ECONOMIC NUMBERS WORRY MARKET
John J. Murphy
THREE BAD NUMBERS... Three economic reports this morning were discouraging for the economy -- and the market. July housing starts fell 2.7% -- a larger drop than expected. Housing has been one of the few bright spots in the economy. Any hint of a slowdown there is worrisome. The latest Michigan Sentiment Survey came in weaker than expected. That's troubling because it hints at weaker consumer spending. And, the July CPI rose just 0.1% -- a smaller increase than expected. We think the last number may be the most important of the three. That's because we believe that deflation is more of a threat than inflation. That would explain the positive correlation between bond yields and stock prices -- and the failure of the economy to respond to successive Fed easings.

DOW IN TUG-OF-WAR... The Dow Industrials is still in the process of testing its 50-day moving average -- which sits today at 8862. We still view that as an important resistance line. The daily chart also shows a month-long up trendline which currently sits near 8500. In our view, the Dow would have to break that line on the downside to signal that the current rebound has ended. We showed that same support line after Tuesday's Fed-inspired selloff. The Dow bounced off it on Wednesday. That makes it a valid trendline (since it's been touched three times). Given the current tug-of-war going on, the two lines worth watching are the 50-day average -- and the rising trendline. Whichever is broken is first will probably determine the short-term direction of the Dow and the rest of the market. We still view the current rebound as a bear market correction. As a result, we think the odds favor the downside -- especially as we approach the traditionally weak September/October season. Until the lower trendline is broken, however, the short-term trend will remain higher.

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August 19, 2002

John J. Murphy, CNBC-TV's technical analyst for many years, and Greg Morris offer money managment and market services at MURPHYMORRIS.COM , email address orders@murphymorris.com.