equityletter.com 9/14/09
Note: Event Calendar is located at bottom of page
I. General Commentary
In our previous letter we expressed concerns regarding what we felt was the beginning of technical deterioration in certain major market averages and various individual sectors with the marketplace. While we remain of the opinion that the overall risk/reward equation at current market price levels is certainly tilted to the risk side, the price action of the past week went a long way to alleviate our concerns regarding imminent technical deterioration. We were specifically concerned that the small-cap Russell 2000 was signaling time for a sharp price correction. The upside price reversal that occurred last week in the IShares Russell 2000 Index Fund (IWM-59.42) proved our concerns to be inaccurate. This coming week brings a September options expiration which on many occasions in the past has provided a positive boost to the marketplace. Overall the most important market driver continues to be the declining U.S. Dollar. When the U.S. Dollar declines, the markets rise, when the U.S. Dollar advances, the markets decline. While equities continue to respond favorably to this pattern for now, there may come a cruel realization that bunch of worthless currency printed out of thin air has created yet another market bubble.
The major market averages under our coverage that we currently rate with a positive weekly technical indications are the SPDR- S&P 500 (SPY-104.77), IShares Russell 2000 Index Fund (IWM-59.42), Diamonds Trust (DIA-96.22), NASDAQ Composite (COMP-2080.90), Powershares QQQQ Trust (QQQQ-41.52), and the I-share 7-10 year Treasury bond (IEF-92.02) We currently have a negative view on the U.S. $ Index (UUP-22.81). Take note that the IWM and DIA are positive changes of opinion from the prior week.
Sectors within our coverage universe that remain in favor according to our weekly oriented technical analysis include Managed Healthcare, Retailers (RTH), Gold (GLD), Semiconductors (SMH), Agriculture (MOO), Oil Service (OIH), Real Estate (IYR), Transportation (IYT), Coal (KOL), Internet Related (HHH), and Steel (SLX). Take note that the KOL and HHH are positive changes of opinion from the previous letter. Use price weakness to increase long exposure or to initiate long trades.
Sectors that we currently have neutral opinions on include the Large Integrated Oil companies (XOI).
Sectors that we believe to be currently vulnerable to downside pricing pressure are the Natural Gas (UNG), Crude Oil (USO), Homebuilding (XHB), Pharmaceutical (PPH), and Financials (XLF).
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-92.02 (I-share 7-10 year Treasury bond) advanced 0.90% for the week as the yield on the 10- year treasury decreased from 3.44% to 3.34%. For comparative reference the yield on the 10-year Treasury began the 2009 trading year at 2.24%. The IEF is entering week five of a “buy” signal. The weekly closing price support level in order to maintain our current “buy” signal shall remain 90.98. Any weekly closing price below 90.98 will negate our current “buy” signal for the IEF. The IEF stalled once again last week at the 92.00 price resistance area. Any weekly closing price significantly above the 92.00 level will indicate further potential upside to the 94.00 – 95.00 area. 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-14.53) finished the trading week with a 2.18% advance. The XLF is now positive by 16.05% to date for the 2009 trading year. The XLF is entering week two of a “sell” signal. Our weekly closing price resistance shall remain at 14.75. Any weekly closing price above 14.75 will negate our current “sell” signal for the XLF. Our “sell” signal issued last week for MetLife (MET-38.83) has been aborted. Weekly “sell” signals continue to exist for XLF components J.P. Morgan (JPM-42.50), Bank of
B. Builders
The Homebuilder exchange traded fund (XHB-15.56) advanced 3.18% for the week. The 2009 year-to-date performance of the XHB currently stands at a positive 30.86%. The XHB is entering week two of a “sell” signal. Our weekly closing price resistance level in order to maintain our current “sell” signal for XHB shall remain at 15.89. Any weekly closing price above the 15.89 resistance level will negate our fresh “sell” signal in the XHB. Weekly “sell” signals remain in place for XHB components D R Horton (DHI-12.69), Pulte Homes (PHM-12.30), and Ryland Group (RYL-22.74). XHB components that continue to reside in weekly “buy” mode include, Toll Brothers (TOL-21.69), KB Homes (KBH-18.70), and Lennar (LEN-15.71). It is week two of a “sell” signal; continue to use extended price strength in above negatively mentioned names to reduce long exposure and or to initiate short trades.
B. Semiconductor
The Semiconductor group (SMH-25.75) advanced 1.02% for the week. The SMH performance for 2009 to date stands at a positive 46.22%. The SMH is entering week nine of “buy” mode. Our weekly price support level shall be raised to the 25.00 level. Any weekly closing price below 25.00 will negate our current “buy” signal for the SMH. Weekly “buy” signals remain prevalent in SMH components Intel (INTC-19.51),
D. Retailers
The Retail sector (RTH-87.85) finished the trading week with a 0.83% advance. The 2009 performance of the RTH currently stands at a positive 16.91%. The RTH is entering the ninth week of a “buy” signal. Our weekly closing price support level for the RTH shall be raised to 86.47. Any weekly closing price below 86.47 will negate our current “buy” signal for the RTH. RTH components that continue to enjoy favorable weekly status include Target (TGT-47.95), Home Depot (HD-27.34), Walgreen’s (WAG-34.08), BestBuy (BBY-39.76), WalMart (WMT-50.72), and Kohl’s (KSS-55.18). RTH component Sears Holding’s (SHLD-64.18) shall remain on our “sell” list at this time. Take note that a quarterly earnings report is due in the coming week from BBY. Although the trend remains favorable the risk/reward equation does not appear quite as favorable from current price levels; caution is urged as proper long trade entry is critical at this juncture.
E. Steels
The Steel sector (SLX-51.46) finished the week with a 7.97% advance. The current 2009 trading year return for the SLX is a positive 75.21%. The SLX is entering the ninth 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. Fresh weekly “buy” signals have been generated in SLX components Nucor (NUE-46.37), Steel Dynamics (STLD- 17.14) and Arcelor Mittal (MT-39.67). A weekly “buy” signal remains in place for SLX component
F. Pharmaceuticals and Healthcare
The Pharmaceutical group (PPH-64.55) advanced 1.46% last week. The current 2009 return for the PPH stands at a positive 5.25%. The PPH is entering week two of a “sell” signal. Our weekly price resistance level shall remain at 64.66. Any weekly closing price above 64.66 will negate our current weekly “sell” signal for the PPH. A fresh weekly “buy” signal has been generated in PPH component Merck (MRK-32.54). The “buy” signal for MRK reverses a “sell” signal issued in our previous letter. Weekly “buy” signals remain in place for Johnson & Johnson (JNJ-60.42), Abbott Lab’s (ABT-46.83), and GlaxoSmithKline (GSK-39.39). Eli Lilly (LLY-32.82) and Pfizer (PFE-16.25) shall remain on our “sell” list at this time. It is week two of a “sell” signal; use extended price strength in the PPH and above mentioned negative components to reduce long exposure and or to initiate short trades.
III. Gold
GLD (streetTracks gold index) – The GLD (98.78) advanced 1.28% on the week. For the 2009 trading year the GLD currently rests with a positive return of 14.17%. The GLD is entering week two of a “buy” signal. Our weekly closing price support level in order to maintain our current “buy” signal shall be raised to 96.00. Any weekly closing price below 96.00 will negate our current “buy” signal for the GLD. A new 52-week closing high for the GLD has left it resting at the upper end of a thirty-week trading range defined as 99.00 on the upside and 85.00 on the downside. Continued weakness in the U.S. Dollar will provide the fuel for a potentially powerful upside break-out for the GLD from current price levels.
IV. Energy- (Oil, Oil Service, Nat’l Gas, Coal)
The Large-Cap Integrated Oil space (XOI-1020.83) closed out the trading week with a 3.97% advance. The XOI is now positive by 4.20% for the 2009 trading year. The XOI is entering week three of a “buy” signal. Our weekly price support in order to maintain our current weekly “buy” signal shall be raised to 981.88. Any weekly closing price below 981.88 will negate our current “buy” signal for the XOI. A fresh weekly “buy” signal has been triggered in Suncor Energy (SU-34.02). Weekly “buy” signals remain in place for XOI components British Petroleum (BP-54.58) and Conoco-Phillips (COP-45.96). Weekly “sell” signals remain in place for XOI components Exxon-Mobil (XOM-69.98) and Chevron-Texaco (CVX-70.75). We shall remain of the opinion that there are too many divergent cross currents in this sector at this time. We shall keep our neutral stance for now until the divergences are resolved.
The Oil Service Index (OIH-106.03) advanced 6.28% this past trading week. The 2009 year to date return for the OIH stands at a positive 52.75%. The OIH is entering week nine of a “buy” signal. Our weekly closing price support level shall remain at 105.01. Any weekly closing price below 105.01 will negate our current weekly “buy” signal for the OIH. Fresh weekly “buy” signals have been generated in OIH components Schlumberger (SLB-60.39), Baker Hughes (BHI-37.58), Ensco (ESV-40.89), and Transocean (RIG-81.49). A weekly “buy” signal remains in place for OIH component Halliburton (HAL-26.10). Our previous concerns regarding internal component weakness for the OIH have been proven unwarranted as across the board price strength this past week has resolved these concerns to the upside. An upside eclipse of the 116.00 area may set off a potential upside run toward the 140.00 area.
Natural Gas (UNG-10.59) advanced 11.01% this past week. The current 2009 performance of the UNG is a negative 54.29%. The UNG is entering week five of a “sell” signal. Our weekly price resistance level shall remain at 11.01. Any weekly closing price above 11.01 will negate our current “sell” signal for the UNG. A nice price rebound this past week for the UNG but not quite enough for an upside opinion change. A weekly closing price above 11.01 for the beleaguered UNG will be an upside opinion changer according to our evaluation.
The Coal Sector (KOL-29.43) advanced by 5.60% this past week. Year-to-date the KOL is positive by 97.64%. Last week we rated the KOL as neutral due to the indecisive price action. Our concerns have been resolved to the upside as the KOL appears poised to work higher from current price levels. Our weekly closing price support level in order to maintain favorable status shall remain at the 27.32 price level. Any weekly closing price below 27.32 would trigger a change of opinion from positive to negative for the KOL.
V. Dow 30 Analysis
Our Weekly Trend Indicator (WTI) measures in at +12, an increase from the previous week reading of +8. Currently 70.0% of the thirty Dow Jones Industrial components have favorable weekly chart formations; this is an increase from 63.0% in the prior week. The Dow Jones Industrial average advanced 1.74% for the week to 9605.41. The current return for the 2009 trading year stands at a positive 9.44%.
The S&P 500, as measured by the SPY (104.77), advanced 2.66% for the week. The 2009 trading year return for the SPY is positive by 16.10%. Small caps issues, as measured by the IWM (IShares Russell 2000 Index Fund- 59.42), advanced 4.15% for the week. The IWM year to date return is currently a positive 20.67%.
The DIA (96.22) closed out the week with a 1.87% advance and closed above our weekly price resistance level thereby reversing our “sell” signal issued just one week ago. We shall reluctantly accept the reality that the DIA is once again in weekly “buy” mode. Our weekly closing price support level in order to maintain said weekly “buy” signal shall be set at 93.30. Any weekly closing price below 93.30 will negate our fresh “buy” signal for the DIA. The extremely choppy trading action of the past two weeks has made the prognostication of future direction a very difficult task. All that can be currently stated is that our technical discipline has reversed direction and that our weekly “sell” call issued last week has been aborted. The ongoing battle between the bulls and the bears has once again shifted in favor of the bulls with the 100.00 price level a distinct upside possibility for the DIA.
Fresh weekly buy signals generated: AA, CSCO, DIS, MRK
Fresh negative weekly signals generated: KFT, MCD
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, CAT, CSCO, DD, DIS, GE, HD, HPQ, INTC, JNJ, KO, MMM, MRK, MSFT, T, TRV, UTX, VZ, WMT
Dow 30 stocks with negative weekly signals:
BAC, CVX, IBM, JPM, KFT, MCD, PFE, PG, XOM
· Underline names have changed from previous week*
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VI. KEY EVENTS IN THE WEEK AHEAD:
Monday, September 14
Economic
Earnings
Before: FMCN, SCMR
After: PLL
Events
MAPP Presentation of Phase 3 LEVADEX data
POOL Analyst Meeting
HUM, ABT, GILD, MHS at Morgan Stanley Global Healthcare Conf.
ACGL, AWAC, FSR, HCII at Fox-Pitt, Kelton Inc
FFIN, GBCI at SourceMedia
HTSX, SNDK, STAR, DMAN at Deutsche Bank Securities Technology Conf.
ADSK, FLWS, NVTL, SAP at ThinkEquity Growth Conf.
FED: Fed's Duke; Fed's Lacker; Fed's Yellen; $29 bln 6-month Treasury Bill Auction; $29 bln 3-month Treasury Bill Auction
Tuesday, September 15
Economic
Earnings
Before: BBY, CBRL, RAIL, GIGM, KR
After: ADBE, CGA
Events
| BAM Investor Day ICXT Investor Day AMP, BAC, MS, JPM @ Barclays Capital Global Financial Services Conf. UNH, AET, GSK, BMRN @ Morgan Stanley Global Healthcare Conf. SYNA, MSFT, SAP, BRCM Jefferies & Co. Technology Conf. BCE, RCI, TRI @ BMO Capital Markets 2009 Media & Telecom Conf. VR, RNR, PRE, AHL @ Fox-Pitt, Kelton Inc EXP, USG, CAT, DOW, POT @ JP Morgan Diversified Industries Conf. TWC, TIVO, IPG, BIDU @ Goldman Sachs Communacopia Conference MONG, CYT, WLK, TRA @ Credit Suisse Group Chemical Conf. BIDU, AOB, WATG @ Susquehanna International Group CRM, GILD, RAX, BCSI @ Think Equity Growth Conf. CF, HUN, LZ, PX @ Keybanc Capital Markets Basic Materials Conf. NTAP, MU, JDSU, MSFT, GLW @ Deutsche Bank Securities Technology Conf. BKI, SMSI @ Wedbush Morgan Securities New Mobile Network Conf. RGLD @ Denver Gold Forum |
Wednesday, September 16
Economic
Earnings
Before: ZLC
After: APOG, CTAS, CKR, CLC, DBRN, DDMX, MLHR, ORCL, OPB
Events
MT Investor Day in
BAX 2009 Investor Conf.
BHP Analyst Meeting; SLE Meet the Management Analyst Day
DBD Investment Community Conf.
ALTI Analyst Day at PJM Interconnection
KNXA Analyst Meeting
CFL Analyst/Investor Day
MXIM Products Analyst Meeting
ARW, NFLX, BRCM, YHOO at Deutsche Bank Securities Technology Conf.
WFC, FITB, CME, COF at Barclays Capital Global Financial Services Conf.
NS, EPD, EEP, ETP at National Association of Publicly Traded Partnerships Master Limited Partnerships Investor Conf.
MWV, LPX, IP at UBS Global Paper and
LVLT, VIA, IACI, SVVS at Goldman Sachs Communacopia Conference
IMAX, INFA, PEGA, MDP Roth Capital Partners Media/Software Investor Event
CKR, CPKI, CPLA, URBN at RBC Capital Markets Consumer Conf.
JAZZ, SGEN, DEPO, VVUS at BioCentury `NewsMakers in the Biotech Industry`
POL, DOW, SOA, CF at Credit Suisse Group Chemical Conf.
WLK, OLN, GTI, MLM at Keybanc Capital Markets Basic Materials Conf.
USG, ARRS, TKLC, ARB at CL King and Associates Best Ideas Conf.
ATO, CNP, ED, PNY at American Gas Association (AGA) Mini Forum
CML, SCLN, ELX, VPHM; ThinkEquity Growth Conf.
BEZ, ETN at Sterne Agee Best Ideas Conf.
Thursday, September 17
Economic
Earnings
Before: CCL, DFS, FDX, MCS, PIR, SMTS
After: CMTL, HIS, PALM, PSEM, TSCM
Events
GE Security Analyst Meeting
ACS Investor Day
TSRA Analyst Day
BHI Analyst Conf.
ALC @ UBS Health Care REITs & Operators Conf.
SVVS, EQIX, TMRK, LVLT @ Jefferies & Co. Communications Conf.
SVVS, LVLT, ABVT, RAX @ Goldman Sachs Communacopia Conf.
JOSB, QDEL, JOYG, NTY @ CL King and Associates Best Ideas Conf.
STRA, BPI,
SKT, BBY, BJRI, HAIN @ RBC Capital Markets Consumer Conf.
FWRD, GWR, HRZ, WERN @ Morgan Keegan Industrial/Transportation Conf.
DD, PX, HUN, FMC @ Credit Suisse Group Chemical Conf.
FWLT, URS, ORN, PWR @ D.A. Davidson Engineering & Construction, Construction Products Conf.
MDAS, HMSY, NVDA, FSYS @ Think Equity Growth Conf.
CLR, GEOI, INKN, GMXR @ Equities Magazine West Coast Energy Conf.
Friday, September 18
Economic
08:30
Earnings
Before:
After:
Events
AXE, GBX, FSIN, FAST at Morgan Keegan Industrial/Transportation Conf.
LAYN, MDR, MYRG, ENG at D.A. Davidson Engineering & Construction, Construction Products Conf.
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