equityletter.com 10/27/08
Note: Event Calendar is located at bottom of page
I. General Market Commentary
The
Now that we have vented our simmering anger let’s take a look a where we go from here. Where are we in the process of de-leveraging? It is this writer’s belief that the actual de-leveraging process is near the eighth or ninth inning. This fact is a good thing for the financial industry. The real problem now is that the fall-out from this process is just beginning to affect the real economy that is outside of Wall Street. Fact number one; the largest employer in the
A quick comment on the price of crude oil. It has become quite apparent that the meteoric rise and subsequent jaw-dropping collapse in the price of crude oil had very little to do will the supply/demand equation of this precious commodity. At this point in time it has become quite obvious that large pools of money, be it from pension funds or hedge funds, were playing the momentum game. The recent massive commodity correction eerily coincides with the emergence of liquidity problems in the hedge fund industry. Collusion works very well on the way up, but on the way down it is every man for himself.
Sector analysis below will provide information as to where to best allocate funds at this time.
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II. Sector Analysis
The IEF-89.39 (I-share 7-10 year Treasury bond) advanced 1.64% for the week as the yield on the 10- year treasury decreased from 3.94% to 3.70%. For comparative reference the yield on the 10- year treasury began the 2008 trading year at 4.03%. The flight to safety price action returned thereby nullifying our weekly “sell” signal. The IEF is once again in weekly “buy” mode with the weekly closing price support level at 87.29. Although in weekly “buy” mode we would categorize the IEF as violently thrashing around in a trading range. This range, defined as 86.00 on the lower end and 91.50 on the higher end is reflecting the push and pull of fear and reality. The IEF is being driven up by the flight to safety from those currently stricken with investment fear. Eventually the reality of higher interest rates will trump the fear crowd and result in lower prices for the IEF.
A. Financials
The Financial Select Sector Index (XLF-13.55) finished the trading week with an 11.73% decline. Year to date the XLF is currently down 53.16%. The XLF is entering week four of a “sell” signal. Our weekly closing price resistance for the XLF remains at 18.51. It has been stated that the last one carried out of a burning building is the piano player. The piano player of the XLF was carried out last week in the form of
B. Builders
The Homebuilder exchange traded fund (XHB-12.32) declined 10.66% leaving the year-to-date return at a negative 36.33%. The XHB is entering week four of a “sell” signal with the weekly closing price resistance residing at the 15.13 level. XHB components that remain in weekly “sell” mode include Centex (CTX-8.78), Pulte Homes (PHM-8.50), Lennar (LEN-6.52), Toll Brothers (TOL-17.91), KB Home (KBH-12.96), and Ryland Group (RYL-15.86). The group continues to reflect the poor state of the
C. Semiconductors
The Semiconductor group (SMH-18.355) declined 6.62% for the week. Year to date the SMH performance is a negative 43.47%. The SMH is now entering week ten of a weekly “sell” signal. The key weekly closing price resistance level for the SMH has been lowered to 20.31. The technical picture remains one of distribution for the SMH and the corresponding underlying components. At this time we shall remain negative on Intel (INTC-14.28),
D. Retailers
The Retail sector (RTH-67.89) finished the trading week with a 7.25% decline bringing the year-to-date return to a negative 27.27%. The RTH is entering week six of a weekly “sell” signal. Our weekly closing price resistance for the RTH resides at 76.05. RTH components that are currently in weekly “sell” mode include WalMart (WMT-51.40), Target (TGT-32.92), Home Depot (HD-18.51), Walgreen’s (WAG-22.59), BestBuy (BBY-22.51), Sears Holding’s (SHLD-47.67), and Kohl’s (KSS-27.36). Continue to use any significant price rallies as an opportunity to reduce long exposure.
E. Steels
The Steel sector (SLX-26.86) finished the week with a 18.38% decline bringing the current year to date return to a negative 68.41%. The SLX is now entering week twenty of a “sell” signal. The SLX has collapsed an astonishing 74.00% since our “sell” signal issued in June. Our weekly closing price resistance for the SLX is now at 36.62. Any weekly closing price above 36.62 will signal an end to the frightful price correction from the highs made in June. SLX components that remain on the “unfavorable “list include
F. Pharmaceuticals and Healthcare
The Pharmaceutical group (PPH-56.78) declined 4.25% last week bringing the year to date return to a negative 28.30%. We are now entering week nine of a “sell” signal for the PPH with our closing price resistance remaining at 65.19. The previous multi-year support level of 66.00 will now act as major over head price resistance for the PPH. The key underlying components of the PPH all currently rest in what we categorize as “sell” mode. These components include Pfizer (PFE-16.57), Merck (MRK-27.35), Wyeth (WYE-32.39), Johnson & Johnson (JNJ-60.79), Abbott Lab’s (ABT-54.30), and Eli Lilly (LLY-31.73). Week nine of corrective mode, this supposedly defensive sector continues to provide little shelter from the storm.
Take note that the VIX (79.13) increased 12.51% from a reading of 70.33 the prior week. We are now entering week eight of a “buy” signal for the VIX. The weekly closing price support for the VIX is now 50.91. Any weekly closing price below 50.91 will signal time for a respite from the extreme volatility of the past several weeks. With hedge funds in survival mode and the landscape of Wall Street forever changed, liquid markets may be a distant memory for an extended period.
III. Gold
GLD (streetTracks gold index) – The GLD (72.21) declined 6.48% on the week. The current year to date return for the GLD is now a negative 12.43%. We are now entering week two of a weekly “sell” signal for the GLD. Our weekly price closing price resistance for the GLD is 78.56. Last week we stated that it was time to switch gears and look to short rallies in the GLD. Use any price strength as an opportunity to reduce long exposure and or initiate short positions in the GLD. We see the potential for a decline to the 60.00-65.00 area for the GLD.
IV. Energy- (Oil, Oil Service, Nat’l Gas, Coal)
The Large-Cap Integrated Oil space (XOI-817.42) closed out the trading week with a 4.42% decline. Year to date the XOI is currently showing a negative return by 47.59%. The XOI is entering week four of a “sell” signal with the weekly closing price resistance remaining at the 1060.00 level. XOI components that currently reside in “sell” mode include Chevron Texaco (CVX-63.91), Conoco Phillips (COP-48.45), British Petroleum (BP-42.59) and Exxon Mobil (XOM-69.04). The trend remains one of massive distribution but we are beginning to witness the formation of a trading range. The range can be defined as 750.00 on the low side and 950.00 on the high side. Look to trade the range but respect the resistance level as the trend remains a negative one.
The Oil Service Index (OIH-83.74) declined 6.74% this past trading week. The year to date return for the OIH now stands at a negative 55.70%. It is now week seventeen of “sell” mode for the OIH. Readers should take note that the OIH closed at 211.25 one the week of our “sell” signal. The weekly closing price resistance for the OIH is 102.96. OIH components that remain in weekly “sell” mode include Schlumberger (SLB-47.52), Halliburton (HAL-18.65), Baker Hughes (BHI-31.43), Transocean (RIG-66.26), Ensco (ESV-32.34), and B.J. Services (BJS-12.04). While we shall continue to respect the current negative weekly signal, the OIH remains in a deeply oversold stage and subject to a near term relief rally up to our weekly resistance area around 110.00. We would not be short at current levels.
Natural Gas (UNG-27.50) declined 10.37% this past week. Year-to-date the UNG is currently showing a negative return of 24.14%. The UNG is entering week four of a “sell” signal with our closing weekly price resistance level at 31.41. Equities in the Natural Gas arena continue to reflect weekly technical characteristics of distribution and therefore should continue to be avoided.
The Coal Sector (KOL-15.00) declined by 20.17% this past week. It is now week eight of a “sell” signal for the KOL with the weekly closing price resistance residing at 21.00. Any weekly closing price above the 21.00 price level will indicate a change of weekly trend from negative to positive for the KOL. Similar to the other sub-sectors in the energy arena the KOL has been decimated by the forced liquidation of over-leveraged investment funds. While we would love to declare an end to the carnage we have yet to witness the price action that would enable such a declaration.
V. Dow 30 Analysis
Our Weekly Trend Indicator (WTI) measures in at -30, unchanged from the previous week reading of -30. From an historical standpoint, in our experience (25 years of trading), we have never seen two consecutive weeks of -30 reading in our Weekly Trend Indicator. The Dow Jones Industrial average declined 5.35% for the week to 8378.95 and is currently showing a negative return for 2008 by 36.83%.
The S&P 500, as measured by the SPY (87.04), declined 6.62% for the week and is currently 40.47% to the downside year to date. Small caps issues, as measured by the IWM (IShares Russell 2000 Index Fund- 47.17), declined 10.07% for the week, leaving the index 37.87% to the downside year to date.
The DIA (83.09) closed out the week with a 5.08% decline and is entering week eight of a weekly “sell” signal. Our weekly closing price resistance level remains at 101.50. Any weekly closing price above the 101.50 resistance level will indicate a change of trend for the wounded DIA. The bears remain in control as the domino effect of margins calls continues to expose any company or hedge fund that has neglected to reduce leverage. We would continue to look to trade the defined three week range, buying around the 80.00 area and selling in to the 95.00 area of price resistance. Our opinion remains the same; use any price rallies that approach our weekly price resistance level as an opportunity to reduce long exposure and or to initiate short positions.
Fresh weekly buy signals generated: NONE
Fresh negative weekly signals generated: NONE
Readers should take note that Dow Jones Industrial components CVX, KFT, PG, VZ, and XOM are scheduled to report quarterly earnings this week.
Dow 30 stocks with positive weekly signals:
Dow 30 stocks with negative weekly signals:
AA, AXP, BA, BAC, C, CAT, CVX, DD, DIS, GE, GM, HD, HPQ, IBM, INTC, JNJ, JPM, KFT, 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, October 27
Economic
Earnings
Before: ACV, ARLP, AIT,,ACI, BOH, BEAV, BWP, CRNT, CAN, CORS, DIN, DCO, EXP, FSNM, FPL, GEHL, HAE, HTLF, LO, MSA, ONB, PTC, PENN, PVTB, SOHU, TDW, TYL, VZ
After: ABAX, ACTU, ALB, AFG, ACF, ATHR, AXS, BWLD, CLMS, CF, CSR, CHH, CVTI, CR, EDR, EPIQ, EXEL, FIS, FADV, FELE, HGR, HLIT, HPC, ININ, IVAC, KRC, LCRD, XPRT, MASI, MERC, MTH, MCRL, NAVG, OMI, PRXL, PCTI, PFWD, PCL, PLXT, RCII, SCUR, SLG, TXRH, TZOO, UCTT, UHS, VECO, VRTX, WMS, ZRAN
Events
AVID 2008 Investor Day
WMT Analyst Meeting; AVNR, MBRX, CYTX, ANDS, HALO at BIOCOM Annual Investor Conf.
Tuesday, October 28
Economic
Earnings
Before: CAS, AMED, ECOL, ARTG, ASH, BMS, BYD, BP, CP, CRS, CNC, CRDN, CHKP, CVG, CYNO, DXYN, ELNK, ETR, EL, FMER, FORM, FDP, GKSR, GVHR, GPI, HMA, HSII, HEP, IPG, KDN, KSU, LCAV, MSO, MLM, MAS, MHP, MV, OXY, OMX, QLTI, RBC, ROC, RCL, RTIX, SAP, SEPR, SII, SAH, TASR, TFX, TIN, TPP, TUES, X, UA, USG, VLO, VSH, WDR, WHR
After: RNT, ACE, ACTL, ADVS, ATAC, ALGN, AGNC, APOL, ARNA, ARRS, AJG, BBSI, BEC, BMRN, BBOX, BXP, BTUI, BPL, BKI, CAI, CALD, CSCD, CBG, CBI, CRA, CTX, CTLM, CEPH, CPHD, CHB, CPSS, CTS, DENN, XRAY, DRIV, DBTK, DWA, EAC, ENTR, EXAC, EXR, FALC, FEIC, FGXI, FISV, FLS, FMC, GMKT, SOLD, HHGP, ISSI, JLL, KFRC, LDSH, LFL, LFG, LNC, LNET, MTW, MCK, MSTR, MOLX, NLC, NATI, NETL, NBIX, NAL, ODSY, PACR, PMTC, PDFS, PEET, PLXS, PZN, RSYS, RNR, RFMD, RCKY, RRR, SWIR, SNCI, SNWL, STAA, STAR, STM, SUMT, SDXC, TRMK, ULTI, VIMC, VPRT, VOCS, WRB, WLT, WBSN
Events
DPZ Analyst Meeting
PFE Analyst and Investor Meeting
PFWD Analyst Day Meeting
PLL Analyst Meeting
WMT Analyst Meeting
BITI, HIL, POOL, POL, GPX, OLN, TUNE at Sidoti & Company, LLC Emerging
Growth Institutional Investor Forum
BMY, CADX, VICL, EPCT, ISIS at BIOCOM Investor Conf.
SASR, SMTB, FNBN, PBNY, SNBC at American Bankers Association Community Bank Investor Conf.
TCX at Sidoti & Company, LLC Emerging Growth Institutional Investor Forum
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Wednesday, October 29
Economic
Earnings
Before: AET, AG, AGN, ANR, ASPM,AUXL, BCE, BPHX, BWA, BPO, CETV, CEVA, CINF, CMCSA, CEG, GLW, EEFT, FSRV, FORR, GRMN, GW, GLF, HERO, HES, IDCC, IMA, IVZ, JNY, K, KEM, KFT, ID, LANC, LAZ, LM, LFUS, MAG, MPX, MKTX, MCGC, MWV, MDP, MNC, MCO, MRT, NEM, NXY, NBL, NUS, NYB, OIIM, OZM, ODP, OC, POZN, PX, PG, Q, RHB, RES, RBCN, SVVS, SEE, SMI, SHPGY, SLAB, SNE, SPNC, SPR, SPW, SU, TSO, TWP, TRX, UNF, UMC, VICL, VPHM, WBC, WPI, WEC, WATG, WXS, ZBRA
After: ARAY, ACXM, AEA, AAP, AEM, AW, ALO, AMP, AMKR, NLY, ASYT, ATML, BMR, BBBB, CBT, COG, CDR, CEDC, CIR, CLF, CME, CGNX, CYH, CVLT, CPTS, OFC, CSGP, CW, DNEX, DSCM, DTE, DXPE, EFJI, EQ, EPIC, EQR, DAVE, FARO, FRT, FR, FSLR, GNK, BGC, GMR, GIVN, GKK, GCFB, HBI, HAR, HRS, HSTX, HIG, HLX, HIW, HMN, ICAD, ICO, ITRI, JDSU, KEX, KONA, LVS, LHCG, MANT, MET, MIPS, MUR, NEWP, NHWK, OIS, ASGN, ORCC, OPWV, ORLY, OI, MALL, PGTI, PDGI, PBI, PPO, PRAA, PRU, STR, RCRC, RNWK, RJET, SGMO, SANM, SCRX, SHOR, SFLY, SSTI, SIRF, SMSI, SPF, STAN, STNR, SUNH, SUPG, SPRT, SYMC, SYMM, SMMX, TWLL, TSCM, TWPG, TRN, TTMI, VARI, V, VNUS, WCAA, WLL
Events
KCI 2008 Analyst Day
ED, RRC, APC at Platts Appalachian Gas Conf.
CEL, CYCC, RPTP, ELXR, GENR, MNOV at 7th Annual BIO Investor Forum
MRCY 9th Annual Investor Conf.
Fed Policy Announcement
Thursday, October 30
Economic
Earnings
Before: ACW, ATG, ALU, ARE, ATK, ABC, ANPI, APA, ABG, AIZ, AZN, ATRO, AVP, BLL, ABX, BRY, BJS, BXC, BCX, BCO, BRNC, BRKR, BW, CAM, CNQ, CRR, CBZ, CBS, CDI, CTL, CI, CBB, CMS, CL, CMC, CGX, CRY, CTCM, CVS, D, DDE, DVD, DRQ, DSPG, EK, ENDP, ENR, NPO, ENZN, EVR, EXPE, XOM, FSS, FAF, FTK, FTE, RAIL, FCN, IT, GTIV, GLBL, GHL, HSC, HNR, HGRD, HGSI, HURN, ICON, ICTG, IAR, IFLO, IMCL, IPCC, ICE, IFF, IGT, IP, ITG, IRM, ISTA, SFI, JAH, LB, LEA, LXRX, TVL, LKQX, LZ, MHO, CLI, MRO, MBI, MFA, MDS, MOG/A, MOT, MPS, LABL, MYL, BABY, NM, NWL, GAS, NTMD, NOVA, NRG, NMX, CHUX, ZEUS, OHI, OCR, ORCH, OSCI, OSIS, PMTI, PTEN, PCCC, PAG, PRGO, POR, PDE, PEG, QCCO, QUIX, RVSN, FRZ, REDF, RBA, RDS/A, RRST, SCG, SCHN, SNH, SGR, SINT, SBNY, SPIL, SIRI, SRT, STE, STRA, TSM, TE, PNX, THOR, TBL, GTS, TRW, ULBI, UIS, UNT, UTHR, VC, WMI, WWY, WYN
After: PAR, ACTS, ADLR, AATI, ABCO, ACS, AKAM, AIQ, ALNY, ACAS, ACAP, AHS, ANEN, ANSV, AMCC, AUTH, AVNX, AVR, RATE, BARE, BGFV, BBND, BMC, BVN, CA, CAB, CAP, CAMD, ELY, CALL, CPT, BEAT, CEGE, CHRT, CEM, CHK, CIM, CQB, CSTR, FIX, CTV, SCOR, CNXT, CRAY, DEPO, DGII, DIVX, DLLR, DW, DNB, DRRX, BOOM, EHTH, ERTS, EEP, ERES, EXAR, ESRX, FMD, FBC, FDRY, FBN, GGP, GHDX, GPRO, GERN, GFIF, ROCK, HAIN, HYC, IDSY, IMMR, IBNK, IN, ITMN, KND, KLAC, LOOP, MEE, MXWL, MFE, MEDX, MTD, MCRS, MWY, MIL, MNST, MORN, NANO, NAPS, NATL, NFS, NAVR, NCI, NR, OII, ORH, ONNN, OPLK, OPNT, OTTR, OSG, PSEM, PMC, PHTN, PWAV, PGIC, PSB, PSYS, QSII, QSFT, RADS, RMKR, RMTR, O, RSG, RTEC, SBAC, SGMS, SSW, SIGI, SQNM, SIMO, SSD, FIRE, SFN, SPRD, SXE, JAVA, SPN, SWN, TLEO, TEAM, TSRA, SWIM, CLUB, UDRL, URI, USTR, UAM, UNM, VCLK, VSEA, VISN, VLCM, WTS, WBMD, WRI, WYNN, ZIGO
Events
WAG Analyst Meeting
ALNY, ATHX, PIP, RGN, CYTR at 7th Annual BIO Investor Forum
NFG, SE at Platts Appalachian Gas Conf.
SPLS 2008 Analyst and Investor Conf.
Friday, October 31
Economic
Earnings
Before: EYE, ALE, LNT, AEE, AXL, AEP, AOC, AIV, B, BKC, CSAR, GTLS, CVX, CLX, CDE, CMI, EMS, ELMG, EVVV, GG, HPOL, HS, HMSY, ISPH, KBR, LNCE, MGLN, MBFI, MDC, MDU, MNTG, NYX, PGN, SMG, TSTY, WY
After: DAC, DRC
Events
AMRA, ONTY, DEPO, PPHM, CLDN, ISTA at 7th Annual BIO Investor Forum
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