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What's the Consumer Made Of?


The proof will be in the pudding and that will come over the holidays, when we really see what the consumer is made of.


Good morning, Minyans,

Yesterday was not easy if you were long just about anything. Much more important than just the draw was the technical damage that was done and which must be respected. All major averages gave back their previous strong advance and in the case of the S&P and Dow, they gave back just about all of the recent bounce that has been seen. I think it is safe to assume that each side was skeptical of the previous bounce as it came on much lighter volume. However, the strong move on Wednesday, post Fed, was sound and sucked in many. After yesterday, it was back to the drawing board.

This morning we have a positive start to the day after the employment data indicates that we are not seeing a terrible drop off in jobs and therefore the consumer should remain relatively healthy. This of course is how the bulls would interpret it, but the bears will quickly jump on the wires and tell us how the real story is that the only jobs being really created are in the service sector and that consumer power is really being diminished, not restored.

The proof will be in the pudding and that will come over the holidays, when we really see what the consumer is made of. My guess is the consumer spends very well, but it is done on their credit cards and the debate continues. The bulls will say spending is spending and a vast majority is now conducted on-line where there is no other option other than credit, while the bears will tell us that the consumer is leveraging themselves into a dark hole that will ultimately be our financial death.

I hope you see my point in relaying all of this. At the end of the day it is a market that takes both sides and is driven by supply and demand. To clarify all of this and put some or all of the noise to rest, we can always look to the charts and let them be our guide. At this very moment, things look a little shaky and yesterday's sell off has my respect. It is always my style to let my individual charts take me out of them one by one, which systematically has me raising cash when needed. Yesterday, I was stopped out of a few, but most remained within their respective ranges. The ones I have been following this week were in that camp.

Today I am watching a new name that I have been trading around pretty actively. Harmonic Inc. (HLIT) manufactures encoders used in digital and fiber optic systems and recently reported a very impressive 50% jump in EPS on a 31% increase in revenue. The stock looks relatively cheap with a forward estimate for 2008 of 0.62 but is off due to a secondary share offering recently completed.

It is actually this share offering that has me interested. The company priced 12.5 mln shares on Wednesday night at $12.00 per share. Unfortunately, it was on the eve of yesterday's thrashing and a quick glance at the chart tells you that just about everyone bailed regardless of price. Now, the stock is trading below the secondary and a trader could actually pick up shares cheaper than institutions. I have a place marker here and will be watching this one closely. If it starts to perk up, I will add. If it falls into the abyss, I won't bother.

I will move slow today and, as always, remain open-minded. We will open sharply higher but I can't yet get into the excitement after yesterday's big red bars. It will take time to repair the damage and I will view the action with a skeptical eye until it is well behind us.

Some other thoughts:

  • NYSE Euronext (NYX) reported excellent numbers and the stock is set to open higher. I continue to like the exchanges and am eyeing adds to Nasdaq (NDAQ), InterContinental Exchange (ICE) and NYMEX Holdings (NMX).

  • My IBD 100 play will make its debut tonight on a close over $15.00. If NetScout Systems (NTCT) starts to gain traction, I will add and carry a good chunk overnight.

  • Depressed semis are starting to interest me. Do I see Broadcom (BRCM) and Texas Instruments (TXN) dancing on their longer term trend lines?
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Positions in HLIT, ICE, NMC and NTCT.

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