equityletter.com 8/24/09

Thank you in advance for all comments and criticisms.....regards, the equityletter.com team

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 8/24/09

 

 

     Note:  Event Calendar is located at bottom of page

      

I.                  General Commentary

 

U.S. markets fearfully awoke this past Monday and were greeted by a 5.8% drop from China’s Shanghai index.  Most market participants believed that the gap down opening of U.S. markets would be the catalyst for the beginning of an overdue market correction.  The fear surprisingly lasted only one day as the U.S. equity markets spent the balance of an options expiration week climbing the proverbial wall of worry.  For the week the S&P 500 gained 2.16%, the Russell 2000 tacked on 3.08%, the Dow Jones Industrial average was up by 1.98%, and the NASDAQ Composite was better by 1.78%, all indices closed at their best levels for the 2009 trading year.  While we do not argue that the pace of decline of the U.S. economy has slowed we firmly believe that the current advance of U.S. markets is being fueled by the declining U.S. Dollar and the performance factor.  By “performance factor” we mean that many non-believing money managers who are behind the performance curve are currently being forced to chase a market that continues to climb higher in the face of an economy that is simply “less bad”.  We remain of the opinion that when and if increased trading volume does finally show up it will be a sign of upside capitulation.  All aboard, we believe unfortunately, will not be a bullish development.  Until further notice equity market dips shall remain buying opportunities regardless of fundamentals.

 

We are about to get a prime example of what occurs upon the removal of Government stimulus.  This weekend the Government automobile program called “Cash for Clunkers” is set to expire.  The program to date has spent approximately $3 billion dollars and generated around 475,000 sales of new autos.  Auto manufacturers have called back furloughed employees and ramped up production to restock dealer inventories that have been depleted by the raging success of the program.  Something tells me that auto sales might drop right back off the cliff as incentive conditioned consumers wait for the next Government offering.  But then again as the Government now turns the incentive game toward the purchase of more energy efficient household appliances we could see the highways cluttered with refrigerators, washing machines and dishwashers.

 

   The major market averages under our coverage that we currently rate with a positive weekly technical indications are the SPDR- S&P 500 (SPY-102.97), IShares Russell 2000 Index Fund (IWM-58.15), NASDAQ Composite (COMP-2020.90), Powershares QQQQ Trust (QQQQ-40.29), Diamonds Trust (DIA-95.03) and the I-share 7-10 year Treasury bond (IEF-90.45)  We currently have a negative view on the U.S. $ Index (UUP-23.23).  Take note that there are no changes of opinion from the prior week.

 

Sectors within our coverage universe that remain in favor according to our weekly oriented technical analysis include Financials (XLF), Managed Healthcare, Internet Related (HHH), Homebuilding (XHB), Retailers (RTH), Pharmaceutical (PPH), Semiconductors (SMH), Agriculture (MOO), Coal (KOL), Oil Service (OIH), Real Estate (IYR), Transportation (IYT), and Steel (SLX).  Take note that there are no changes of opinion from the previous letter.  Use price weakness to increase long exposure or to initiate long trades.

 

 Sectors that we believe to be currently vulnerable to a downside correction are the Large Integrated Oil companies (XOI), Natural Gas (UNG), Crude Oil (USO), and Gold (GLD).  Take note that there are no changes of opinion from the previous letter.

 

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-90.45 (I-share 7-10 year Treasury bond) declined 0.06% for the week as the yield on the 10- year treasury decreased from 3.56% to 3.55%.  For comparative reference the yield on the 10-year Treasury began the 2009 trading year at 2.24%.  The IEF is entering week two of a “buy” signal.  The weekly closing price support level in order to maintain our current “buy” signal shall be raised to 90.42.  Any weekly closing price below 90.42 will negate our current “buy” signal for the IEF.  There was very unusual price action last week as the equity markets were strong yet the bond markets maintained weekly price support levels.  We shall maintain our bullish stance until our price level is violated on a weekly closing price basis.

 

A.     Financials

 

          The Financial Select Sector Index (XLF-14.55) finished the trading week with a 2.18% advance. The XLF is now positive by 16.21% to date for the 2009 trading year.  The XLF is entering week twenty-four of a weekly “buy” signal.  Our weekly price support for the XLF shall remain at the 13.16 level.  Any weekly closing price below 13.16 will negate our current “buy” signal for the XLF.  XLF components that remain in “buy the dip” mode include Goldman Sachs (GS-163.51), Bank of America (BAC-17.46), Bank of New York (BK-29.12), MetLife (MET-38.93), J.P. Morgan (JPM-43.66), Wells Fargo (WFC-27.94), Citigroup (C- 4.70), U.S. Bancorp (USB-22.28), American Express (AXP-32.85), and Morgan Stanley (MS-29.69).  The only top ten XLF component that remains on our “sell” list is Chicago Mercantile Exchange (CME-276.12).  Nothing has changed here, the XLF has been the key contributor to the overall market recovery from the depths of despair.  According to our work the weekly trend remains favorable for the XLF and the majority of the top ten components.  Continue to use price weakness to increase long exposure and or to initiate long trades.

    

          B.  Builders

 

 The Homebuilder exchange traded fund (XHB-15.34) advanced 3.16% for the week. The 2009 year-to-date performance of the XHB currently stands at a positive 28.04%.  The XHB is entering week six of a “buy” signal.  Our weekly closing price support level in order to maintain our current “buy” signal for XHB shall remain at 14.28.  Any weekly closing price below the 14.28 support level will negate our current “buy” signal in the XHB.  XHB components that currently reside in weekly “buy” mode include D R Horton (DHI-12.66), Pulte Homes (PHM-12.67), Toll Brothers (TOL-22.70), KB Homes (KBH-17.73), Ryland Group (RYL-23.29), and Lennar (LEN-14.52).  The XHB continues to rest just below what we consider to be a key weekly price resistance level, the 16.00 area.  While we are reluctant to fight the trend and call a top, we must convey that the current risk/reward for the sector now favors the risk side.  Long positions should tighten up protective sell-stops at current price levels to protect profits.  Take note the quarterly earnings are due from TOL in the coming week.  Continue to use price weakness to accumulate long positions and or to initiate long trades.

 

B.     Semiconductor

 

The Semiconductor group (SMH-25.03) advanced 1.96% for the week.   The SMH performance for 2009 to date stands at a positive 42.13%.   The SMH is entering week six of “buy” mode.  Our weekly price support level shall remain at the 24.33 level.  Any weekly closing price below 24.33 will negate our current “buy” signal for the SMH.   Weekly “buy” signals remain prevalent in SMH components Texas Instruments (TXN-24.54), Applied Materials (AMAT-13.74), Micron Technology (MU-7.14), SanDisk (SNDK-16.88), and Analog Devices (ADI-28.42).  SMH components that currently reside in “sell” mode include Intel (INTC-18.89) and Novellus (NVLS-17.52).  There are no changes from our prior week opinions for the SMH or the individual internal components.  Continue to use price weakness in favorably mentioned names to increase long exposure and or to initiate long trades.

 

D.   Retailers 

 

          The Retail sector (RTH-85.27) finished the trading week with a 0.88% advance.  The 2009 performance of the RTH currently stands at a positive 13.48%.  The RTH is entering the sixth week of a “buy” signal.  Our weekly closing price support level for the RTH shall remain at 83.12.  Any weekly closing price below 83.12 will negate our current “buy” signal for the RTH.  Our weekly “sell” signal in Target (TGT-45.66) has been negated after a positive response to their earnings report last week.  A fresh weekly “sell” signal has been generated in RTH component Sears Holding’s (SHLD-66.02).  RTH components that continue to enjoy favorable weekly status include Home Depot (HD-27.50), Walgreen’s (WAG-31.63), WalMart (WMT-51.36), and Kohl’s (KSS-52.36).  The shares of BestBuy (BBY-37.49) remain on our “sell” list at this time.  Based upon the year-to-date performance of this sector as a whole, the markets appear to be discounting a vibrant return of the U.S. consumer.  With the availability of credit still in contraction and home prices still in decline, albeit at a slower pace, the RTH and related components appear ripe for future disappointment.  As we have stated on numerous occasions, market moves do not necessarily have to make fundamental sense.  The fact of the matter is that the trend remains favorable regardless of the questionable fundamentals.  Although somewhat extended to the upside, the trend remains favorable; use price weakness in the RTH and positively mentioned components to increase long exposure and or to initiate long trades.

 

E.    Steels

 

The Steel sector (SLX-48.26) finished the week with a 1.26% advance.  The current 2009 trading year return for the SLX is a positive 64.31%.  The SLX is entering the sixth week of a “buy” signal.  Our weekly closing price support level for the SLX shall remain at 47.21.  Any weekly closing price below 47.21 will negate our current “buy” signal for the SLX.  Weekly “buy” signals remain in place for SLX components U.S. Steel (X-44.86) and Nucor (NUE-47.15).  Our current weekly “sell” list includes Steel Dynamics (STLD- 16.92) and Arcelor Mittal (MT-36.54).  The SLX continues to benefit from a weak U.S. Dollar.  Any unexpected strength in the U.S. Dollar may cause a sharp correction in this highly volatile sector.  Continue to use price weakness in favorably mentioned names to increase long exposure and or to initiate long trades.

 

F.    Pharmaceuticals and Healthcare

 

          The Pharmaceutical group (PPH-64.64) advanced 3.19% last week. The current 2009 return for the PPH stands at a positive 5.39%.  The PPH is entering the sixth week of a “buy” signal.  Our weekly price support level shall remain at 62.40.  Any weekly closing price below 62.40 will negate our current weekly “buy” signal for the PPH.  Fresh weekly “buy” signals have been generated in PPH components Johnson & Johnson (JNJ-61.03) and Abbott Lab’s (ABT-45.39).  Weekly “buy” signals remain in place for GlaxoSmithKline (GSK-40.03), Merck (MRK-32.56), and Pfizer (PFE-16.64).  Our current “sell” list of PPH components contains only one issue at this time, Eli Lilly (LLY-33.45).  Last week we were concerned that the PPH and related components were ripe for a price correction.  Our call was proven inaccurate as the PPH advanced sharply to close at new high price levels for the 2009 trading year.  These are the risks in trying to call a “top” in an up-trending market.  The general trend remain a favorable one but the sharp advance of the past week has left the PPH vulnerable somewhat extended to the upside.

 

III.           Gold

 

GLD (streetTracks gold index) – The GLD (93.65) advanced 0.70% on the week.  For the 2009 trading year the GLD currently rests with a positive return of 8.24%.  The GLD is entering week two of a “sell” signal.  Our weekly closing price resistance in order to maintain said “sell” signal shall be lowered to 93.80.  Any weekly closing price above 93.80 will negate our current “sell” signal for the GLD.  After experiencing early week selling pressure the GLD spent the remainder of the week recovering valiantly to close with a slight gain as the U.S. Dollar trended lower.  Despite this recovery our negative stance remains in place until our weekly closing price resistance is violated on a closing price basis.  For now the 93.80 – 94.00 area should act as price resistance.

 

 

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

 

The Large-Cap Integrated Oil space (XOI-985.94) closed out the trading week with a 3.52% advance.  The XOI is now positive by 0.63% for the 2009 trading year.  Last week we issued a “sell” signal for the XOI with our closing price resistance set at 963.89.  In very unusual price action the XOI collapsed in early week trading only to completely reverse course and close up for the week.  The late week price strength carried the XOI above our stated price resistance level at week’s end.  Despite this strong price action we shall remain negative at this time and reset our weekly closing price resistance at 987.00.  Any weekly closing price above 987.00 and we shall “throw in the towel” on our negative stance.  Weekly “sell” signals remain in place for XOI components Exxon-Mobil (XOM-69.92), Chevron-Texaco (CVX-69.73) and Suncor Energy (SU-32.75).  Weekly “buy” signals remain in place for XOI components British Petroleum (BP-52.25) and Conoco-Phillips (COP-44.20).  Very strange, head-shaking, whipsaw price action in the past week has left us confused as to future direction for the XOI.  For now we shall shift to a neutral stance with a negative bias until our above adjusted price resistance is violated on a weekly closing basis.

 

The Oil Service Index (OIH-109.15) advanced 5.27% this past trading week.  The 2009 year to date return for the OIH stands at a positive 48.00%.  The OIH is entering week six of a “buy” signal.  Our weekly closing price support level shall remain at 101.41.  Any weekly closing price below 101.41 will negate our current weekly “buy” signal for the OIH.  OIH components currently in “sell” mode and remaining so are Schlumberger (SLB-56.56), Baker Hughes (BHI-38.71), Ensco (ESV-38.85), and Transocean (RIG-77.53).  Weekly “buy” signals remain in place for OIH components Halliburton (HAL-25.05) and B.J. Services (BJS-15.45).  The OIH put in a very strong performance this past week but failed to generate weekly “buy” signals in several above mentioned negative components.  In similar fashion to the XOI the whipsaw price action of the OIH currently leaves us confused as future trend identification.  This being stated we shall shift to a neutral stance with a slight positive bias as our OIH signal remains positive with several weekly “sell” signals in place for individual internal components.

 

Natural Gas (UNG-11.35) declined 9.13% this past week.  The current 2009 performance of the UNG is a negative 51.01%.   The UNG is entering week two of a “sell” signal.  Our weekly price resistance level shall be lowered to 12.48.  Any weekly closing price above 12.48 will negate our current “sell” signal for the UNG.  The UNG continues to maintain the distinction as the most underperforming commodity in the marketplace.  Bottom picking is a very difficult task; use price strength to reduce long exposure and or to initiate short positions.

 

The Coal Sector (KOL-28.95) declined by 0.17% this past week.  Year-to-date the KOL is positive by 94.42%.  The KOL is entering the sixth week of a “buy” signal.  Our weekly closing price support shall remain at 27.95.  Any weekly closing price below 27.95 will negate our current “buy” signal for the KOL.  Week six of a “buy” signal, the momentum favors the upside with the 32.00 level in our sights; use price weakness to increase long exposure and or to initiate long trades.

 

 

V.               Dow 30 Analysis

 

Our Weekly Trend Indicator (WTI) measures in at +20, an increase from the previous week reading of +14.  Currently 83.0% of the thirty Dow Jones Industrial components have favorable weekly chart formations; this is an increase from 73.0% in the prior week.  The Dow Jones Industrial average advanced 1.98% for the week to 9505.96.  The current return for the 2009 trading year stands at a positive 8.32%. 

 

The S&P 500, as measured by the SPY (102.97), advanced 2.16% for the week.  The 2009 trading year return for the SPY is positive by 14.10%.   Small caps issues, as measured by the IWM (IShares Russell 2000 Index Fund- 58.15), advanced 3.08% for the week.  The IWM year to date return is currently a positive 18.09%.

 

          The DIA (95.03) closed out the week with a 2.09% advance and is entering the sixth week of a “buy” signal.  Our weekly closing price support level shall remain at 91.97.  Any weekly closing price below 91.97 will negate our current “buy” signal for the DIA.  Our statement from our previous letter that called for a near term pause in the DIA looked pretty good for one day, last Monday.  After a sharp Monday decline the DIA spent the duration of the week in a steady ascent capped off by a 1.68% advance on Friday.  The DIA closing price of 95.03 leave it sitting right at our near term price resistance level.  Any significant close above 95.00 in the coming week will indicate further strength up to the 100.00 area.

           

Fresh weekly buy signals generated: JNJ, KO, MCD

 

Fresh negative weekly signals generated: NONE

 

Readers should take note that there are no Dow Jones Industrial components scheduled to report quarterly earnings in the coming week.

 

Dow 30 stocks with positive weekly signals:

 

 AA, AXP, BA, BAC, CAT, DD, DIS, GE, HD, HPQ, IBM, JNJ, JPM, KFT, KO, MCD, MMM, MRK, MSFT, PFE, T, TRV, UTX, VZ, WMT

                 

Dow 30 stocks with negative weekly signals:  

      

           CSCO, CVX, INTC, PG, 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 24

 

Economic

 

Earnings

 

Before: PCAP

 

After: ARAY, FMCN, WINN

 

Events

 

ATSI, HOLX, NUVA, WAG at Barrington Research Healthcare Conf. FED: $31 bln 3-month Treasury Bill Auction; $30 bln 6-month Treasury Bill Auction

 

Tuesday, August 25

 

Economic

 

09:00 S&P/Case Schiller Home price Index (Jun.): -16.40% cons.

10:00 Consumer Confidence (Aug.): 49.0 cons.

 

Earnings

 

Before: AMWD, BIG, BKC, CHS, COCO, DAKT, RAIL, GIGM, MDT, RTLX, SAFM, SPLS, JAVA, TUES

 

After: APSG, BCSI, DY, HAIN, IRF, MYGN

 

Events

 

CSCO Back to the Core of Business -- Service Provider Networks ATRC, EVVV, VAR, XRAY at Barrington Research Healthcare Conf. ASML, ATHR, INTC at Piper Jaffray Chicago Semiconductor Summit PDE at Jefferies Conf. TQNT, MENT FEIC, RSYS at TechAmerica Silicon Forest Technology and Financial Forum SYMC, ADSK, CAH, NTAP at SourceMedia Conferences Americas Summit 2009 FED: $42 bln 2-year Treasury Note Auction; $27 bln 1-year Treasury Bill Auction

Wednesday, August 26

 

Economic

 

08:30 Durable Orders (Jul.): 3.2% cons.

08:30 Durables Ex.-Transportation (Jul.): 1.0% cons.

10:00 New Home Sales (Jul.): 390K cons.

10:30 Crude Inventories: -8.40M prior

 

Earnings

 

Before: BWS, CHRS, CCUR, DLTR, DSW, IVR, KIRK, NWY, WSM

 

After: CWTR, GES, HEI, JAS, SIGM, SINA, TIVO

 

 

Events

 

CSCO Back to the Core of Business -- Business Networks

ASML, ATHR, INTC, MU at Morgan Stanley Semiconductor & Semi Cap Equipment Access Day

FED: $39 bln 5-year Treasury Note Auction; Fed's Lockhart

 

Thursday, August 27

 

 

Economic

 

08:30 Initial Claims: 565K cons.

08:30 GDP-Prelim. (Q2): -1.4% cons.

08:30 GDP Deflator (Q2): 0.2% cons.

08:30 Core PCE (Q2): 2.0% cons.

 

Earnings

 

Before: APWR, AEO, CSUN, CONN, ENER, FRED, GCO, GRB, LB, NOVN, OSIS, SCVL, TK, TOL, VIP

 

After: ARUN, BEBE, DELL, DLLR, FCEL, IMMR, JCG, MRVL, MCRS, NZ, NOVL, OVTI, SB, SLH, NCTY

 

Events

 

ATPG Analyst Breakfast

MDT Annual Shareholders Meeting

FED: $28 bln 7-year Treasury Note Auction; Fed's Bullard

 

Friday, August 28

 

Economic

 

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

08:30 Personal Spending (Jul.): 0.2% cons.

08:30 PCE Core (Jul.): 0.1% cons.

09:55 Michigan Sentiment-Rev. (Aug.): 64.8 cons.

 

Earnings

 

Before: FRO, TIF

 

After:

 

Events

 

NONE