BreakoutWatch.com Weekly Review

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.

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

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

# of Breakouts

Period Average¹

Max. Gain During Period²

Gain at Period Close³

This Week

20.92

4.79%

2.18%

Last Week

21.08

6.77%

2.87%

13 Weeks

289

22.23

10.62%

-0.43%