equityletter.com 9/21/09
Note: Event Calendar is located at bottom of page
I. General Commentary
As correctly stated in our previous letter, the positive bias from a quadruple options expiration provided the impetus for the equity markets to continue their ascension to the bewilderment of many a money manager. With the clarity of hindsight we get the feeling that the incredible amount of monetary stimulus provided by the Federal government has successfully propped up equity prices and created a game of financial “hot potato”. The great market rebound from the depths of despair reached in March of this year has left the majority of money managers and hedge funds well behind the performance curve. These under performing funds whose main concern entering this year was capital preservation are now, with great anxiety, under pressure to provide capital appreciation regardless of fundamentals. We remain of the opinion that this low volume, wall of worry advance will continue until we witness a large trading volume “upside capitulation” from the non-believing, under performing funds. These funds, unfortunately, will be the ones left holding the “hot potato”.
The major market averages under our coverage that we currently rate with a positive weekly technical indications are the SPDR- S&P 500 (SPY-106.72), IShares Russell 2000 Index Fund (IWM-61.91), Diamonds Trust (DIA-98.11), NASDAQ Composite (COMP-2132.86), Powershares QQQQ Trust (QQQQ-42.44), and the I-share 7-10 year Treasury bond (IEF-91.18) We currently have a negative view on the U.S. $ Index (UUP-22.76).
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), Natural Gas (UNG), Crude Oil (USO), Homebuilding (XHB), Financials (XLF), and Steel (SLX). Take note that the XLF, XHB, UNG, and USO 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 Pharmaceuticals (PPH).
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-91.18 (I-share 7-10 year Treasury bond) declined 0.91% for the week as the yield on the 10- year treasury increased from 3.34% to 3.47%. For comparative reference the yield on the 10-year Treasury began the 2009 trading year at 2.24%. The IEF is entering week six 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-15.14) finished the trading week with a 4.52% advance. The XLF is now positive by 20.92% to date for the 2009 trading year. The XLF has closed above our weekly price resistance level therefore aborting our “sell” signal that lasted a mere two weeks. A new weekly positive trend is once again now in place. Our weekly closing price support shall be set at 14.33. Any weekly closing price below 14.33 will negate our fresh “buy” signal for the XLF. Concurrent weekly “buy” signals have been triggered in XLF components J.P. Morgan (JPM-44.95), Morgan Stanley (MS-31.38), and
B. Builders
The Homebuilder exchange traded fund (XHB-16.10) advanced 3.68% for the week. The 2009 year-to-date performance of the XHB currently stands at a positive 34.39%. The XHB has closed above our weekly price resistance level therefore aborting our “sell” signal that lasted only two weeks. A fresh weekly “buy” signal has been generated for the XHB. Our weekly closing price support level in order to maintain our fresh “buy” signal for XHB shall be set at 15.23. Any weekly closing price below the 15.23 support level will negate our fresh “buy” signal in the XHB. A fresh weekly “buy” signal has been generated in XHB component Ryland Group (RYL-24.05). XHB components that continue to reside in weekly “buy” mode include, Toll Brothers (TOL-22.20), KB Homes (KBH-20.21), and Lennar (LEN-16.54). Weekly “sell” signals remain in place for XHB components D R Horton (DHI-13.25) and Pulte Homes (PHM-12.71). Take note that quarterly earnings reports are due in the coming week from LEN and KBH. A change of trend has been signaled from negative to positive; use price weakness in positively mentioned names to increase long exposure and or to initiate long trades.
B. Semiconductor
The Semiconductor group (SMH-25.57) declined 0.68% for the week. The SMH performance for 2009 to date stands at a positive 45.20%. The SMH is entering week ten of “buy” mode. Our weekly price support level shall remain at 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-19.56),
D. Retailers
The Retail sector (RTH-88.88) finished the trading week with a 1.17% advance. The 2009 performance of the RTH currently stands at a positive 18.28%. The RTH is entering the tenth week of a “buy” signal. Our weekly closing price support level for the RTH shall be raised to 87.21. Any weekly closing price below 87.21 will negate our current “buy” signal for the RTH. A fresh weekly “buy” signal has been generated in Sears Holding’s (SHLD-68.09). Fresh weekly “sell” signals have been triggered in WalMart (WMT-50.72) and BestBuy (BBY-39.76). RTH components that continue to enjoy favorable weekly status include Target (TGT-47.95), Home Depot (HD-27.34), Walgreen’s (WAG-34.08), and Kohl’s (KSS-55.18). While it is no secret that we do not like the risk/reward scenario for the RTH at current price levels the weekly trend remain a favorable one with upside potential to the 93.00 area.
E. Steels
The Steel sector (SLX-54.20) finished the week with a 5.32% advance. The current 2009 trading year return for the SLX is a positive 84.54%. The SLX is entering the tenth week of a “buy” signal. Our weekly closing price support level for the SLX shall be raised to 50.34. Any weekly closing price below 50.34 will negate our current “buy” signal for the SLX. Weekly “buy” signals remain in place for SLX components
F. Pharmaceuticals and Healthcare
The Pharmaceutical group (PPH-64.56) advanced 0.02% last week. The current 2009 return for the PPH stands at a positive 5.26%. The PPH is entering week three 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. Weekly “buy” signals remain in place for Merck (MRK-31.88), Johnson & Johnson (JNJ-60.78), Abbott Lab’s (ABT-45.97), and GlaxoSmithKline (GSK-39.10). Eli Lilly (LLY-32.86) and Pfizer (PFE-16.51) shall remain on our “sell” list at this time. It is week three 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 (98.67) declined 0.11% on the week. For the 2009 trading year the GLD currently rests with a positive return of 14.04%. The GLD is entering week three of a “buy” signal. Our weekly closing price support level in order to maintain our current “buy” signal shall be raised to 97.56. Any weekly closing price below 97.56 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-1048.28) closed out the trading week with a 2.69% advance. The XOI is now positive by 7.00% for the 2009 trading year. The XOI is entering week four of a “buy” signal. Our weekly price support in order to maintain our current weekly “buy” signal shall be raised to 1008.97. Any weekly closing price below 1008.97 will negate our current “buy” signal for the XOI. A fresh weekly “buy” signal has been triggered in Chevron-Texaco (CVX-72.64). Weekly “buy” signals remain in place for XOI components British Petroleum (BP-54.79), Suncor Energy (SU-37.03), and Conoco-Phillips (COP-46.80). A weekly “sell” signal remains in place for XOI component Exxon-Mobil (XOM-69.99). The XOI currently rests slightly below the major price resistance area of 1059.00. The 1059.00 price level is a very important price resistance level; any weekly close above this level will indicate much higher prices to come. We shall remain of the opinion that there are too many technically 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-119.21) advanced 5.81% this past trading week. The 2009 year to date return for the OIH stands at a positive 61.64%. The OIH is entering week ten of a “buy” signal. Our weekly closing price support level shall be raised to 109.68. Any weekly closing price below 109.68 will negate our current weekly “buy” signal for the OIH. Weekly “buy” signals remain in place for OIH components Halliburton (HAL-28.15), Schlumberger (SLB-61.85), Baker Hughes (BHI-44.01), Ensco (ESV-41.25), and Transocean (RIG-86.45). Another strong week for a strong sector with the next upside target for the OIH being the gap filling 124.75 price level.
Natural Gas (UNG-11.64) advanced 9.92% this past week. The current 2009 performance of the UNG is a negative 49.76%. The UNG has closed above our weekly price resistance level therefore indicating a weekly change of trend from negative to positive. Our weekly price support in order to maintain said “buy” signal shall be set at 10.23. Any weekly closing price below 10.23 will negate our fresh “buy” signal for the UNG. The bald-headed step child, serial under performer of the energy sector has indicated a weekly change of trend; use any price weakness approaching the 10.23 price level to increase long exposure and or to initiate long trades.
The Coal Sector (KOL-31.75) advanced by 7.88% this past week. Year-to-date the KOL is positive by 113.23%. Our weekly closing price support level in order to maintain favorable status shall be raised to the 28.90 price level. Any weekly closing price below 28.90 would trigger a change of opinion from positive to negative for the KOL. The next level of price resistance for the KOL is the 35.00 – 37.00 area.
V. Dow 30 Analysis
Our Weekly Trend Indicator (WTI) measures in at +16, an increase from the previous week reading of +12. Currently 76.0% of the thirty Dow Jones Industrial components have favorable weekly chart formations; this is an increase from 70.0% in the prior week. The Dow Jones Industrial average advanced 2.24% for the week to 9820.20. The current return for the 2009 trading year stands at a positive 11.89%.
The S&P 500, as measured by the SPY (106.72), advanced 2.35% for the week. The 2009 trading year return for the SPY is positive by 18.26%. Small caps issues, as measured by the IWM (IShares Russell 2000 Index Fund- 61.91), advanced 4.19% for the week. The IWM year to date return is currently a positive 25.73%.
The DIA (98.11) closed out the week with a 2.15% advance and is entering the second week of a “buy” signal. Our weekly closing price support level in order to maintain said “buy” signal shall be raised to 95.40. Any weekly closing price below 95.40 will negate our current “buy” signal for the DIA. Aided by the positive bias from a quadruple options expiration, the DIA march of the bulls continued northward last week. Although once again appearing in an over bought stage and vulnerable to a swift downside correction to the 94.40 area, the weekly trend of the DIA remains a favorable one. The upside target remains the 100.00 area with potential to possibly fill a old downside gap from September 2008 at the 103.09 price level.
Fresh weekly buy signals generated: CVX, IBM, JPM, MCD, PG
Fresh negative weekly signals generated: TRV, VZ, WMT
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, CVX, DD, DIS, GE, HD, HPQ, IBM, INTC, JNJ, JPM, KO, MCD, MMM, MRK, MSFT, PG, T, UTX
Dow 30 stocks with negative weekly signals:
BAC, KFT, PFE, TRV, VZ, WMT, XOM
· Underline names have changed from previous week*
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VI. KEY EVENTS IN THE WEEK AHEAD:
Monday, September 21
Economic
Earnings
Before: LEN
After: SNX
Events
EMC TechTalk
A, ARRY, TMO, DHR at UBS Global Life Sciences Conference
FED: $29 bln 3-month and 6-month Treasury Bill Auctions
Tuesday, September 22
Economic
Earnings
Before: KMX, CCL, CAG, FDS, RAIL, GIGM, PRGS
After: AIR, FUL
Events
| LOW Analyst Meeting |
Wednesday, September 23
Economic
Earnings
Before: AZO, GIS
After: BBBY, CTAS, CMTL, CPRT, OHB, PAYX, RHT
Events
ABT Investor Briefing
FED: FOMC Policy/Rate Decision, $40 bln 5-yr Treasury Note Auction
Thursday, September 24
Economic
Earnings
Before: COMS, AM, CRAI, MKC, NEOG, RAD, SCHL, SCS, TXI, MTN, ZLC
After: ALOG, CBK, FINL, PSEM, RIMM, TSCM, TIBX
Events
HPQ Analyst Day
DNDN Analyst Day
CNH, TRA at Sterne, Agee AG Conference
FED:$29 bln 7-yr Treasury Note Auction
Friday, September 25
Economic
Earnings
Before: AZZ, KBH
After:
Events
UFI Investor Update Meeting
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