Schaeffer's Market Observation Features General Motors and Intel.

CINCINNATI -- Among the stocks featured in this Schaeffer's Market Observation are General Motors (NYSE:GM) and Intel (NASDAQ:INTC). This article is just one of the many free market commentaries written every day at www.SchaeffersResearch.com - the home of Bernie Schaeffer and Schaeffer's Investment Research.

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Sector Scan, Part IV: Going Dow(n) Swinging

A Technical and Sentiment Look at the Dow Jones Industrial Average, General Motors (GM), and Intel (INTC)

Today, I am taking a closer look at the granddaddy of all indices in the U.S., the Dow Jones Industrial Average (DJIA - 11,569.0). What better way to end a week themed with sector breakdowns than delving into the baron of blue-chip stocks?

There's no denying that DJIA has come on strong during the past couple of weeks from a technical perspective. In fact, on a year-to-date basis, the average has added roughly eight percent, compared to the Russell 2000 Index's (RUT - 727.53) gain of about 8.4 percent for the same period. The debate between small caps and large caps continues to be skewed in the blue chips' favor on Wall Street, but it has taken a considerable gain in the Dow during the past couple of weeks to close the gap between it and the RUT. Checking a daily chart, DJIA really turned on the afterburners recently, adding some 8.2 percent along the support of its 10-day and 20-day trendlines since mid-July and accounting for nearly all of the average's gains on the year.

Looking at a long-term chart of DJIA, I begin to see some rather concerning developments. It is often said that the trend is your friend, so if a stock or index seems to be locked in a directional move, you should probably bet on the trend. The concerning development I mentioned above would fall in to the category of "external force" where the Dow is concerned.

The average has enjoyed a nice run higher, but DJIA once again finds itself contending with some rather staunch resistance in the 11,600 region. On a monthly chart, you can see that the Dow has never closed a month above this level, and was already soundly rejected by the 11,600 level this year. In May, DJIA made a run at the 11,700 level, breaking through the 11,600 level for a brief period only to be rejected and sent on a 4.15-percent bender. A repeat performance is not entirely out of the question at this point.

With the technical analysis of DJIA out of the way, let's take a look at the sentiment breakdown of the average's 30 components. For reference, the composite Schaeffer's Equity Scorecard for the Dow arrives at 5.8 out of 10 - a relatively mediocre reading. Meanwhile, and much more disturbing, is the fact that 62 percent of analysts covering Dow components rate them a "buy" or better, with a mere four percent handing out "sell" ratings. This latter indicator does not bode well for the venerable average given the fact that it is set to challenge resistance that has not been breached on a monthly basis, ever.

Click the following link to see a Sentiment chart for DJIA components: http://www.schaeffersresearch.com/wire?ID=17348 .

Looking over the list above, the lack of short selling on the Dow components is disturbing. Only two of the stock's listed above have a short-interest ratio that I would consider bullish from our contrarian perspective: General Motors (NYSE:GM) and AT&T (T). The rest seem to be ill prepared for a pullback, at least as far as short-covering support is concerned. On a final note concerning the group as a whole, you may have noticed quite a few Schaeffer's put/call open interest ratios (SOIR) that are near or at an annual high. Normally, this would indicate an extreme bearish opinion from the group. However, I would take these readings with a few grains of salt considering that September options expire today and these readings could change drastically during the next week or two.

Before we take a look at my favorite bullish and bearish picks from the sector, I would like to relate an interesting development involving a correlation between the market as a whole and the Select Sector Spyder Energy Fund (XLE) that Bernie Schaeffer noted earlier this morning in e-mail. Bernie stated that while XLE has outperformed the market during the past few years, there has been little in the way of divergence between the broad market and the fund. However, there has been the beginning of a divergence very recently. As such, Bernie indicated that such a breakdown in the XLE could be the harbinger of a broad-market breakdown. Some very interesting food for thought.

Dow Bull/Bear Picks

--General Motors: Despite being the top DJIA performer on a year-to-date basis, gaining more than 65 percent using this measure, General Motors (NYSE:GM) continues to receive no end of bad press and sentiment from the Street. The stock receives the most "sell" ratings of any Dow component, with only 25 percent of the 12 analysts covering the equity rating it a "buy." This type of negativity from the brokerage bunch is very uncharacteristic for a blue-chip company and is seen as a bullish indicator from our contrarian perspective. Meanwhile, the financial media has joined the bearish bandwagon en force, with articles like "GM'S Shrinking Fund Fans" and "Detroit's Cash Cow Stumbles" appearing in The Wall Street Journal during August. Despite this negativity, GM remains the top performing member of the Dow while it continues to enjoy the solid support of its 10-week and 20-week moving averages. It is because of this heavy pessimistic sentiment amid the stock's stellar technical performance that GM has earned a Schaeffer's Equity Scorecard rating of 9.0 out of 10.

Click the following link to see a Weekly chart of GM since April 2006 with 10-week and 20-week moving averages: http://www.schaeffersresearch.com/wire?ID=17348 .

--Intel: While the sultan of semiconductors doesn't have the lowest Schaeffer's Equity Scorecard rating of the bunch, Intel (NASDAQ:INTC) still gets my firm stamp of disapproval. Why, you might ask? For the exact same reasons that I am bullish on GM. INTC has only one "sell" rating out of the 27 analysts covering the shares, compared to 16 "strong buys" and four "buys." Furthermore, with articles showing up in the financial media during the past couple of months titled "Intel Sharpens Its Offensive Game" from BusinessWeek and "DJ Merrill Analysts Sees Tech-Sector Valuation Issues" from the Dow Jones Newswire, it is clear that the bullish message on INTC is being broadcast all over the Street. Despite this wealth of reassurance from analysts and investors alike, there is no denying that the stock's year-to-date loss of more than 21 percent places it at the bottom of its fellow Dow components. During this time frame, INTC's 10-month and 20-month moving averages have acted as solid resistance to any advance from the shares. In fact, the last time that the security closed a month above these long-term trendlines was November 2005. INTC may only earn a Schaeffer's Equity Scorecard rating of 4.0 out of 10, but given the stock's performance this year and the wealth of optimism still levied against it, I think its clear that the shares make a much better bearish play than a neutral or bullish one.

Click the following link to see a Monthly chart of INTC since July 2005 with 10-month and 20-month moving averages: http://www.schaeffersresearch.com/wire?ID=17348 .

Take advantage of the timely Schaeffer commentaries by signing up for their free e-newsletters -- Opening View, Market Recap and Monday Morning Outlook. Click here to have the Schaeffer's commentaries delivered to you free via email every day and get entered to win an iPod Nano. http://www.schaeffersresearch.com/redirect.aspx?CODE=PROAW13M&PAGE=1 .

About Schaeffer's Investment Research (www.SchaeffersResearch.com)

Schaeffer's Investment Research, founded by Bernie Schaeffer in 1981, is a financial information and trading resources company. It publishes Bernie Schaeffer's Option Advisor, the nation's leading options subscription newsletter. The firm's contrarian approach focuses on stocks with technical and fundamental trends that run counter to investor expectations. The firm's website, http://www.SchaeffersResearch.com , is recognized as one of the leading information sources for stock and options traders and was cited as the top options website by both Forbes and Barron's. Click here for more details about Schaeffer's trading methodology: http://www.SchaeffersResearch.com/method .