equityletter.com 9/08/08

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 9/08/08

 

 

     Note:  Event Calendar is located at bottom of page

      

I.                  General Market Overview

 

The major U.S. stock market indices experienced a wave of selling pressure this past week.  The television media highlighted the aggressive selling pressure in the energy sectors as a result of the lack of damage from hurricane Gustav.  As is usually the case the reporting was completely off base.  The energy sectors collapsed last week for one reason alone.  Once word surfaced that hedge fund Ospraie Fund ($2.8 Billion under management as of August 2008-year-to-date return <40.0%>) was closing it’s doors due to poor bets on energy and commodities the liquidators took over.  The violent gap down and continued sharp decline of anything energy and commodity related was classic Wall Street forced margin liquidation.  When this scenario occurs bids completely disappear as market participants realize that the desperate seller is in a “must sell” situation.  The real question going forward is whether this is an isolated event or the beginning of a downward spiral in the hedge fund universe.  One thing is certainly for sure, the influence of hedge fund activity on the incredible move in energy and commodity markets over the past few years is about to become more translucent.  If as highly speculated by many, the hedge fund community is highly concentrated in similar investments (long energy, commodities, short U.S. Dollar) the same forces that drove prices to incredible levels might just begin to work in a reverse fashion.  If the dominoes begin to fall in the hedge fund world and more and more funds shutter their doors, we could be looking at a much stronger U.S. Dollar and potentially much lower energy prices.

 

 

We believe that the trading atmosphere remains one of preservation of capital.  Currently favorable sectors, Financial and Retailers, appear to be a place to lose less money.  While we expect the markets to bounce on the news of “conservatorship” for Fannie Mae and Freddie Mac, we are very concerned that some serious technical damage was done to the major U.S. market indices this past week.  We are so concerned that we no longer believe that we exist in an intermediate term rally mode.  Be forewarned that just as buying begets more buying, selling begets more selling, its just a much more painful side of the equation.  We must concur with PIMCO guru Bill Gross who stated earlier this week, “its very hard to find a bull market in anything these days”.

 

 

Sector analysis below will provide information as to where to best allocate funds at this time. 

 

Please frequent http://www.equityletter.com/ and http://stkinfo.com/.

 

 

 

II.               Sector Analysis

                                             

The IEF-90.04 (I-share 7-10 year Treasury bond) advanced 0.74% for the week as the yield on the 10- year treasury decreased from 3.81% to 3.66%.  For comparative reference the yield on the 10- year treasury began the 2008 trading year at 4.03%. The IEF is now in week six of a “buy” signal with the weekly closing price support level remaining at 89.10.  The recent six-week strength in the bond market has been a direct reflection of investor fear of the “next shoe to drop”.  Whether this “next shoe” is the Federal bailout of mortgage market behemoths Fannie Mae and Freddie Mac or a cascade of hedge fund failures remains to be seen.  We shall stubbornly remain cautious as to further potential gains from current prices levels for the IEF as a protracted decline in interest rates appears highly improbable.

 

A.     Financials

 

          The Financial Select Sector Index (XLF-21.74) finished the trading week with a 1.49% advance.  Year to date the XLF is currently down 24.85%.  The XLF is now in week six of a weekly “buy” signal.   We shall continue to view the 20.00 level as key weekly price support for the XLF.  We would view any price retreat to said area as an entry point for a long trade.  We continue to see potential for an intermediate term advance up to the 23.00 – 24.00 area.  We would highly recommend taking profits upon any appreciation to the 23.00 – 24.00 area of price resistance.   Any weekly closing price below the 20.00 level will abort our near term bullish stance on the XLF.   XLF banking sector components that currently reside in weekly “buy” mode include Bank America (BAC-32.23), Citibank (C-19.07), Wells Fargo (WFC-31.20), J.P. Morgan (JPM-39.60), and State Street Bank (STT-67.87).  The story remains the same, although a difficult fundamental long trade, the intermediate technical uptrend for the XLF remains intact.  Continue to use weakness in the sector to initiate long positions.

 

          The Brokerage sector (IAI-33.73) index declined 0.44% on the week.  The year to date performance of the IAI stands at a negative 34.07%.   The IAI is now entering week six of a “buy” signal.   The 32.09 price level remains as key weekly closing price support for the IAI.  When we view the key underlying components of the IAI we continue to see divergence.  This past week “buy” signals were generated in Morgan Stanley (MS-41.36) and Goldman Sachs (GS-163.24).  Both MS and GS have the potential to rally 15% - 20% from current levels.  Raymond James (RJF-29.71) is entering week six of a “buy” signal and remains very constructive.  The negative divergence in the IAI continues to come in the form of Lehman (LEH-16.20) and Merrill Lynch (MER-26.73).  Look to buy dips in the positively mentioned names but continue to avoid MER and LEH as they have yet to turn the corner.

         

B.     Builders

 

 The Homebuilder exchange traded fund (XHB-19.89) advanced 0.81% leaving the year-to-date return at a positive 2.79%.   The XHB is now entering week five of a weekly “buy” signal.  We shall now view the 18.52 price level as weekly closing price support in order to maintain our weekly “buy” signal.   Our view shall remain that the XHB will trade up to the 22.00 – 24.00 area of weekly price resistance at which point longs should look to take profits.   XHB components that currently maintain favorable weekly status include Centex (CTX-16.67), Pulte Homes (PHM-14.58), Lennar (LEN-13.56), Toll Brothers (TOL-24.20), and Ryland Group (RYL-23.77).   Continue to buy weakness as the intermediate trend remains favorable.

 

C.  Semiconductors

 

The Semiconductor group (SMH-26.50) declined 7.02% for the week.   Year to date the SMH performance is a negative 18.36%.   The SMH is now entering week three of a weekly “sell” signal.  The key weekly closing price resistance level for the SMH is 29.17.    The SMH closed out the week under the key 27.00 support level which indicates further potential weakness down to the next level of price support, 22.00.  Key SMH components that remain in “sell” mode include Intel (INTC-20.61), Texas Instruments (TXN-22.64), Applied Materials (AMAT-17.16), Micron Technology (MU-4.36), and Analog Devices (ADI-27.50).  News of a potential merger involving Samsung sent the shares of SanDisk (SNDK-17.64) soaring this past week to the tune of a one-week 22.00% gain.  Now that SNDK is officially “in play” we would look to initiate long positions upon price dips.  Use price strength in negatively mentioned names of this sector as an opportunity to reduce long exposure or to initiate short positions.

 

D.   Retailers

 

          The Retail sector (RTH-96.85) finished the trading week with a 1.18% advance bringing the year-to-date return to a positive 3.75%.  The RTH is now entering week five of “buy” mode.  Our weekly closing price support for the RTH now stands at 94.14.  We would continue to look to trade the range, buying around the 93.00 support area and selling into the 100.00 area of over head resistance.  RTH components under our coverage that currently enjoy favorable weekly status include WalMart (WMT-60.74), Target (TGT-55.03), Home Depot (HD-28.59), Sears Holding’s (SHLD-90.68), BestBuy (BBY-44.92), and Kohl’s (KSS-51.04).   The poor performance of the past week in the shares of Walgreen’s (WAG-34.59) has generated a weekly “sell” signal.  We would underweight or reduce long exposure in the shares of WAG at this time.  The near term trend remains to he upside for the sector but do not chase at current elevated levels.  Look for price retreats for proper entry for long positions.

 

E.    Steels

 

The Steel sector (SLX-68.68) finished the week with a 14.68% decline bringing the current year to date return to a negative 19.24%.  The SLX is now entering week thirteen of a corrective phase but at this point in time appears sharply oversold and subject to a near term relief rally.  Our weekly pivot point for the SLX is now at 78.70.  Any weekly closing price above the 78.70 level will signal an end to the near term corrective phase for the SLX.   SLX individual components that currently reside in weekly “sell” mode include U.S. Steel (X-113.61), Nucor (NUE-48.45), Mittal (MT-64.29), and Steel Dynamics (STLD-22.08).   The apparent forced liquidation of positions by potentially troubled hedge funds has taken a brutal toll on this once high flying sector.  While we shall remain negative at this time the group appears sharply oversold and subject to a near term relief rally.

 

F.    Pharmaceuticals and Healthcare

 

          The Pharmaceutical group (PPH-68.85) declined 2.07% last week bringing the year to date return to a negative 13.06%.  In our prior letter we stated that the PPH had signaled a reversal of weekly trend to the negative side.  We are now entering week two of a “sell” signal for the PPH with our closing price resistance standing at 71.43.  The key underlying components of the PPH all currently rest in what we categorize as “sell” mode.  We would look for rallies in Pfizer (PFE-18.51), Merck (MRK-34.30), Wyeth (WYE-40.81), Johnson & Johnson (JNJ-70.67), Abbott Lab’s (ABT-57.10), and Eli Lilly (LLY-45.44) as an opportunity to reduce long exposure and or to initiate short positions.  Week two of corrective mode, look to sell rallies.

 

G.   Internet

 

 

          The Internet sector (HHH-48.60) declined 4.22% last week and is currently negative by 17.91% for all of 2008 trading year.  The HHH is now entering week three of a “sell” signal.  Any failure for the HHH to hold above the 48.00 level of key weekly price support will indicate further weakness down to the three year lows of 44.00.  Key HHH components Ebay (EBAY-23.77) and YaHoo (YHOO-18.08) remain in negative weekly mode at this time.  A fresh weekly “sell” signal has been generated in the shares of Amazon.com (AMZN-79.19).   Respect the “sell” signals in the HHH and look to reduce long positions in to any price strength.

 

 

Take note that the VIX (23.06) increased 11.67% from a reading of 20.65 the prior week.  After spending six weeks in a “sell” signal the action of the past week has generated a “buy” signal for the VIX.   This “buy” signal for the VIX does not have positive connotations for the overall market.  It appears that an already bumpy ride is about to get a little more turbulent.  Our weekly closing support price for the VIX now stands at 20.47.

 

III.           Gold

 

GLD (streetTracks gold index) – The GLD (78.98) declined 3.34% on the week.  The current year to date return for the GLD is now a negative 4.22%.   We are now entering week seven of “sell” mode for the GLD with the 84.50 price level remaining as weekly closing price resistance.  As the U.S. Dollar continues to benefit from the liquidation of short positions in the troubled hedge fund industry the price of the GLD will remain in distribution mode.  With the 84.50 level now acting as well established price resistance we would use any strength approaching this area as an opportunity to exit long positions or establish short positions.  Continue to sell in to rallies as the trend remains a negative one at this time.

 

IV.            Energy- (Oil, Oil Service, Nat’l Gas, Coal)

 

The Large-Cap Integrated Oil space (XOI-1222.21) closed out the trading week with a 7.88% decline.  Year to date the XOI is currently showing a negative return by 21.64%.   The XOI remains in weekly “sell” mode, now entering week sixteen of a “sell” signal.   The precipitous decline of the XOI this past week had absolutely nothing to do with the lack of damage incurred from Hurricane Gustav.  The collapse in the sector appears attributable to forced liquidation in the hedge fund world.  We have seen this movie many times before.  By the time the media releases the details of the latest victim in the Hedge Fund world to collapse, prices are likely to already have recovered substantially.  The information of whom and what is being liquidated is only reserved for the select few, (Hint, what Wall Street firm is the largest clearing firm for the hedge fund industry?) whom I’m quite sure most likely profited substantially from this information.  Sour grapes aside the sharp decline of the past week has left the XOI in a short term deeply oversold state.  While the weekly trend remains to the downside there is definitely room for a short term oversold relief rally.  Our ”buy” signal in Chevron Texaco from last week (CVX-80.22) has been aborted.  CVX now joins Exxon Mobil (XOM-75.62), British Petroleum (BP-54.03), and Conoco Phillips (COP-75.43) in weekly distribution mode.  The weekly trend remains to the downside but the sharp decline of the past week has left the XOI in a near term oversold state.

 

The Oil Service Index (OIH-167.58) declined 8.92% this past trading week.  The year to date return for the OIH now stands at a negative 11.34%.   It is now week ten of “sell” mode for the OIH.  The 175.00 support level for the OIH was shredded like a wet paper bag as a tsunami of forced liquidation decimated the sector.  Our weekly closing price resistance for the OIH now stands at 178.59.  While we shall remain negative at this time the OIH now appears to be deeply oversold and subject to a near term relief rally.   OIH components Schlumberger (SLB-85.79), Halliburton (HAL-39.37), Transocean (RIG-122.27), Ensco (ESV-61.91), Baker Hughes (BHI-72.49), and B.J. Services (BJS-22.83) all reside in week ten of correctives phases.   The weekly trend remains a negative one but the current deeply oversold state of the sector has left it vulnerable to a near term relief rally.

 

Natural Gas (UNG-34.27) declined 6.77% this past week, another victim of the circumstances mentioned above.  Year-to-date the UNG is currently showing a negative return of 5.46%.  We continue to see very strong weekly price support at the 34.00 area for the UNG and view this price level as a critical one.  Our bullish call on the sector last week was obviously grossly premature.  We were noticeably blindsided by extreme selling pressure provided by the hedge fund forced liquidation collapse.  In similar fashion to other energy sub-sectors the sharp decline of the past week has left the UNG in an oversold state and subject to a near term relief rally.  The weekly trend is a negative one but a near term relief rally may be in the cards.

 

The Coal Sector (KOL-37.60) declined an astonishing 17.14% this past week thrusting it back in to weekly “sell” mode.    In our previous letter we stated that the violent seven-week downside correction in the Coal sector had come to a conclusion.    We could not have been any more off base.  The across the board collapse in this sector caught us completely off guard and our trading results of the past week certainly reflected that fact.  The poor action of the past week has reversed all the “buy” signals of the individual components in the sector.  Arch Coal (ACI-43.29), Peabody Energy (BTU-53.30), Massey Coal (MEE-53.94), and CONSOL Energy (CNX-59.14) have all been violently thrust back in to weekly “sell” mode.

 

 

V.               Dow 30 Analysis

 

Our Weekly Trend Indicator (WTI) measures in at -6, a decrease from the previous week reading of +4.   The Dow Jones Industrial average declined 2.69% for the week to 11220.96 and is currently showing a negative return for 2008 by 15.41%. 

 

The S&P 500, as measured by the SPY (124.42), declined 3.39% for the week and is currently 14.90% to the downside year to date.   Small caps issues, as measured by the IWM (IShares Russell 2000 Index Fund- 71.64), declined 3.02% to 71.64, leaving the index an out performing 5.64% to the downside year to date.

 

          The DIA (112.35) closed out the week with a 2.69% decline and has generated a weekly “sell” signal.  The intermediate term advance has come to a conclusion.  We would now use any rally up to our 117.20 resistance area as an opportunity to reduce long exposure and or initiate short positions.  At minimum we anticipate an eventual decline to the 100.00 – 105.00 area for the DIA.

 

Fresh weekly buy signals generated: AIG

 

Fresh negative weekly signals generated: CVX, DD, DIS, HPQ, MCD, UTX

 

Readers should take note that none of the Dow Jones Industrial components are scheduled to report quarterly earnings this week.

 

Dow 30 stocks with positive weekly signals:

 

AIG, AXP, BA, BAC, C, GM, HD, JPM, PG, T, VZ, WMT

 

Dow 30 stocks with negative weekly signals:  

 

AA, CAT, CVX, DD, DIS, GE, HPQ, IBM, INTC, JNJ, KO, MCD, MMM, MRK, MSFT, PFE, UTX, XOM

 

 

·        Underline names have changed from previous week*

 

                              

For access to Equity Letter individual trading positions and ideas contact Richard Reilly at rreilly123@comcast.net

 

 

VI.    KEY EVENTS IN THE WEEK AHEAD:

 

Monday, September 8

 

Economic

 

15:00 Consumer Credit (Jul.): $8.5B cons.

 

Earnings

 

Before: HITK

 

After: CHP, FNSR, LRN, MIND, PBY

 

Events

 

CATY, GLG, ZION, FSR, RNR, WABC at Lehman Brothers Global Finance Services Conf.

CELG, CYPB, ACOR, BMRN, ALTH, CGRB at Citigroup Biotech Unplugged Conf.

CTIB, TBUS, BLD, BNE at Wall Street Analyst Forum; LSTR, ABFS, YRCW, JBHT, ODFL, CNW at Wachovia First Union Transportation and Packaging Conf.

NAK, PAL, AZK, WGI, ANV, VGZ at Denver Gold Forum

SSD, SYNO, CCMP, TSRA, ROL, ACET at Sidoti & Company Healthcare Conf

Dallas Fed Pres. Fisher

 

 

Tuesday, September 9

 

10:00 Pending Home Sales (Jul.): -1.0% cons.

10:00 Wholesale Inventories (Jul.): 0.7% cons.

    

Earnings

 

Before: AHII, ARST, GNET, KFY

 

During: PNY

 

After: AVAV, GIII, OXM, SHFL, PAY

 

 

Events

 

TXN Q3 Mid Quarter Update (17:00 ET)

BBND Analyst Meeting; CRA Analyst Meeting

MMM 2008 Investor Day Meeting

NFX Analyst/Investor Meeting

OC Investor Day

SRX Analyst Meeting

PNR Investor and Analyst Day

AIMC, FSS, MEA, SPAR at Next Generation Equity Research, LLC Small and Midcap Investor Conf.

ALL, CNB, NTRS, FMER, WB, ACGL at Lehman Brothers Global Finance Services Conf.

ALL, CNB, NTRS, FMER, WB, ACGL at Lehman Brothers Global Finance Services Conf.

BDX, BIIB, IVC, DNA, AMAG, LLY, AMLN at Morgan Stanley Global Healthcare Unplugged Conf.

CLS, NVDA, PMTC, ARBA, ENTR, JDSU at Deutsche Bank Securities Technology Conf.

CWCO, PSSI, BSMD, RPM, EPM, EDAP at Wall Street Analyst Forum

OI, PTV, SON, BMS, CCK, SEE at Wachovia First Union Transportation and Packaging Conf.

PAAS, RGLD, AEM, NG, EGO, NXG at Denver Gold Forum

 

   

Wednesday, September 10

 

Economic

 

10:35 Crude Inventories: -1898K prior

 

    

Earnings

 

Before: STEI

 

After:  GCOM, SHE, GROW

 

Events

 

COV Analyst Meeting

PBI Investor Update Meeting

ACOR, CPHD, ARRY, AMAG, MDAS, CLRT at Robert W. Baird & Co. Small Cap Healthcare Conf.

ADCT, INTU, OPXT, HLIT, TXN, NETL, PWAV at Jefferies & Co. 2nd Annual Technology Conf.

AKAM, CTXS, DRIV, RNOW, ADCT at Deutsche Bank Securities Technology Conf.

AKNS, AMSC, CLNE, VRNM, ABAT at Cowen and Company 2nd Annual Clean Energy Conf.

APEI, SKIL, CAST, CPLA, COCO, LRN at BMO Capital Markets Back to School Education Conf.

AVAV, BDC, DCO, DMND, DXPE, FWRD at BB&T Capital Markets 1-on-1 Conf.

CCK, CRS at Keybanc Basic Materials & Packaging Conf.

EGLE, SSW, PRGN at Dahlman Rose & Co. LLC 1st Annual Global Transportation Conf.

ERTS, SNI, MVL, CVC at Merrill Lynch Media Fall Preview

FCX, NEM, GG, ABX, AU, GFI at Denver Gold Forum

GD, GR, BA, ROK, LMT, GE, HON at Morgan Stanley Global Industrials CEO's Unplugged Conf.

MMSI at Credit Suisse Group HOLT UFO Conf.

SLM, TRV, AHL, DUF, WFC, AF, BAC at Lehman Brothers Global Finance Services Conf.

 

 

    

Thursday, September 11

 

Economic

 

08:30 Export Prices Ex-Ag. (Aug.): 0.8% prior

08:30 Import Prices Ex-Oil (Aug.): 0.9% prior

08:30 Initial Claims: 444K prior

08:30 Trade Balance (Jul.): -$58.0B cons.

14:00 Treasury Budget (Aug.): -$105.0B cons.

 

Earnings

 

Before: CPB, CRAI, LULU, MEI, OHB, SIFY

 

After: ARTC, ASHW, CAO, RVI

 

Events

 

BDN, DCT, LRY, OFC, AIV, EPR at BMO Capital Markets North American Real Estate Conf.

BRCM, SAI, SFSF, CNQR, PRO at Jefferies & Co. 2nd Annual Technology Conf.

CSX, BNI, CNI, KSU, UNP, NSC at Dahlman Rose & Co. LLC 1st Annual Global Transportation Conf.

MOT, PMCS, SIRF, VRSN, FNSR, SIGM at Deutsche Bank Securities Technology Conf.

OLN, ARJ, FMC, MEA, POL at Keybanc Basic Materials & Packaging Conf.

TKR, LECO, PH, TRN, MTW, IPGP at Longbow Research Industrial Products Investor Conf.

TYC, ROP, UTX, RTN, WCC, MTW at Morgan Stanley Global Industrials CEO's Unplugged Conf.