equityletter.com 7/14/08
Note: Event Calendar is located at bottom of page
I. General Market Overview
Another week, another poor showing on Wall Street as the major
Since the past week was dominated by negative headlines, we will start with “good news” of the past week. In a strategic buy out, Dow Chemical announced a deal to acquire chemical maker Rohm & Haas at a 78.0% premium to the current market price. This market needs to see an increase in “strategic” merger activity which will be a strong indication that the collapse of share prices has reached a level of “value” creation.
Now we shall move on to the bad news. It was reported that the year-to-date average return as of the end of June in the $1.9 trillion Hedge fund community was a negative 0.75%. Relatively speaking the performance is somewhat impressive. The problem here lies with the 2.0% annual management fee coupled with the 20.0%-30.0% management share of any profits. The scary thought here is what do these figures mean for the “long only” mutual fund industry. The statement shock will be in the mail box very soon.
Crude oil remains stubbornly extended on the upside courtesy of two countries that have the most to gain from higher prices,
In a quite ironic and historical twist, in this day and age, as
I will leave with one final thought. As the massive de-leveraging of the
II. Sector Analysis
The IEF-87.96 (I-share 7-10 year Treasury bond) advanced 0.29% as the yield on the 10- year treasury decreased from 3.97% to 3.94%. We are now entering week three of weekly “buy” mode for the IEF. Our weekly closing price support level shall now rise to 87.45. Any weekly closing price below the 87.45 price level will indicate a change of trend for the IEF. We continue to view the IEF as currently benefiting from an investor flight to safety as the general market remains under heavy selling pressure. This being stated the upside from current levels could be limited as the Federal Reserve has strongly indicated that in order to contain upward inflationary pressure the next move for interest rates will be to tighten. The trade here continues to be a place to hide (lose less money) as the equity market remains under selling pressure.
A. Financials
The Financial Select Sector Index (XLF-18.68) finished the trading week with a 6.32% decline. Year to date the XLF is now down an astonishing 39.97%. The current ten week slide continues to grind painfully lower. Our weekly pivot point for the XLF is 20.63. Until the XLF can close above the 20.63 resistance level on a closing weekly basis the trade shall continue to be sell all rallies. XLF sector components which continue to display relative weakness but continue to appear deeply over sold at this time include Bank America (BAC-21.67), Citibank (C-16.19), Well Fargo (WFC-23.00), J.P. Morgan (JPM-33.16), Wachovia Bank (WB-11.54), and State Street Bank (STT-59.56). The trend remains negative but appears to be very deeply over sold at this time.
The Brokerage sector (IAI-29.67) index declined 8.34% on the week. The year to date performance of the IAI is a painful, negative 48.77%. The seemingly never ending need to raise more capital remains a dark cloud for common equity holders in this beleaguered sector. The price action for the IAI and the underlying individual components remains the same, negative. We shall continue to concede that the IAI is in a deeply oversold condition and therefore subject to some sort of near term relief rally. The sad part about the previous statement is that is the only bullish comment we can make about the sector. The weekly pivot point for the IAI is now 33.10. Any weekly closing price above the 33.10 price resistance level will indicate a change of trend from negative to positive. 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-33.44), Goldman Sachs (GS-162.48), Merrill Lynch (MER-27.61), Lehman (LEH-14.43), and Raymond James (RJF-25.88), all maintain negative weekly status at this time.
B. Builders
The Homebuilder exchange traded fund (XHB-14.72) declined 7.88% and is currently negative year-to-date by 26.38%. As we have stated on numerous occasions, the after effects of the bursting of the “great
C. Semiconductors
The Semiconductor group (SMH-28.19) declined 1.78% for the week. Year to date the SMH is showing a negative return of 13.84%. Three weeks ago we issued a weekly “sell” signal for the SMH. Since that declaration the SMH has declined by 9.65%. The SMH shall remain in weekly “sell” mode at this time with the 29.48 price level now acting as weekly price resistance. Any weekly closing price above the 29.48 level will indicate a change of trend from negative to positive. The coming week brings quarterly earnings reports from SMH components Intel (INTC-20.64) and Novellus (NVLS-19.16). The individual sector components of the SMH that currently reside in weekly “sell” mode include Intel (INTC-20.64), Texas Instruments (TXN-27.50), Micron Technology (MU-5.44), SanDisk (SNDK-16.56), Novellus (NVLS-19.16), and Analog Devices (ADI-30.34). Use any strength in the SMH up near the 30.00 - 31.00 area to reduce long exposure as we foresee further weakness down to the 27.00 area of price support.
D. Retailers
The Retail sector (RTH-85.85) finished the trading week with a 2.11% decline bringing the year-to-date return in to negative territory by 8.23%. With no relief at the gasoline pump (as well as all other energy commodities) in sight we continue to see no relief for the RTH as well. The 84.00 price level appear to be the last bastion of price support for the RTH, any breech of this critical support area could be the beginning of a more serious price swoon. The individual RTH sector components under our radar continue to point to weakness across the board. WalMart (WMT-56.29), Target (TGT-44.74), Home Depot (HD-21.58), Walgreen’s (WAG-32.72), Sear’s Holdings (SHLD-70.91), BestBuy (BBY-37.61), and Kohl’s (KSS-39.11) all currently reside in weekly “sell” mode. The retrenchment of a tired
E. Steels
The Steel sector (SLX-94.51) finished the week with a 4.10% advance retracing 30% of the decline from the prior week. The current year to date return for the SLX now stands at 13.79%. 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. The near term downside target for the SLX is the 80.00 area of weekly price support. The 100.00 area is now established near term price resistance for the SLX. SLX individual components that currently reside in weekly “sell” mode include
F. Pharmaceuticals and Healthcare
The Pharmaceutical group (PPH-69.19) advanced 1.60% last week bringing the year to date return to a negative 12.20%. The price action of the past week has generated a weekly “buy” signal for the PPH. The key weekly pivot support level is now 67.27. Any weekly closing price below the 67.27 price level would reverse our “bullish” stance for the PPH. The near term upside target for the PPH is the 74.00 area. Fresh weekly “buy” signals have been generated in PPH components Johnson & Johnson (JNJ-66.26) and Eli Lilly (LLY-47.67). Individual names currently in weekly “buy” mode and remaining so include Wyeth (WYE-48.30) and Abbott Laboratories (ABT-56.43). Merck (MRK-36.75) and Pfizer (PFE-17.81) are the negative component outliers at this time. Look to buy dips in the positively mentioned names above as this group currently displays one of the few bright spots in an otherwise ugly stock market.
G. Internet
The Internet sector (HHH-50.63) advanced 1.66% last week and is currently negative by 14.13% for all of 2008. We issued a sell signal on the HHH five weeks ago and since that time the HHH has declined by 9.81%. Potentially renewed merger speculation has generated a weekly “buy” signal in the shares of YaHoo (YHOO-23.57). We consider this a “special” situation and highly doubt that Microsoft will come back with a bid anywhere close to the $31.00 per share previous offer. We see current upside to about 27.00 for the shares of YHOO but do not like the risk/reward from current price levels. Individual HHH sector components Ebay (EBAY-28.01) and Amazon.com (AMZN-68.54) currently remain in weekly “sell” mode. Although not a HHH component, Google (GOOG-533.80) is currently in week three of “sell” mode and appears likely to decline to the 440.00 - 450.00 area of weekly price support. Both GOOG and EBAY are scheduled to report quarterly earning in the coming trading week.
Take note that the VIX (27.49) increased 10.85% from a reading of 24.80 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 (95.16) advanced 3.37% on the week. The current year to date return for the GLD is 15.86%. The GLD is now entering week three of favorable weekly trend status. Our closing weekly price support level will remain at 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 are now at that level. The current price action suggests a move toward the all time highs for the GLD of 100.44, and possibly higher. 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-1411.50) closed out the trading week with a 4.77% decline. Year to date the XOI is currently showing a negative return by 9.76%. We have been negative on the Large-Cap oils for the last six weeks and shall remain so. The major sector components, Exxon Mobil (XOM-85.48), Chevron Texaco (CVX-92.25), British Petroleum (BP-64.53), and Conoco Phillips (COP-88.13), all remain on the weekly unfavorable list at this time. The failure of the XOI to hold above the 1450 key weekly price support level suggests further weakness for the sector. Our next level of weekly price support is around the 1300.00 area, approximately 8.00% lower from current price levels. The XOI appears to be near term oversold but remains in weekly downtrend.
The Oil Service Index (OIH-205.26) declined 2.84% this past trading week. The year to date return for the OIH currently stands at 9.21%. In our previous Equity Letter we issued a weekly “sell” signal for the OIH. We continue to be of the view that the OIH is currently in the midst of a corrective phase and are looking for a further decline down to the 185.00 – 190.00 area of weekly price support. The lone “positive” wolf in the group, Halliburton (HAL-48.04), has now joined the rest of the sector in weekly “sell” mode. OIH components Schlumberger (SLB-99.16), Baker Hughes (BHI-81.36), Transocean (RIG-145.02), Ensco (ESV-74.70), and B.J. Services (BJS-30.26) all reside in week two of correctives phases. Take note that Schlumberger (SLB) is due to report quarterly earnings in the coming week. Use price rallies to trim long exposure until the passing of this near term corrective phase.
Natural Gas (UNG-55.65) could not stand the prosperity of being the lone advancing sector and plunged 12.13% this past week in similar fashion to the waterfall decline of the Steel sector in the previous week. The UNG is still up a remarkable 71.72% for all of the 2008 trading year. We would now caution that the UNG could potentially suffer a quick and painfully sharp decline down to the 48.00 area of weekly price support. The upside momentum has stalled; the downside momentum will be sharp and nasty. A weekly “sell” signal has been generated in high flier
The Coal Sector (KOL-53.00) advanced by 7.92% this past week recovering a little more than half of the prior week decline. A week after an alarming 12.00% plunge, the KOL staged a relief rally. There is now established price resistance over head at the 56.00 – 57.00 area. We continue to see further downside for the KOL to the 43.00 – 44.00 area of weekly price support. The weekly charts of sector components Arch Coal (ACI-66.66), Peabody Energy (BTU-76.85), Massey Energy (MEE-83.11), and CONSOL (CNX-100.30), are all entering week two of “sell” signals. 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 potentially punishing price correction.
V. Dow 30 Analysis
Our Weekly Trend Indicator (WTI) measures in at -26, a slight increase from the previous week reading of -28. The indicator remains firmly in negative territory. The Dow Jones Industrial average declined 1.67% for the week to 11000.54 and is currently showing a negative return for 2008 by 16.97%.
The S&P 500, as measured by the SPY (123.84), declined 1.96% for the week and is currently 16.24% to the downside year to date. Small caps issues, as measured by the IWM (IShares Russell 2000 Index Fund- 67.27), advanced 1.43% to 67.27, leaving the index 10.79% to the downside year to date.
The DIA remained under selling pressure and is quickly approaching our near term downside target around the 106.00 – 108.00 area. 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 116.00 – 118.00 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: IBM, JNJ
Fresh negative weekly signals generated: MRK
Readers should take note that Dow Jones Industrial components C, IBM, INTC, JNJ, JPM, KO, MSFT, and UTX are scheduled to report quarterly earnings this week.
Dow 30 stocks with positive weekly signals:
IBM, JNJ
Dow 30 stocks with negative weekly signals:
AA, AIG, AXP, BA, BAC, C, CAT, CVX, DD, DIS, GE, GM, HD, HPQ, INTC, JPM, KO, MCD, MMM, MRK, 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 14
Economic
Earnings
Before: MTB
After: ELS, DNA, JBHT, NVLS, STLY
Events
ALU, ALST at Financial Research Associates Carbon Counting Conf.
ENTG, FEIC NANO at SEMICON West 2008
NVLS Analyst and Press Event at Semicon West 2008
SFE at Friedland Capital, Inc. Summer Global Equities Conf.
Tuesday, July 15
Economic
Earnings
Before: ADTN, SCHW, ETN, JNJ, PII, RLRN, STT, USB, GWW
After: ALTR, CTAS, CPSS, CSX, HCSG, INTC, PHHM, RLI, STX, SPSN, VFC
Events
GE Analyst Meeting
THQI Analyst Meeting
VRGY Analyst Meeting
AEO 2008 Analyst Day
DNB 2008 Investor Day
DRC at Infocast Power Storage Projects & Enabling Technologies
KLAC Analyst Briefing at Semicon West
LRCX Analyst Meeting coinciding with SEMICON West 2008
TGAL at SEMICON West 2008 (Day 3 of 6)
Fed Chief Bernanke testimony
SF Fed Pres. Yellen
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Wednesday July 16
Economic
Earnings
Before: ABT, AMB, ASML, DAL, DSL, GCI, HST, NITE, LSTR, LUFK, MI, MTOX, VIVO, MERX, NTRS, ORCT, PJC, STJ, WFC
During: AMR, CBSH
After: ADS, CAVM, CCK, DTLK, EBAY, HOKU, KMP, KFN, LHO, PLCM, RECN, SSW, TER, TBI, UFPI, XLNX, YUM
Events
LDK Analyst Meeting
RTEC Analyst Meeting
SEMICON West 2008
Fed: Bernanke testifies again
FOMC policy minutes released
Fed Hoenig
Thursday, July 17
Economic
Earnings
Before: AOS, AMFI, APH, BK, BAX, BBT, BLK, CHB, CIT, KO, CCE, CMA, CAL, COT, CY, DHR, FCS, FCF, FHN, F, GPC, HOG, HNI, HBAN, ITW, IIIN, IGT, IONA, JCI, JPM, KNL, MMR, MEG, MEI, MTG, NAFC, EDU, NXY, NOK, NVS, NUE, ORB, PNC, PPG, RS, SWY, SCHL, SON, SPWR, AMTD, TXT, UMPQ, UTX, USAK, WSO
During: HTLD
After: ACTS, AMD, ATR, ARNA, AVCT, BRO, CLMS, COF, CIM, CBST, CYT, ESLR, EXAR, FBC, GILD, GOOG, IBM, ICUI, INFA, IUSA, LCRD, LEG, MER, MSFT, NVEC, PNFP, PMCS, RUSHA, SPP, SWKS, SOV, SYK, SRDX, SYMM, TPX, CHIP, WERN, WIT, ZION
Events
DVAX, VICL, MRK, WYE at IBC Life Sciences Next Genereation Vaccines Conf.
Marcus Evans Crisis Communication & Reputation Protection in the Financial Sector Conf.
SEMICON West 2008
Friday, July 18
Economic
Earnings
Before: ACO, C, GAP, HON, IGTE, MAN, MAT, BPOP, SLB, SXT, WL
After: BMI
Events
INO, BHTX, EBS at IBC Life Sciences Next Genereation Vaccines Conf.
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