equityletter.com 8/25/08

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 8/25/08

 

 

     Note:  Event Calendar is located at bottom of page

      

I.                  General Market Overview

 

The major U.S. market indices ended another volatile week of trading with a strong Friday recovery rally to close out the week little changed.  For the week, the S&P 500, as measured by the SPY (129.65) declined 0.40%, the Dow Jones Industrials (11628.06) shed 0.27%, and the small cap Russell 2000 (IWM-73.68) was lower by 2.95%.  A strange week it was indeed.  This past week featured a parade of negative news reports regarding the imminent taxpayer bailout of Government Sponsored Entities (GSE’s) Fannie Mae (FNM-5.00) and Freddie Mac (FRE-2.81), the widening of corporate debt spreads over treasuries back up to multi-decade highs (3.11%), and an intra-week spike in oil prices, yet volatility, as measured by the VIX (18.81) actually declined by almost 4.00% to three month lows.  The failure of the markets to decline in the face of negative news is evidence that the near term intermediate uptrend within the scope of an overall bear market remains intact for the time being.  We are simply just tired of going down for the near term.  The fact that the Financial Sector (XLF-20.74) did not collapse amid the FNM and FRE turmoil means that the event has most likely already been priced in.  Please do not confuse our near term bullishness with our longer term bearishness. Currently the stabilization of the decline in the U.S. Dollar has provided relief via a painful hedge fund retreat across the board in the commodity sector which is being interpreted by the markets as a relief to a debt-laden, inflation tired U.S. consumer.  The Retail sector (RTH-96.60) has rallied 11.00% in three weeks time. While impressive this rally may be we shall be highly skeptical as to the issue of sustainability.  The fate of the U.S. consumer ultimately rests with the direction of the U.S. housing market.  As we have stated numerous times, the excesses of the Greenspan Era of easy money shall take years, possibly decades to be digested by the U.S. economy.  Nevertheless our current overall view is that the major market indices are currently enjoying a respite from further longer term declines.  Let’s all enjoy the breather while we can. 

 

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-88.87 (I-share 7-10 year Treasury bond) declined 0.11% for the week as the yield on the 10- year treasury increased from 3.85% to 3.87%.  For comparative reference the yield on the 10- year treasury began the 2008 trading year at 4.03%. The IEF is now in week four of a “buy” signal with the weekly closing price support level now moving up to 88.70.  We have been of the opinion that the IEF is contained within a trading range; the upper end being 89.50 and the lower end resting at 85.80.  The IEF appears to have rejected the upper end of a seventeen week trading range.  We currently expect the IEF to retreat down to the 87.00 – 87.50 area.  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-20.74) finished the trading week with a 2.90% decline.  Year to date the XLF is currently down 28.31%.  The XLF is now in week four 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-30.21), Wells Fargo (WFC-29.36), J.P. Morgan (JPM-37.67), and State Street Bank (STT-66.95).  A fresh weekly “sell” signal has been generated in the shares of Citibank (C-18.14).  We would exit long positions in C as the stock appears destined to retest the 14.00 – 16.00 support area.  While the past week certainly was a test in patience for those long the XLF the fact of the matter is the weekly closing price support has not been violated.  Continue to buy dips in the XLF or above positively mentioned names until proven otherwise.

 

          The Brokerage sector (IAI-32.77) index declined 2.93% on the week.  The year to date performance of the IAI is a negative 35.95%.   The IAI is now entering week four of a “buy” signal.  We are generally surprised that the IAI has been able to maintain favorable weekly status considering the overall weakness in the individual underlying components.  With this being stated our current IAI “buy” signal should be viewed with hesitance.  Our weekly closing price support level shall now be raised up to 32.09.  Any weekly closing price below 32.09 will not bode well for the IAI.   IAI component Raymond James (RJF-30.47) is the sole positive weekly chart of the group.  After a nice five week bounce, the shares of Morgan Stanley (MS-38.89) appear to have stalled.  MS has generated a weekly “sell” signal.  IAI sector components that remain with negative signals include Goldman Sachs (GS-159.81), Merrill Lynch (MER-25.22) and Lehman (LEH-14.41) shall remain in negative weekly mode at this time.  Although in weekly “buy” mode long positions in the IAI should tread cautiously as the negative divergence of the underlying components give reason for caution.

         

B.     Builders

 

 The Homebuilder exchange traded fund (XHB-18.99) declined 1.40% swinging the year-to-date return to a negative 1.86%.   The XHB is now entering week three of a weekly “buy” signal.  We shall continue to view the 18.01 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.  XHB components that currently maintain favorable weekly status include Centex (CTX-15.45), Pulte Homes (PHM-13.66), Toll Brothers (TOL-23.30), and Ryland Group (RYL-21.07).  The negative outlier of the sector continues to be Lennar (LEN-11.83), 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-29.15) declined 4.11% for the week.   Year to date the SMH performance is a negative 10.20%.   A poor showing by the SMH this past week has generated a weekly “sell” signal.  The failure to maintain the weekly support level of 29.91 is indicating a possible downside retest of the 27.00 – 28.00 support area for the SMH.  Semiconductor giant Intel (INTC-23.49) is flashing a weekly “sell” signal.  We would now view the 24.30 level as formidable over head price resistance for the shares of INTC.  The near term downside target for INTC is the 20.50 – 21.00 support area.  Also generating “sell” signals this past week are Micron Technology (MU-4.69), and Analog Devices (ADI-28.84).  SMH components that have been and shall retain negative weekly status include Texas Instruments (TXN-24.65) and SanDisk (SNDK-15.02).  There are currently two positive outliers in the sector, Applied Materials (AMAT-18.49) and Novellus (NVLS-22.68).  Be alerted to the reversal of weekly trend from positive to negative and look to reduce long positions upon market strength.

 

D.   Retailers

 

          The Retail sector (RTH-96.60) finished the trading week with a 1.01% decline bringing the year-to-date return to a positive 3.48%.   As we stated in our previous Equity Letter, the recent two-week sharp advance of the RTH had tilted the risk/ reward more toward the risk side and that the prudent entry for long positions was down around the 93.00 – 94.00 area.  The low trade for the RTH last week was 92.79 with the end of week closing price 96.60.  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-59.44), Target (TGT-52.66), Home Depot (HD-27.11), Walgreen’s (WAG-36.47), Sears Holding’s (SHLD-88.43), BestBuy (BBY-45.14), and Kohl’s (KSS-49.80).  Take note that quarterly earnings are due in the coming week from SHLD.  The near term trend is up 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-80.35) finished the week with a 3.91% advance bringing the current year to date return to a negative 5.52%.  Despite the rally of the past week the SLX remains in week eleven of a corrective phase and must maintain the 75.00 area of price support.  Our weekly pivot point for the SLX shall remain at 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-133.76), Nucor (NUE-51.60), Mittal (MT-76.08), and Steel Dynamics (STLD-25.49).   Regardless of the strength of the past week our work continues to project lower prices for this highly volatile sector.  We shall remain of the view that price strength in the SLX should be used to trim long positions or initiate short positions.

 

F.    Pharmaceuticals and Healthcare

 

          The Pharmaceutical group (PPH-71.43) declined 0.69% last week bringing the year to date return to a negative 9.80%.  It is now week seven of “buy” mode for the PPH with the weekly pivot support level remaining at 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-19.75), Johnson & Johnson (JNJ-71.42), Abbott Lab’s (ABT-58.48), and Eli Lilly (LLY-48.03).  The shares of Merck (MRK-35.27) and Wyeth (WYE-42.71) currently retain their unfavorable status, continue to avoid.   Look to buy dips in the positively mentioned names above as favorable technicals continue to point toward further appreciation.

 

G.   Internet

 

 

          The Internet sector (HHH-51.55) declined 2.39% last week and is currently negative by 12.92% for all of 2008 trading year.  Based on the price action of the past week we shall reverse our near term bullish stance for the HHH from positive to negative.  Our reversal of opinion is based upon the poor price action of YaHoo (YHOO-19.53) and Google (GOOG-490.59).  Prior week “buy” signals in both YHOO and GOOG have been aborted.  We have been negative on HHH component Ebay (EBAY-25.03) for the past twelve weeks and shall continue to remain so at this time.   The shares of Amazon.com (AMZN-85.26) shall continue to act as the positive outlier of the sector.  We shall persist of the view that the 78.00 area is strong price support for the shares of AMZN.   Respect the “sell” signals in the HHH and look to reduce long positions in to price strength.

 

 

Take note that the VIX (18.81) decreased 3.93% from a reading of 19.58 the prior week.  The VIX is now in week five 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 (81.08) advanced 4.44% on the week.  The current year to date return for the GLD is now a negative 1.67%.  Despite the rally of the past week we are now entering week five of “sell” mode for the GLD with the 84.50 price level remaining as weekly closing price resistance.  We view the rally of the past week in the GLD as nothing more than a bounce from an over sold condition.  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-1322.46) staged an over sold rally and closed out the trading week with a 3.67% advance.  Year to date the XOI is currently showing a negative return by 15.21%.   The XOI remains in weekly “sell” mode, now entering week fourteen 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-80.30), Chevron Texaco (CVX-88.10), British Petroleum (BP-57.14), and Conoco Phillips (COP-83.18).  After reaching a price apex in mid-May the XOI has been in a steady fourteen week decline.  For the time being we shall view the strength of the past week as nothing more than a bounce from an oversold condition.  If the XOI can finish the coming week above the 1327 resistance level we may have to adjust our negative stance.

 

The Oil Service Index (OIH-186.90) advanced 4.622% this past trading week.  The year to date return for the OIH now stands at a negative 1.12%.   It is now week eight of “sell” mode for the OIH.  After successfully retesting the 175.00 area of weekly price support the OIH managed an oversold price rally.   The weekly closing price of 186.90 has left the OIH in a very interesting position.  While we shall remain negative at this time we shall now view any weekly closing price above the 186.90 level as having bullish implications.   OIH components Schlumberger (SLB-97.26), Halliburton (HAL-45.46), Transocean (RIG-129.74), Ensco (ESV-68.59), Baker Hughes (BHI-80.47), and B.J. Services (BJS-26.83) all reside in week eight of correctives phases.    While we view the strength of the past week as nothing more than a bounce from an oversold condition, a strong performance in the coming week will certainly bode well for the future prospects of the OIH.  Watch for a closing price above the 186.90 level for an indication of weekly trend change from negative to positive.

 

Natural Gas (UNG-36.60) declined 3.12% this past week, bringing the violent six week decline from the June highs to just below 45.50%.  Year-to-date the UNG is currently showing a positive return of 0.97%.     We continue to see very strong weekly price support at the 34.00 area for the UNG.  Individual natural gas equities El Paso (EP-16.80), Chesapeake Energy (CHK-47.65), XTO Energy (XTO-48.34), and Encana (ECA-72.26), although displaying price strength in the past week,, all remain in weekly “sell” mode.   In similar fashion to the other energy sectors the UNG must follow up the strength of the past week in order to confirm a possible weekly trend change from negative to positive.

 

The Coal Sector (KOL-44.63) advanced 7.44% this past week and has generated a weekly “buy” signal.    After spending the past nine weeks in “correction” mode the price action of the past week has signaled a reversal of weekly trend from negative to positive.  We would now use price weakness in the KOL down around the 42.00 – 43.00 area as an opportunity to accumulate long positions.  A protective sell stop should be placed below the 39.76 level.  Individual coal equities are also signaling a reversal of weekly trend from negative to positive.   Arch Coal (ACI-55.61), Peabody Energy (BTU-64.51), Massey Energy (MEE-66.96) and CONSOL Energy (CNX-69.49) are all indicating that it is time to switch gears and look to buy price dips.  The seven week vicious price correction for the coal sector has come to a conclusion.  It is time to switch gears and use price weakness as an opportunity to initiate long positions.

 

 

V.               Dow 30 Analysis

 

Our Weekly Trend Indicator (WTI) measures in at +12, an increase from the previous week reading of +16.   The Dow Jones Industrial average declined 0.27% for the week to 11628.06 and is currently showing a negative return for 2008 by 12.33%. 

 

The S&P 500, as measured by the SPY (129.65), declined 0.40% for the week and is currently 11.33% to the downside year to date.   Small caps issues, as measured by the IWM (IShares Russell 2000 Index Fund- 73.68), declined 1.89% to 73.68, leaving the index an out performing 2.95% to the downside year to date.

 

          The DIA (116.32) closed out the week with a marginal 0.18% decline and is now entering week three of a weekly “buy” signal.  In order to maintain said “buy” signal the DIA must remain above 114.68 on a closing weekly basis.  We continue to view the DIA as in the midst of an intermediate term rally with the upside target being the 122.00 -123.00 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.  Continue to buy the price dips in the DIA until the weekly uptrend is violated.

 

Fresh weekly buy signals generated:

 

Fresh negative weekly signals generated: C, INTC

 

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:

 

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

 

Dow 30 stocks with negative weekly signals:  

 

AA, AIG, C, CVX, CAT, IBM, INTC, 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 25

 

Economic

 

10:00 Existing Home Sales (Jul.): 4.90M cons.

 

Earnings

 

Before: APWR

 

After: TMA

 

Events

 

No events/conferences of note

 

 

Tuesday, August 26

 

Economic

 

10:00 Consumer Confidence (Aug.): 53.0 cons.

10:00 New Home Sales (Jul.): 523K cons.

14:00 FOMC Minutes

    

Earnings

 

Before: AEO, BIG, CHS, COCO, DAKT, LTXX, MGPI, SAFM, SFD, TUES

 

After: APSG, BGP, DY, HAIN, JCG, PEC

 

 

Events

 

ANSS Analyst Meeting

Independent Petroleum Association of America International Forum

PERY at MAGIC International Investor Conf.

TER at Morgan Stanley Semiconductor Conf.

FOMC policy minutes released

 

   

Wednesday August 27

 

Economic

 

08:30 Durable Orders (Jul.): 0.1% cons.

10:35 Crude Inventories: 9390K prior

    

Earnings

 

Before: BWS, CHRS, DLTR, FTD, GMTN, GTOP, OSIS, SOLF, TLB

 

After:  BNHN, CWTR, FCEL, GA, GEF, HEI, JAS, MW, TIVO

 

Events

 

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

Independent Petroleum Association of America Summer NAPE Conf.

Atlanta Fed Pres. Lockhart

 

    

Thursday, August 28

 

Economic

 

08:30 GDP Prel. (Q2): 2.7% cons.

08:30 Chain Deflator Prel. (Q2): 1.1% prior

08:30 Initial Claims: 432K prior

 

Earnings

 

Before: BF/B, CONN, DLM, DHT, DSW, ENER, FLE, FRED, GCO, GRB, KIRK, LB, LAYN, NZ, SHLD, SIFY, TIF, TWB, VIP, WSM, ZLC

 

During: NX

 

After: ARUN, JRJC, CMOS, DLIA, DELL, DDS, DLLR, ESL, JMBA, LTON, LAVA, MRVL, MCRS, NOVL, OVTI, PETM, SNDA, SIGM, LNUX, CHIP, WIND

 

Events

 

Independent Petroleum Association of America Summer NAPE Conf.

SAI, ZBRA, SPSS, GLDD, LLL at American Electronics Association Illinois FedTech Security Procurement Conf.

UHAL Announces 2nd Annual Virtual Analyst and Investor Meeting

Friday, August 29

 

Economic

 

08:30 Personal Income (Jul.): -0.1% cons.

08:30 Personal Spending (Jul.): 0.3% cons.

09:45 Chicago PMI (Aug.): 49.9 cons.

10:00 Michigan Sentiment Rev. (Aug.): 62.3 cons.

 

Earnings

 

Before:

 

After:

 

Events

 

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