equityletter.com 6/30/08

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 6/30/08

 

 

     Note:  Event Calendar is located at bottom of page

      

I.                  General Market Overview

 

Another week, another 3.00-4.00% decline for the major U.S. stock market indices.  The lack of action by the U.S. Federal Reserve to defend the Dollar and display a vigilant concern to contain accelerating inflationary pressure provided further impetus for the sellers in an already wobbly stock market.  The Federal Reserve should know by now that jawboning has very little influence in this day and age.  The “hope” that elevated inflationary pressures will ease is evidence that the Federal Reserve is much more concerned with providing liquidity to a financial system which is completely occupied with massive de-leveraging.  In the grand scheme the Federal Reserve is sacrificing the average American worker to pay for the mistakes of bankers on Wall Street.  Some things will never change. 

The coming holiday shortened trading week will bring an unemployment report on Thursday.  The previous report brought an alarming increase in the unemployment rate.  Have things improved in a month’s time?  Just last week Bank America disclosed that after the Countrywide Financial merger (bail-out) closes they will be shedding 7500 jobs.  This writer cannot recall the last time that a newswire ran a story which revealed the creation of 7500 jobs, let alone the creation of a 1000 jobs.  Higher unemployment, accelerating inflation, massive financial de-leveraging, declining real estate values, a potential Democratic Presidential victory resulting in higher taxes, sounds like a recipe for further declines in a wobbly stock market.

 At this point in time the sectors with the most favorable upside trends include Oil Service (OIH), Natural Gas (UNG), Crude Oil (USO), and Coal (KOL).

On the negative side we would continue to under weight and/or avoid the Financials (XLF), Brokerage (IAI), Builders (XHB), Pharmaceuticals (PPH), Semiconductors (SMH), and the Retailers (RTH).  The previously strong Transportation Index (IYT) is now signaling impending weakness.  The recent stabilization of the U.S. Dollar appears to have ended and another leg down has now begun.  The major market indices which we are currently negative on include the S&P 500 (SPY), Dow Jones Industrials (DIA), QQQQ, the NASDAQ Composite (COMP), and the Russell 2000 ETF (IWM).

 

 

II.               Sector Analysis

                                             

The IEF-87.94 (I-share 7-10 year Treasury bond) advanced 1.54% as the yield on the 10- year treasury decreased from 4.14% to 3.99%.  The price action of the past week has generated a weekly “buy” signal in the IEF after spending twelve weeks on our “sell” list.  The flight to safety trade has begun once again as the slide in U.S. equity indices has accelerated.  We now view the IEF as a “buy on dips” with the 86.46 price level acting as weekly closing price support.

 

A.     Financials

 

          The Financial Select Sector Index (XLF-20.57) finished the trading week with a 7.26% decline.  Year to date the XLF is now down a putrid 30.59%.  The ugly sister of the stock market just became even uglier.  A view of XLF sector components continues to point to across the board weakness.  We remain of the view that the sector is deeply over sold at this time and therefore subject to a near term counter trend rally which could carry the XLF up toward the 24.00 area of major over head price resistance.  XLF sector components which continue to display relative weakness but continue to appear deeply over sold at this time include Bank America (BAC-24.59), Citibank (C-17.25), Well Fargo (WFC-24.03), J.P. Morgan (JPM-35.05), Wachovia Bank (WB-16.22), and State Street Bank (STT-64.01).  The trend remains negative but appears to be very deeply over sold at this time.

 

          The Brokerage sector (IAI-34.32) index declined 6.49% on the week.  The year to date performance of the IAI is a negative 34.75%.  Last week we mentioned Goldman Sachs (GS-174.56) as a potential positive outlier in an otherwise morbid sector.  The price action of the past week has aborted our “buy” signal in GS and it once again joins the rest of the sector in weekly distribution mode.  A weekly “sell” signal has also been generated in the shares of Raymond James (RJF-26.89).  Other sector components that are in weekly “sell” mode and have remained so for the past eight weeks include Morgan Stanley (MS-36.71), Merrill Lynch (MER-32.70), and Lehman (LEH-22.25).  In similar fashion to the banking sector mentioned above, the brokers now appear very deeply oversold at this juncture but picking price bottoms can be a very dangerous and costly venture.  Continue to underweight or avoid until the nasty downtrend abates.

         

B.     Builders

 

 The Homebuilder exchange traded fund (XHB-17.25) declined 4.27% and is currently negative year-to-date by 11.14%.   For the past six weeks we have continually stated that a retest of the 16.00 price level of weekly price support was an unfortunate eventuality.  If taking in to account the current state of the U.S. building industry this price support level might be as strong as a wet paper bag.  It is just way too soon to attempt to pick a bottom in a sector that may take several years to recover from the excesses of an unparalleled U.S. housing boom gone bust.   Individual sector components Centex (CTX-13.96), Pulte Homes (PHM-10.07), Lennar (LEN-12.62), Toll Brothers (TOL-19.16), Ryland Group (RYL-22.95), and Beazer Homes (BZH-5.90), all continue to maintain negative weekly status at this time. 

 

C.  Semiconductors

 

The Semiconductor group (SMH-29.89) declined 3.89% for the week.   Year to date the SMH is showing a negative return of 8.08%.  Last week we issued a weekly “sell” signal for the SMH.  The individual sector components of the SMH that currently reside in weekly “sell” mode include Intel (INTC-21.49), Texas Instruments (TXN-28.51), Micron Technology (MU-6.10), SanDisk (SNDK-19.23), Novellus (NVLS-21.26), and Analog Devices (ADI-31.70).  Last week we mentioned Applied Materials (AMAT-19.29) as the lone positive in the sector.  If long AMAT we would place a protective sell stop at the 18.39 level.  Use any strength in the SMH up near the 32.00 area to reduce long exposure as we foresee further weakness down to the 28.00 area of price support.

 

D.   Retailers

 

          The Retail sector (RTH-89.36) finished the trading week with a 3.53% decline bringing the year-to-date return in to negative territory by 4.29%.  The strength of WalMart (WMT-56.30) could only hold the RTH together for so long.  At a certain point in time investors sell what they can, now is that point in time.  The individual RTH sector component under our radar now point to weakness across the board.  WalMart (WMT-56.30), Target (TGT-47.87), Home Depot (HD-24.02), Walgreen’s (WAG-32.97), Sear’s Holdings (SHLD-77.73), BestBuy (BBY-40.05), and Kohl’s (KSS-41.38) all currently reside in weekly “sell” mode.  With disposable income shrinking in concert  with the increasing price at the gas pump the outlook for the Retailers will continue to deteriorate.  Continue to use any strength to reduce long exposure.

 

E.    Steels

 

The Steel sector (SLX-104.11) finished the week with a marginal 0.27% decline and remains in what we categorize as weekly “sell” mode by closing the week under the 108.78 price level.  The current year to date return for the SLX is an impressive 22.48%.  The divergence mentioned last week remains in place.  While the SLX is in week three of “sell” mode, the major underlying individual components have yet to confirm the sell signal.   U.S. Steel (X-186.93), Nucor (NUE-74.88), Mittal (MT-99.36), and Steel Dynamics (STLD-38.41) have all managed to maintain favorable weekly status despite the broader market weakness.  Something has to give here and we believe it will occur very soon.  We could be reaching the stage of the broader market decline where investors begin to shed some of their winners to offset the losses in other sectors of the market.  Watch these momentum names closely as the exit door is only so big when inhabitants yell “fire”!!

 

F.    Pharmaceuticals and Healthcare

 

          The Pharmaceutical group (PPH-66.65) advanced a meager 0.12% last week bringing the year to date return at a negative 15.71%.  As stated in our previous Equity Letter, while the weekly technical readings remain in the negative camp, we shall continue to monitor the 66.00 price level as an entry level for a long trade.  The 66.00 level is a multi-year (six to be exact) low level for the PPH and should provide near term price support.  A weekly “buy” signal has been generated this past week in the shares of Merck (MRK-36.98).  Just to be clear and to the point, we were sucker punched by a news event the last time a weekly “buy” signal was generated in MRK.  If playing the long side in MRK from current levels, we would use a protective sell stop at the 34.98 level.  The only other individual PPH sector component that currently resides in weekly “buy” mode is Wyeth (WYE-46.09).  PPH sector components that currently maintain unfavorable weekly status include Pfizer (PFE-17.28), Johnson & Johnson (JNJ-63.57), Abbott Lab’s (ABT-53.00), and Eli Lilly (LLY-45.61).  Continue to underweight or avoid the PPH but look for a possible long trade around the multi-year price support level around the 66.00 area.

 

G.   Internet

 

 

          The Internet sector (HHH-51.23) declined 4.49% last week and is currently negative by 13.88% for all of 2008.  We issued a sell signal on the HHH three weeks ago and since that time the HHH has declined by 9.56%.  Individual HHH sector components Ebay (EBAY-27.61), YaHoo (YHOO-21.33), and Amazon.com (AMZN-74.66) all currently reside in weekly “sell” mode.  Although not a HHH component, Google (GOOG-528.07) has generated a weekly “sell” signal by closing the week underneath the 539.00 weekly support level.  The chart of GOOG has a gap to fill down at the 450.00 price level.

 

Take note that the VIX (23.44) increased 2.49% from a reading of 22.87 the prior week.  It is somewhat perplexing that the VIX has remained relatively subdued despite the current carnage in the major U.S. market indices.  We remain of the view that the VIX is on a renewed upward path with the 19.40 level currently acting as weekly support.  With fear once again creeping in to the marketplace, any sharp spike in the VIX up to the 32.00-34.00 area may signal a short term buying opportunity.

 

III.           Gold

 

GLD (streetTracks gold index) – The GLD (91.47) advanced 2.83% on the week.  The current year to date return for the GLD is 11.84%.  The failure of the U.S. Federal Reserve to display vigilance against inflation by marginally raising interest rates has reignited interest in Gold and put further pressure on an already anemic U.S. Dollar.  Federal Reserve Chairman Bernanke should know by now that actions speak much louder than words.  We have stated numerous times in this column, watch what they do, not what they say.  The GLD has closed above the 90.00 weekly price resistance level thereby generating a weekly “buy” signal.  We now view the 86.13 price level as strong support for the GLD.  We would use any price retreat near said support level as an opportunity to initiate long positions.  Any weekly closing price below the 86.13 level would abort our “buy” signal and signal a reversal in trend.  It is once again time to buy the price dips in the GLD.  At minimum, we see appreciation to the 95.00 area and possibly new high price levels above the record high of 100.44.

 

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

 

The Large-Cap Integrated Oil space (XOI-1508.40) closed out the trading week with a 0.94% advance.  Year to date the XOI is currently showing a negative return by 3.25%.  The XOI outperformed the weakness of the general market indices as crude oil remained on a northward trek.  We have been negative on the Large-Cap oils for the last four weeks.  The only sector component that we have been endorsing was Conoco Phillips (COP-91.64).  COP has now generated a weekly sell signal and joined the other major sector components, Exxon Mobil (XOM-86.55), Chevron Texaco (CVX-97.80), and British Petroleum (BP-67.78) on the unfavorable list.  Although currently in weekly “sell” mode we will continue to watch the 1450 key price support level for the XOI for an opportunity to initiate long trades in the sector.

 

The Oil Service Index (OIH-220.56) advanced 3.12% displaying strength relative to the broader market weakness.  The year to date return for the OIH currently stands at 16.27%.   The OIH has now spent the last eight weeks in what we categorize as weekly “buy” mode.  At this time we shall raise our key weekly closing price support level to 212.75.  Any weekly closing price below 212.75 will signal a change in trend for the OIH.  A weekly “buy” signal has been generated in Transocean (RIG-152.50).  Sector components currently in weekly “buy” mode and remaining so include Schlumberger (SLB-105.90), Halliburton (HAL-52.16), Ensco (ESV-80.68), and B.J. Services (BJS-32.13).  The only current negative outlier of the sector is Baker Hughes (BHI-87.75).  Our negativity on BHI would be reversed upon a weekly closing price above the 88.00 level.  We would continue to buy the dips in this very strong group until the upward weekly trends are reversed.

 

Natural Gas (UNG-62.40) continues to perform spectacularly and advanced 1.23% this past week.  The UNG is up a remarkable 70.23% for all of the 2008 trading year.  The pattern remains two steps forward one step back.  UNG individual components Chesapeake Energy (CHK-64.09), XTO Energy (XTO-67.50), and El Paso Corp. (EP-20.95) all enjoy favorable weekly trends at this time.  The 59.81 price level is now weekly closing price support for the UNG.  Although appearing somewhat over bought and extended at this time, the weekly trend remains favorable for the UNG.  We would continue to buy dips here until proven other wise.

 

The Coal Sector (KOL-56.90) declined by a marginal 0.87% this past week but despite the decline maintained favorable technical status.  The KOL is now in the thirteenth week of an amazing 48% advance.  The weekly charts of sector components Arch Coal (ACI-73.41), Peabody Energy (BTU-84.05), Massey Energy (MEE-91.19), and CONSOL (CNX-111.95), although appearing extended on the upside, all maintain favorable technical status at this time.  Continue to buy the dips until the weekly trend signals otherwise.

 

 

 

V.               Dow 30 Analysis

 

Our Weekly Trend Indicator (WTI) measures in at -26, a slight increase from the previous week reading of -28.   The Dow Jones Industrial average declined 4.19% for the week to 11346.51 and is currently showing a negative return for 2008 by 14.79%. 

 

The S&P 500, as measured by the SPY (127.53), declined 3.08% for the week and is currently 13.32% to the downside year to date.   Small caps issues, as measured by the IWM (IShares Russell 2000 Index Fund- 69.70), declined 3.95% to 69.70, leaving the index 7.37% to the downside year to date.

 

          The DIA has fallen and closed below the critical weekly price support level of 116.00.  The next level of price support does not appear until the 106.00 – 108.00 area.  Although now in a sharply oversold stage, we see no compelling reason to initiate long positions in the DIA until we reach our next level of weekly price support, the 106.00 – 108.00 area.  In fact if the DIA does stage a relief rally from current levels we would look to initiate a short position around the 118.00 – 120.00 area.  Continue to use rallies as an opportunity to reduce long exposure or to initiate short positions.

 

Fresh weekly buy signals generated: MRK

 

Fresh negative weekly signals generated:

 

Readers should take note that there are no Dow Jones Industrial components scheduled to report quarterly earnings this week.

 

Dow 30 stocks with positive weekly signals:

 

  MRK, MSFT

 

Dow 30 stocks with negative weekly signals:  

 

AA, AIG, AXP, BA, BAC, C, CAT, CVX, DD, DIS, GE, GM, HD, HPQ, IBM, INTC, JNJ, JPM, KO, MCD, MMM, PFE, PG, T, UTX, VZ, WMT, 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, June 30

 

Economic

 

9:45 Chicago PMI (Jun.): 48.5 cons.

 

Earnings

 

Before: RBN

 

After: HRB, HMX

 

Events

 

DCGN 8th Annual R&D Event 2 00:00 The NASDAQ OMX Group, Inc. Food and Restaurant Industry Forum With the National Restaurant Association.

 

Tuesday, July 1

 

Economic

 

00:00 Auto Sales (Jun.): 5.3M prior

00:00 Truck Sales (Jun.): 5.1M prior

10:00 Construction Spending (May): -0.6% cons.

10:00 ISM Index (Jun.): 49.6 prior

    

Earnings

 

Before: STZ, MSM, SMSC

 

After: APOL, GTOP

 

 

 

Events

 

CPB Presentation to Securities Analysts; TDG Analyst Day

TSTY, BGF, FLO, LNCE, LANC at Longbow Research Food & Beverage Conf.

   

Wednesday July 2

 

Economic

 

8:15 ADP Employment (Jun.): 28K cons.

10:00 Factory Orders (May): 0.6% cons.

10:30 Crude Inventories: 830K prior

     

Earnings

 

Before: SHLM, AYI, FDO, ISLE, SGK, UNF

 

After:  WDFC

 

Events

 

No notable events

    

Thursday, July 3

 

Economic

 

8:30 Average Workweek (May): 33.7 cons.

8:30 Hourly Earnings: 0.3% cons.

8:30 Initial Claims: 384K prior

8:30 Nonfarm Payrolls: -50K cons.

8:30 Unemployment Rate: 5.4% cons.

10:00 ISM Services (Jun.): 51.5 cons.

 

Earnings

 

Before: CREL, MESA

 

After: SYMM

 

Events

 

Financial future & options early close in observance of Independence Day (13:00 ET)

 

Friday, July 4

 

Economic

 

 

 

Earnings

 

Before:

 

After:

 

 

 

Events

 

Equity and bond markets closed in observance of Independence Day