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Stock Watch - JWN

(August 26, 2004)

Before I go on to discuss the latest stock on our watch list, I want to let my readers know that I have been posting my thoughts and other interesting news items in our Discussion Forum at various times throughout the last few trading days.   Readers are encouraged to check these postings out – as they are mostly posted throughout the trading day as events unfold.  Readers are also encouraged to exchange ideas and views – so please start posting in our Discussion Forum!

I want to take this opportunity to answer a question by one of my readers – that whether JWN (Nordstrom) represents a good buy at this point (after declining nearly 10% last Friday due to an earnings report that did not meet analysts’ expectations).  First of all, on a technical basis, the chart for JWN looks terrible:

Nordstrom (JWN) - The first technical failure was registered when JWN declined below its 50 DMA and failed to break back above it last Tuesday.  The second technical failure happened last Friday when the stock gapped down below its 200 DMA.

As readers can see in the above chart, there were two technical failures on the daily chart of JWN just over the last seven trading days – three if you count the bearish downside gap and the break below its 200 DMA as separate failures.  The fact that JWN announced a 300 million share buyback on Wednesday morning and subsequently failed to incite much excitement (given an up day for the market and for retail stocks in general) is further testimony to the stock’s technical weakness.

Readers should keep in mind the author’s position that we are currently in a cyclical bull market – a cyclical bull market in the context of a secular (longer-term) bear market – similar to the secular bear market of 1966 to 1974.  The initial trigger for this secular bear market (and the first cyclical bear market -- which began in early 2000) was the huge cutback in capital spending.  Given the fact that companies are now flushed with cash and given the fact that consumers are now on the other extreme end of the cash scale, the author believes that the next trigger for the next cyclical bear market is most probably a cutback in consumer spending – whether it is because of higher interest rates or a further rise in energy prices (or both).  Given this belief, it is probably safe to say that retail stocks will lead the next market decline.  Because of this, I am going to warn all my readers to try to stay out of retail stocks in general – as a watershed decline in these stocks can come with absolutely no warning.

That being said, however, this author still believes that this bull cycle has further to go – not only in stocks but also in indicators such as consumer confidence (like I have mentioned before, I do not believe the consumer confidence level has topped out yet).  A further ST decline in oil prices should also increase disposable income and help out retailers – especially given the fact that Nordstrom is most probably one of the best-run department stores compared to the likes of Dillard’s (DDS), May (MAY), and Federated Department Stores (FD).  There is also some ST support at around the $35 level.  Adventurous (and patient) readers could buy here and establish a stop at around the $34.50 level.  Given that there are better long candidates out there, however, the author recommends staying away from this stock.

Happy Trading/Investing!

Henry To, CFA

P.S. Please discuss this stock in our individual stocks discussion forum.

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