equityletter.com 7/07/08
Note: Event Calendar is located at bottom of page
I. General Market Overview
General market overview is postponed due to the holiday weekend. All sections below are updated and current.
II. Sector Analysis
The IEF-87.71 (I-share 7-10 year Treasury bond) declined 0.26% as the yield on the 10- year treasury decreased from 3.99% to 3.97%. We are now entering week two of weekly “buy” mode for the IEF. The flight to safety trade has begun once again as the slide in
A. Financials
The Financial Select Sector Index (XLF-19.94) finished the trading week with a 3.06% decline. Year to date the XLF is now down a horrid 33.65%. The nine week slide continues to grind lower. 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-22.40), Citibank (C-16.82), Well Fargo (WFC-23.92), J.P. Morgan (JPM-35.31), Wachovia Bank (WB-14.88), and State Street Bank (STT-62.00). The trend remains negative but appears to be very deeply over sold at this time.
The Brokerage sector (IAI-32.37) index declined 5.68% on the week. The year to date performance of the IAI is a painful, negative 40.43%. The price action for the IAI and the underlying individual components remains the same, negative. Similar to the above mentioned XLF, at this point in time the IAI is in a deeply over sold condition and therefore subject to a near term relief rally. Investors should continue to use any near term price appreciation as an opportunity to reduce long exposure and or to initiate short positions. The underlying individual equity components, Morgan Stanley (MS-35.91), Goldman Sachs (GS-178.89), Merrill Lynch (MER-31.12), Lehman (LEH-22.85), and Raymond James (RJF-25.37), all maintain negative weekly status at this time.
B. Builders
The Homebuilder exchange traded fund (XHB-15.98) declined 7.36% and is currently negative year-to-date by 18.50%. For the past seven weeks we have continually stated that a retest of the 16.00 price level of weekly price support was an unfortunate eventuality. This forecast has now become an unfortunate reality. Any failure for the XHB to hold at current price levels will indicate further weakness of another 30%. Individual sector components Centex (CTX-12.95), Pulte Homes (PHM-9.70), Lennar (LEN-11.47), Toll Brothers (TOL-18.85), Ryland Group (RYL-23.30), and Beazer Homes (BZH-4.94), all continue to maintain negative weekly status at this time.
C. Semiconductors
The Semiconductor group (SMH-29.89) declined 3.98% for the week. Year to date the SMH is showing a negative return of 12.06%. Two weeks ago we issued a weekly “sell” signal for the SMH. Since that declaration the SMH has declined by 7.87%. The individual sector components of the SMH that currently reside in weekly “sell” mode include Intel (INTC-20.66), Texas Instruments (TXN-27.44), Micron Technology (MU-5.77), SanDisk (SNDK-18.43), Novellus (NVLS-20.98), and Analog Devices (ADI-30.71). Use any strength in the SMH up near the 32.00 - 33.00 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-87.70) finished the trading week with a 1.83% decline bringing the year-to-date return in to negative territory by 6.12%. The individual RTH sector components under our radar continue to point to weakness across the board. WalMart (WMT-56.60), Target (TGT-46.90), Home Depot (HD-22.54), Walgreen’s (WAG-31.45), Sear’s Holdings (SHLD-73.78), BestBuy (BBY-39.59), and Kohl’s (KSS-42.52) all currently reside in weekly “sell” mode. The retrenchment of a tired
E. Steels
The Steel sector (SLX-90.79) finished the week with a waterfall 12.79% decline as momentum investors have begun a run for the exit door. The current year to date return for the SLX has been cut in half in one week and now stands at 9.69%. We have warned for two weeks about the divergence between the SLX (negative) and the underlying individual sector components (positive). We stated that “something had to give”, and it has. This past week witnessed a mass run for the exit door that happens to be only so big. The incredible upside momentum for the Steel sector has now come to a screeching halt. We would now use any strength in the SLX and the accompanying underlying individual components as an opportunity to reduce long exposure as the sector is now indicating that it has entered a near term corrective phase. Weekly “sell” signals have now been generated in
F. Pharmaceuticals and Healthcare
The Pharmaceutical group (PPH-68.15) advanced a 2.21% last week bringing the year to date return to a negative 13.50%. For the time being the PPH has successfully held above the multi-year price support level of 66.00 but has yet to generate a weekly “buy” signal according to our analysis. A weekly closing price above the 68.17 price level would confirm a change of trend from negative to positive for the PPH. Individual PPH sector components that currently maintain favorable weekly status include Merck (MRK-38.45) and Wyeth (WYE-46.99). A fresh weekly “buy” signal has been generated in the shares of Abbott Lab’s (ABT-54.75). Components the currently reside in the negative weekly camp include Pfizer (PFE-17.75), Johnson & Johnson (JNJ-65.12), and Eli Lilly (LLY-46.98). The sector has failed to provide the traditional “defensive protection” year to date, that trend could be in the process of reversing, watch closely.
G. Internet
The Internet sector (HHH-50.25) declined 1.91% last week and is currently negative by 15.79% for all of 2008. We issued a sell signal on the HHH four weeks ago and since that time the HHH has declined by 11.47%. Individual HHH sector components Ebay (EBAY-26.80), YaHoo (YHOO-21.35), and Amazon.com (AMZN-72.00) all currently reside in weekly “sell” mode. Although not a HHH component, Google (GOOG-537.00) is currently in week two of “sell” mode and appear likely to decline to the 450.00 - 460.00 area.
Take note that the VIX (24.80) increased 2.49% from a reading of 23.44 the prior week. The VIX continues to grind higher and has yet to display the “panic” upward spike that would indicate a heightened level of fear of which is characteristic of short term market bottoms. The trend remains upward for the VIX with the 22.70 level now acting as weekly closing price support. Watch for a northward spike in to the 32.00-34.00 area for a near term “capitulation” of market participant fear.
III. Gold
GLD (streetTracks gold index) – The GLD (92.06) advanced 0.65% on the week. The current year to date return for the GLD is 12.49%. The GLD, as mention in our previous Equity Letter, has resumed favorable weekly trend status. Our closing weekly price support level has now moved up to the 90.00 price level. Any weekly closing price below the 90.00 level will indicate a reversal of the current positive trend for the GLD. Last week we stated that at minimum, the GLD would appreciate to the 95.00 area. We shall remain with this opinion and add that any weekly closing price above the 95.00 price level will foreshadow a move to new all time highs for the GLD. The weekly trend is favorable, continue to buy price dips.
IV. Energy- (Oil, Oil Service, Nat’l Gas, Coal)
The Large-Cap Integrated Oil space (XOI-1482.18) closed out the trading week with a 1.74% decline. Year to date the XOI is currently showing a negative return by 4.99%. We have been negative on the Large-Cap oils for the last five weeks and shall remain so. The major sector components, Exxon Mobil (XOM-88.27), Chevron Texaco (CVX-98.63), British Petroleum (BP-66.34), and Conoco Phillips (COP-91.84), all remain on the weekly unfavorable list at this time. 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-211.25) declined 4.22% finally succumbing to the general market weakness. The year to date return for the OIH currently stands at 12.05%. After spending the last eight weeks in what we categorize as weekly “buy” mode, the OIH has generated a weekly “sell” signal by closing below the 212.75 price support level. We would now look for a price retreat for the OIH down to the 190.00 area of weekly support.
The price action of the past week has generated weekly “sell” signals in OIH sector components Schlumberger (SLB-101.88), Transocean (RIG-142.91), Ensco (ESV-74.44), and B.J. services (BJS-30.79). The shares of Baker Hughes (BHI-84.89) are entering week three of negativity. The lone positive weekly chart in the sector is that of Halliburton (HAL-50.55). The time is now ripe for a pullback in this year-to-date strong performing sector.
Natural Gas (UNG-63.33) continued to ignore the negative general market trend and advanced 1.49% this past week. The UNG is now up a remarkable 71.72% for all of the 2008 trading year. We would now caution that we are beginning to see some deterioration in the underlying individual companies within the sector. XTO Energy (XTO-63.81),
The Coal Sector (KOL-49.11) declined by an eye-popping 13.69% this past week. After thirteen weeks and an amazing 48% advance the KOL upside momentum has come to a screeching halt. It is now time for a breather for this amazing year-to-date upside performer. We see further downside for the KOL to the 42.00 price area of weekly support. The weekly charts of sector components Arch Coal (ACI-63.70), Peabody Energy (BTU-77.62), Massey Energy (MEE-75.46), and CONSOL (CNX-94.83), have all generated weekly “sell” signals, the impressive upside momentum has run out of steam. Use any price rallies to reduce long exposure as the impressive upside momentum has come to a near term conclusion. These highly volatile names are now in the midst of a near term punishing price correction.
V. Dow 30 Analysis
Our Weekly Trend Indicator (WTI) measures in at -28, a slight decrease from the previous week reading of -26. The Dow Jones Industrial average declined 0.51% for the week to 11288.54 and is currently showing a negative return for 2008 by 15.30%.
The S&P 500, as measured by the SPY (126.31), declined 0.96% for the week and is currently 14.28% to the downside year to date. Small caps issues, as measured by the IWM (IShares Russell 2000 Index Fund- 66.32), declined 4.85% to 66.32, leaving the index 12.22% to the downside year to date.
The DIA remained under selling pressure and once again closed out the holiday shortened week at new low levels for all of the 2008 trading year, 11288.54, down 15.30% Y.T.D.. The story remains the same, short term oversold and subject to a near term relief rally that could possibly carry the DIA up to the 118.00 – 120.00 area of price resistance. We continue to see no compelling reason to try to pick a bottom and would wait until the DIA reaches the 106.00 -108.00 area of price support. The weekly trend remains to the downside, use any significant upward moves as an opportunity to reduce long exposure or initiate short positions.
Fresh weekly buy signals generated:
Fresh negative weekly signals generated: MSFT
Readers should take note that Dow Jones Industrial components AA and GE are scheduled to report quarterly earnings this week.
Dow 30 stocks with positive weekly signals:
MRK
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, MSFT, PFE, PG, T, UTX, VZ, WMT, XOM
· Underline names have changed from previous week*
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VI. KEY EVENTS IN THE WEEK AHEAD:
Monday, July 7
Economic
Earnings
Before:
After:
Events
CALW Annual Shareholders Meeting
GNB Annual Shareholders Meeting
MICC Extraordinary General Meeting
Tuesday, July 8
Economic
Earnings
Before: GBX, HELE, PBG
During: CBSH
After: AA, PRXI, ZZ
Events
| ATVI Special Meeting of Stockholders AZZ Shareholders Meeting; BIDZ, CBRL, BKC, POOL, TLB at Oppenheimer & Co. Consumer Growth Conference (Day 1 of 3) C.E. Unterberg, Towbin Annual Growth Conference (Day 1 of 3) CCUR Special Meeting of Stockholders Credit Suisse Group Emerging Market Currencies Conference Deutsche Bank Securities FinTech 2008: Senior Executive Forum DIOD, NMTI, TUNE, BTUI, ZIXI at Collins Stewart 4th Annual Growth Conference DLM Analyst and Investor Day HANS Business Update Conference Call Marcus Evans Global Maritime Capabilities Conference (Day 1 of 3) SEL Annual Shareholders Meeting Standard & Poors Introduction to ABCP Conference. |
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Wednesday July 9
Economic
Earnings
Before: ACGY, FLOW, ISCA, NUHC, WWW
After: AIR, INTV, RECN, RT, SGR
Events
AVNX Shareholders Meeting
Bank of
C.E. Unterberg, Towbin Annual Growth Conference (Day 2 of 3)
Credit Suisse Group Emerging Market Currencies Conference
Deutsche Bank Securities FinTech 2008: Senior Executive Forum
EMCI Investor Day Presentation
EPXI, MOSY, BMRN, ICGE, PTEC, CMTL at Collins Stewart 4th Annual Growth Conference
ETH Investor Conference; HTH Shareholders Meeting
IART Shareholders Meeting
Marcus Evans Global Maritime Capabilities Conference (Day 2 of 3)
Merriman Curhan Ford, & Co. Advanced Lighting/LEDs 2008 Analyst Meeting
MNOV Analyst / Investor Meeting
MW Mid-Quarter Update;
Opal Financial Group Family Office/Private Wealth Management Forum (Day 1 of 3)
Opal Financial Group Public Funds Summit East (Day 1 of 3)
Standard & Poors Fifth Annual Asset-Backed Commercial Paper Conference
Thomson Reuters Forum: Innovations In Quantitative Research
TSCO, DENN, AFCE, BKE, CKR, HAIN, TIF at Oppenheimer & Co. Consumer Growth Conference (Day 2 of 3)
WEST Shareholders Meeting
Thursday, July 10
Economic
Earnings
Before: CHTT, EMMS, FCSX, HITK, MAR, PGR, TXI
After: CAMP, INFY, LWSN, SYMM
Events
C.E. Unterberg, Towbin Annual Growth Conference (Day 3 of 3)
Cowen and Company Health Care Policy Conference
CRM Shareholders Meeting
GB, ULBI, FIGI, ICGN, MSO, DARA at Collins Stewart 4th Annual Growth Conference
GET, BXG at Oppenheimer & Co. Consumer Growth Conference (Day 3 of 3)
Global Technology Community LLC 2nd Annual Rediscovering Biomarkers Conference
Marcus Evans Global Maritime Capabilities Conference (Day 3 of 3)
Marcus Evans T&D Asset Management Conference
MEAD Shareholders Meeting
Opal Financial Group Family Office/Private Wealth Management Forum (Day 2 of 3)
Opal Financial Group Public Funds Summit East (Day 2 of 3)
RUS Shareholders Meeting
SHS Shareholders Meeting
SIGM Shareholders Meeting.
Friday, July 11
Economic
Earnings
Before: FAST, GE,
After:
Events
Global Technology Community LLC 2nd Annual Rediscovering Biomarkers Conference
Marcus Evans T&D Asset Management Conference
MRVL Shareholders Meeting
Opal Financial Group Family Office/Private Wealth Management Forum (Day 3 of 3)
Opal Financial Group Public Funds Summit East (Day 3 of 3)
PEFF Shareholders Meeting
RMA Shareholders Meeting.
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