equityletter.com 8/18/08

Thank you in advance for all comments and criticisms.....

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 8/18/08

 

 

     Note:  Event Calendar is located at bottom of page

      

I.                  General Market Overview

 

“A strong dollar is in the best interest of the United States.”  Did you ever wonder why every U.S. Treasury secretary that I can recall has consistently echoed this statement?  Every U.S. Treasury secretary, regardless of the direction of the U.S. Dollar, has repeated this statement because it is categorically true.  A strong U.S. Dollar is the most influential factor in containing commodity inflation.  The recent resurgence of the greenback has spawned a full-fledged across the board sell-off in all commodity related assets.  One could argue that the voracious Chinese appetite for commodities will resume after the conclusion of the Olympic Games.  The flip side of this argument is that the pre-Olympic infrastructure build up of the Chinese will be viewed as the peak of demand.  One could also argue that the recent sharp price correction in the commodity complex is the result of on going investigations in to price manipulation by colluding hedge funds.  Recent poor returns from the hedge fund community are reflective of the fact that they all had similar positions; short the U.S. Dollar and long commodities.  The real reason behind the recent resurgence of the U.S. Dollar is certainly not related to actions brought about by U.S. policy makers.  The strength of the U.S. Dollar is directly related to the fact that the protracted weakness in the U.S. economy is now spreading throughout the globe, in particular the Euro zone and Japan.   As we stated in our prior letter, whatever the reason be, we shall rejoice over the renewed strength in the U.S. Dollar.  The consumer based U.S. economy stands to benefit over the near term as commodity inflation subsides.  Hooray for the strong Dollar!!!

 

 

II.               Sector Analysis

                                             

The IEF-88.97 (I-share 7-10 year Treasury bond) advanced 0.67% for the week as the yield on the 10- year treasury declined from 3.95% to 3.85%.  The IEF is now in week three of a “buy” signal with the 87.67 level now acting as weekly closing price support.  We have been of the opinion that the IEF is contained within a trading range.  The IEF is now at the upper end of a sixteen week trading range.  Long positions should look to protect profits at current levels as a decline in interest rates from current levels appears highly unlikely.

 

A.     Financials

 

          The Financial Select Sector Index (XLF-21.36) finished the trading week with a 2.64% decline.  Year to date the XLF is currently down 26.17%.  The XLF is now in week three 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 see potential for an intermediate term advance up to the 24.00 – 25.00 area.  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-30.70), Citibank (C-18.55), Wells Fargo (WFC-29.76), J.P. Morgan (JPM-38.07), and State Street Bank (STT-69.25).  Look to buy dips as the weekly charts continue to point to an intermediate term rally.

 

          The Brokerage sector (IAI-33.76) index declined 1.63% on the week.  The year to date performance of the IAI is a negative 34.01%.   The IAI is now entering week three of a “buy” signal.  Any weekly closing price below the 31.39 would abort our current near term bullish stance for the IAI.  A combination of analyst earnings estimate reductions and ratings downgrades pressured the shares of Goldman Sachs (GS-163.18) this past week.  GS is now in weekly “sell” mode and any failure for GS to maintain the 160.00 support level will indicate further weakness down to the 140.00 price support area.  IAI components that currently maintain bullish weekly signals include Morgan Stanley (MS-40.88) and Raymond James (RJF-31.93).  In addition to GS, Merrill Lynch (MER-26.29) and Lehman (LEH-16.17) shall remain in negative weekly mode at this time.  Although in weekly “buy” mode the IAI is not firing on all cylinders do to underlying component weakness.  Watch GS closely as it will lead the overall group direction.

         

B.     Builders

 

 The Homebuilder exchange traded fund (XHB-19.26) advanced 2.01% and is currently positive year-to-date by 0.46%.   The XHB is now entering week two of a weekly “buy” signal.  We shall now view the 18.01 price level as weekly closing price support in order to maintain our weekly “buy” signal.   We continue to feel that the XHB will trade up to the 22.00 – 24.00 area of weekly price resistance.  XHB components that currently maintain favorable weekly status include Centex (CTX-15.91), Pulte Homes (PHM-13.13), Toll Brothers (TOL-23.32), and Ryland Group (RYL-21.61).  The negative outlier of the sector continues to be Lennar (LEN-11.82), avoid until a weekly close above the 12.82 resistance level.  Continue to buy weakness as the intermediate trend remains favorable.

 

C.  Semiconductors

 

The Semiconductor group (SMH-30.40) advanced 1.50% for the week.   Year to date the SMH is showing a negative return of 6.35%.  The SMH is now entering week two of a “buy” signal.  In order to maintain the weekly buy signal the SMH must remain above the 29.91 price level on a closing weekly basis.  If the SMH can get through the resistance hurdle of 30.50 we see the potential for further appreciation up to the 33.50 – 34.00 area.  SMH components that currently enjoy favorable weekly status include Intel (INTC-24.26), Applied Materials (AMAT-19.30, Micron Technology (MU-5.39), Novellus (NVLS-23.01), and Analog Devices (ADI-32.57).  Two SMH names that remain as negative outliers include Texas Instruments (TXN-25.52) and SanDisk (SNDK-17.64).  Take note that quarterly earnings are due from ADI in the coming week.  We would continue to ride the intermediate term uptrend by initiating long positions upon price weakness in the SMH and positively mentioned associated names.

 

D.   Retailers

 

          The Retail sector (RTH-97.59) finished the trading week with a 3.93% advance bringing the year-to-date return to a positive 4.54%.   A two-week 12.00% advance has quickly lifted the RTH up to a major price resistance zone, the 100.00 area.  This move has the feeling of too much too soon.  Although our work is currently positive for the sector the powerful upside move has abruptly shifted the risk/reward equation more toward the risk side.  We would not purchase the RTH at current price levels.  The prudent entry point for long positions appears to be around the 93.00 – 94.00 area.  We would continue to trim long positions around the 100.00 level.  RTH components under our coverage that currently enjoy favorable weekly status include WalMart (WMT-59.37), Target (TGT-51.40), Home Depot (HD-27.53), Walgreen’s (WAG-37.27), Sears Holding’s (SHLD-93.03), BestBuy (BBY-46.84), and Kohl’s (KSS-51.79).  Take note that quarterly earnings are due in the coming week from HD.  The near term trend is up for the sector but do not chase as current elevated levels.  Look for price retreats for proper entry for long positions.

 

E.    Steels

 

The Steel sector (SLX-77.33) finished the week with a 2.11% decline bringing the current year to date return to a negative 9.07%.  The SLX is now in week ten of a correction phase and appears headed lower toward the 75.00 area of price support.  Our weekly pivot point for the SLX is now 80.50.  Any weekly closing price above the 80.50 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-130.88), Nucor (NUE-50.41), Mittal (MT-74.21), and Steel Dynamics (STLD-24.83).   The once high flying upside momentum trade is now a low flying downside punishing trade.  Any failure to stabilize the free fall around the 75.00 price level will be a prelude to further weakness down to the 70.00 area.

 

F.    Pharmaceuticals and Healthcare

 

          The Pharmaceutical group (PPH-72.06) advanced 0.35% last week bringing the year to date return to a negative 9.00%.  It is now week six of “buy” mode for the PPH with the weekly pivot support level moving up to 70.80.  Any weekly closing price below the 70.80 price level would reverse our “bullish” stance for the PPH.  The near term upside target for the PPH remains the 74.00 area.  PPH sector components that currently maintain favorable weekly status include Pfizer (PFE-19.97), Johnson & Johnson (JNJ-71.33), Abbott Lab’s (ABT-59.62), and Eli Lilly (LLY-48.78).    The shares of Merck (MRK-36.16) and Wyeth (WYE-43.29) currently retain their unfavorable status, continue to avoid.   Look to buy dips in the positively mentioned names above as this group continues to display optimistic characteristics in an uncertain market atmosphere.

 

G.   Internet

 

 

          The Internet sector (HHH-52.81) advanced 2.98% last week and is currently negative by 10.79% for all of 2008.  The HHH is now entering week two of a “buy” signal.  Our weekly pivot closing price support is now 51.50.  Any weekly closing price below the 51.50 level will reverse our near term bullish stance for the HHH.  Our upside target shall remain the 55.00 area.  The shares of Yahoo (YHOO-20.44) have generated a fresh weekly “buy” signal.  We would look to initiate a long position in YHOO for a trade up to the 24.00 area. A protective sell-stop should be placed at 18.98.  HHH component Amazon.com (AMZN-86.40) continues to lead the HHH higher.  At this time we shall remain negative on the shares of Ebay (EBAY-25.98).  Although not a component of the HHH, Google (GOOG-510.15) has generated a weekly buy signal.  We see the potential for GOOG to trade up to the 560.00 area over the near term.

 

 

Take note that the VIX (19.58) decreased 5.23% from a reading of 20.66 the prior week.  The VIX is now in week four of a “sell” signal with the 24.58 level continuing to act as resistance.   We would view any weekly closing price under the 18.00 level as an extremely bullish indication.  On the flip side any weekly closing price above the 24.58 resistance level will indicate a resumption of market turbulence.

 

III.           Gold

 

GLD (streetTracks gold index) – The GLD (77.63) declined 8.05% on the week.  The current year to date return for the GLD is now a negative 5.86%.  We are now entering week four of weekly “sell” mode for the GLD with the 84.50 price level now acting as weekly closing price resistance.  Once the GLD broke below the key 84.00 price support level the sellers took command of the market.  The next level of critical weekly price support for the GLD is 76.00.  Any failure for the GLD to maintain the 76.00 price support area will foretell further weakness down to the 66.00 area.  The recent sharp correction has left the GLD in a near term oversold state.  We would watch the 76.00 level for a short term bounce trade in the GLD.  The overall trend remains to the downside with the 84.50 upside resistance area now being very formidable.

 

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

 

The Large-Cap Integrated Oil space (XOI-1275.70) closed out the trading week with a 1.28% decline.  Year to date the XOI is currently showing a negative return by 18.21%.   The XOI remains in weekly “sell” mode, now entering week thirteen of a “sell” signal.   Any weekly closing price above the 1327 level would signal a reversal of weekly trend from negative to positive for the XOI.  Major XOI components that continue to remain in negative weekly mode include Exxon Mobil (XOM-77.07), Chevron Texaco (CVX-84.25), British Petroleum (BP-57.52), and Conoco Phillips (COP-77.66).  The story remains the same, downside for the XOI but traders should watch the 1200.00 – 1250.00 major price support area as a possible long entry point.

 

The Oil Service Index (OIH-178.64) declined 0.82% this past trading week.  The year to date return for the OIH now stands at a negative 5.49%.   It is now week seven of “sell” mode for the OIH.  The OIH managed to bounce off the 175.00 area of weekly price support during this past week.  Any failure for the OIH to remain above the 175.00 level on a weekly closing basis will indicate further weakness toward the 160.00 area of major weekly price support.  OIH components Schlumberger (SLB-91.47), Halliburton (HAL-43.61), Transocean (RIG-126.24), Ensco (ESV-64.63), Baker Hughes (BHI-77.76), and B.J. Services (BJS-26.15) all reside in week seven of correctives phases.    Although firmly in a corrective phase the OIH is approaching a major price support level (175.00), watch for an oversold bounce from this level.

 

Natural Gas (UNG-37.78) declined 2.60% this past week, bringing the violent five week decline from the June highs to just below 42.00%.  Year-to-date the UNG is currently showing a positive return of 4.22%.   In similar fashion to many commodity related equities the correction has been fast and quite painful.  We continue to see very strong weekly price support at the 34.00 area for the UNG.  Individual natural gas equities El Paso (EP-16.40), Chesapeake Energy (CHK-45.53), XTO Energy (XTO-45.79), and Encana (ECA-66.24), although appearing temptingly oversold, all remain in weekly “sell” mode.   The story remains the same, continue to sell sharp rallies until the negative weekly trend subsides.

 

The Coal Sector (KOL-41.54) declined 2.35% this past week and is now in week seven of a “corrective “phase.  The KOL bounced off of a critical weekly price support zone this past week, the 40.00 – 42.00 area. Any failure for the KOL to remain above the 40.00 support level will indicate further weakness down to the next level of price support, 37.00.  Individual coal equities that remain in weekly corrective mode include Arch Coal (ACI-48.72), Peabody Energy (BTU-58.58), Massey Energy (MEE-59.03) and CONSOL Energy (CNX-62.93).  This high beta sector is in a sharply oversold state but remains in a near term downtrend.  Resist the temptation to pick a bottom until the weekly charts confirm a reversal of trend.

 

 

V.               Dow 30 Analysis

 

Our Weekly Trend Indicator (WTI) measures in at +16, an increase from the previous week reading of +8.   The Dow Jones Industrial average declined 0.63% for the week to 11659.90 and is currently showing a negative return for 2008 by 12.10%. 

 

The S&P 500, as measured by the SPY (130.17), advanced 0.62% for the week and is currently 10.97% to the downside year to date.   Small caps issues, as measured by the IWM (IShares Russell 2000 Index Fund- 75.10), advanced 2.71% to 75.10, leaving the index an out performing 1.08% to the downside year to date.

 

          The DIA (116.53) closed out the week with a marginal 0.15% decline and is now entering week two of a weekly “buy” signal.  We would now view any price retreat to the 114.00 area as an opportunity to initiate long positions for an intermediate term rally up toward the 122.00 -124.00 area of major weekly price resistance.   Any weekly closing price below the 114.68 support level would reverse our near term bullish stance for the DIA.

 

Fresh weekly buy signals generated: AXP, GM, T, VZ

 

Fresh negative weekly signals generated:

 

Readers should take note that Dow Jones Industrial components HD and HPQ are scheduled to report quarterly earnings this week.

 

Dow 30 stocks with positive weekly signals:

 

AXP, BA, BAC, C, DD, DIS, GE, GM, HD, HPQ, INTC, JNJ, JPM, KO, MCD, MMM, MSFT, PFE, PG, T, UTX, VZ, WMT

 

Dow 30 stocks with negative weekly signals:  

 

AA, AIG, CAT, CVX, IBM, MRK, 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, August 18

 

Economic

 

Earnings

 

Before: BHP, LOW, PWRD, PRGO, TSL, YTEC

 

After: CNTF, SGK, XFML

 

Events

 

ALLI, CBMX at Noble Financial Conf.

AER Investor Meeting; CSR Analyst Meeting

MANT, PTEK, RICK, AIRI, CRIS, ELMG at Noble Financial Mad Max Equity Conf.

PVSW, CALD, COIN, LOOK, AEHR at SRA Summer Technology Conf.

 

 

 

 

Tuesday, August 19

 

Economic

 

08:30 PPI (Jul.): 0.6% cons.

08:30 Core PPI (Jul.): 0.2% cons.

08:30 Housing Starts (Jul.): 963K cons.

08:30 Building Permits (Jul.): 949K cons.

    

Earnings

 

Before: CCUR, HD, MDT, MGPI, MYGN, SOL, SKS, GASS, TGT

 

After: ARAY, ADI, DRYS, HPQ, JKHY, LZB, NVTL, OTEX, CHIP

 

 

Events

 

BIOS, PHC, STKR, MSON, CTGX at Noble Financial Mad Max Equity Conf.

CBC, PCBK, TCBK, IBNK, UCBH, TAYC at Howe Barnes Hoefer & Arnett, Inc. Community Bank Conf.

SNPS, XLNX at Intel Developers Forum

Dallas Fed Pres. Fisher

 

 

   

Wednesday August 20

 

Economic

 

10:35 Crude Inventories: -316K prior

     

Earnings

 

Before: AMWD, BJ, EV, EJ, FTD, MENT, RGS, RTLX, ROST, STP

 

After:  AFCE, BYI, CLZR, IMOS, CTRN, GYMB, HOTT, JDSU, LTD, LTON, LDG, PVH, CRM, SMTC, SYMM, SNPS

 

Events

 

HOMB, GSBC, UWBK, CASB, PFBC, WIBC at Howe Barnes Hoefer & Arnett, Inc. Community Bank Conf

The Armed Forces Communications and Electronics Association (AFCEA) LandWarNet Conf.

 

 

    

Thursday, August 21

 

Economic

 

08:30 Initial Claims: 450K prior

10:00 Leading Indicators (Jul.): -0.2% cons.

10:00 Philadelphia Fed (Aug.): -14.1 cons.

 

Earnings

 

Before: BKS, BONT, BKC, CMRG, CTR, PLCE, CYBX, DKS, DMRC, FRO, GME, GMTN, HNZ, HRL, KNSY, LB, LANC, LYTS, MPR, PDCO, SCHS, SHMR, SFL, SCVL, SIFY, SSI, SMRT, TECD, BKE, TTC, TWB

 

After: ARO, AVNX, BEBE, BCSI, CALL, CPWM, DITC, FMD, FL, GPS, HIBB, HRAY, INTU, JMBA, LRN, NDSN, PSUN, RAE,SCSC, SHOR, TMA, VRGY, WTSLA, ZUMZ

 

Events

 

VSEA Analyst Meeting

ARNA, QCOM at American Electronic Association Green To Gold: Monetizing the Clean Tech Phenomena Conf.

The Armed Forces Communications and Electronics Association (AFCEA) LandWarNet Conf.

 

 

 

 

Friday, August 22

 

Economic

 

Earnings

 

Before: ANN, CSUN, HPOL, SKIL

 

After: PERY

 

Events

 

No events/conferences of note