), which reported earnings $0.12 per share, easily beating the First Call estimate of $0.04 per share.

In other earnings news Tiffany & Co. (TIF) reported net income of $39.16 million, which translates into $.26 per share. Although the company reported $.04 better than estimates, the good news was not enough to prevent a sell off. Tiffany shares closed down $1.81 to $38.56.

Meanwhile, shares of BEA Systems (BEAS) climbed 17 percent on the strength of their second-quarter earnings. The Internet transaction software maker announced today second quarter sales rose by 80 percent, resulting in earnings per share of $.05. Estimates had been for a figure of $.04. BEAS soared $8.13 to $57 on the news.

Consolidated Stores Corporation (CNS), the Columbus Ohio-based retailer, announced its second-quarter profits were up 11 percent from the same period a year ago, meaning it posted earnings of $0.12 per share, match analysts' estimates. The company had announced in June that it would sell, spin off or liquidate its KB Toy unit to concentrate on its closeout chains, and its Pic'N'save stores. In a day that saw many retailers stocks circle the drain, Consolidated Stores managed to buck the trend and gain $.12 to $13.25.

Looking ahead, it appears as if it might take the meeting of the FOMC to coax investors from the sidelines. For the broader markets, the NASDAQ remains bound in a rather narrow trading range and for any significant up trend to occur, it must break through its 200-dma with convincing force. Resistance remains intact at the 3980 level. As for the Dow, support was found today at the 11,000 level, which will hopefully remain firm, as profit-taking the many blue chip issues has likely abated.

Good Luck! And remember not to fight the market trend.

Michael Fairbourn
Research Analyst