Weekly Newsletter 08/29/08
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Market Summary Weekly Breakout Report Top Breakout Choices Top 2nd Chances New Features Tip of the Week
Prior editions of this newsletter with our valuable Tips of the Week are available here.
 Weekly Commentary  
Stocks fell on Friday giving back Thursday's gains and closing the week with only the Russell 2000 showing a modest gain. Volumes were low throughout the week as this was the last week of the summer before the Labor Day weekend. The markets received a fillip on Thursday with the release of surprisingly strong GDP numbers but reality returned on Friday with the Commerce Department reporting core inflation had risen to 2.4% and a fall in consumer spending in real terms. With consumers accounting for 70% of the economy and consumption now falling after the stimulus checks were spent , the economy faces difficult times and the markets too.

The NASDAQ could not sustain a rise above the 200 day moving average level a week ago and another attempt to vault that level failed this week. In contrast, the Russell 2000 tested support at the 200 dma level and bounced back. As we have been reporting for several weeks now, the small caps are providing the best breakouts and the best returns.

On Thursday, in the daily market commentary, I drew attention to what seemed to be a suspect value for the GDP deflator and on Friday the Commerce Department reported that core price inflation was at 2.4%, the biggest jump in 17 years. Superficially, that would seem to justify Thursday's skepticism, but in fact it doesn't and I was wrong to be suspicious of the GDP deflator in the first place. In fact it is quite possible for inflation to be high while the GDP deflator is lower. This happens when inflation is a result of the higher cost of imported goods such as oil, rather than inflation in domestically produced goods and services. A posting to the RGE Monitor blog by a contributor named 'Ernst' makes it clear that inflation in imports is excluded from the GDP deflator and why:

"A practical example in a fictitious country.

In 2007, Islandia produced 500 coconuts, which residents sold to themselves for $1 each, and imported 1 barrel of oil, which cost $100... Nominal GDP in Islandia for 2007 was $500. If you wanted to describe that in real terms, you'd call it 500 coconuts. You don't count the oil in either nominal or real GDP because Islandia didn't produce any oil...
Here are the numbers for 2008. We grew 510 coconuts, sold them for $1.01 each, and still imported 1 barrel of oil, paying $125 for it. So nominal GDP was $515.10 (a 3% increase) and real GDP was 510 coconuts (a 2% increase). The change in the implicit GDP deflator would be the change in the ratio of nominal GDP to real GDP, namely, +1%...
But wait a minute, Islandia's pundits decry. How can your crummy accounting claim that inflation was only 1%? Last year we bought 500 coconuts and 1 barrel of oil for $600, but this year if we tried to buy the same thing it would cost us $630. The inflation rate, they tell you, is obviously 5%, not 1%."

We wish you all a safe and enjoyable Labor Day weekend.
 New Features this Week Additional Value that we added this week
No new features this week.
This Week's Top Tip Tips for getting the most out of our site
No top tip this week.
 Market Summary Overview of market direction and industry rotation
Index Value Change Week Change YTD Market1
Signal
Dow 11544 -0.72% -12.97% enter
NASDAQ 2367.52 -1.95% -10.74% enter
S&P 500 1282.82 -0.73% -12.64% enter
Russell 2000 739.5 0.26% -3.46% N/A
 Best Performing Index
1 Week 13 Weeks 26 Weeks Year-to-Date
Russell 2000
0.26 %
Russell 2000
-1.16 %
Russell 2000
7.77 %
Russell 2000
-3.46 %
 Best Performing Industry (by average technical score over each period)
1 Week 3 Weeks 13 Weeks 26 Weeks
Long Distance Carriers Long Distance Carriers REIT - Healthcare Facilities REIT - Healthcare Facilities
 Most Improved Industry (by change in technical rank2)
Aluminum
+ 54
Aluminum
+ 99
Long Distance Carriers
+ 213
Long Distance Carriers
+ 210
Charts of each industry rank and performance over 12 months are available on the site

1The Market Signal is derived from our proprietary market model. The market model is described on the site.
2The site also shows industry rankings based on fundamentals, combined technical and fundamentals, and on price alone. The site also shows daily industry movements.
 Weekly Breakout Report How confirmed breakouts performed this week
# of Breakouts
Period Average1
Max. Gain During Period2
Gain at Period Close3
This Week 14 20.92 4.79% 2.18%
Last Week 6 21.08 6.77% 2.87%
13 Weeks 289 22.23 10.62%
-0.43%
1The average number of breakouts in each week over the previous 13 weeks.
2This represents the return if each stock were bought at its breakout price and sold at its intraday high.
3This represents the return if each stock were bought at its breakout price and sold at the most recent close.
 Top Breakout Choices Stocks on our Cup-and-Handle list with best expected gain if they breakout
Category
Symbol
Company Name
Expected Gain1
Best Overall DAIO Data I/O Corp 103
Top Technical USAK Usa Truck Inc 51
Top Fundamental BWLD Buffalo Wild Wings 43
Top Tech. & Fund. BWLD Buffalo Wild Wings 43
1This is the gain predicted by our Expected Gain model if the stock breaks out. Expected Gains for all cup-and-handle stocks are published on our site.
 Top Second Chances Stocks that broke out this week and are still in buyable range
Category
Symbol
Company Name
Expected Gain1
Best Overall PMCS Pmc-sierra Inc 89
Top Technical SAPE Sapient Corporation 73
Top Fundamental SAPE Sapient Corporation 73
Top Tech. & Fund. SAPE Sapient Corporation 73
1This is the gain predicted by our Expected Gain model after the stock has broken out which uses the volume on breakout as a predictive term. Because the model variance is +/- 38% the expectation can be negative.

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