equityletter.com 9/28/09

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

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 9/28/09

 

 

     Note:  Event Calendar is located at bottom of page

      

I.                  General Commentary

 

There is one thing for certain in this current equity market atmosphere.  The disposition, or market mood if you will, can change in a split second.  All was well with the “wall of worry”, “liquidity driven” equity market recovery until, after reaching new highs for the 2009 trading year on Tuesday; the mood swiftly changed Wednesday afternoon immediately following the Federal Open Market Committee (FOMC) interest rate decision.  While the FOMC left interest rates at historically low levels as expected and intimated the need to do so for the foreseeable future, the equity markets went in to a freefall which lasted throughout the duration of the week.  The simple truth of the matter is that it appears currency speculators are beginning to detect the future eventual removal of a portion of the historic amount of liquidity provided by the U.S. Federal Reserve.  The market retreat of this past week was in direct response to the unanticipated strengthening of the U.S. Dollar.  Clearly, three days of appreciation for the greenback do not warrant a declaration that the end of the decline of the U.S. currency is upon us, but a renewed upside heartbeat has certainly raised an eyebrow or two.  The sharp three-day retreat for the stock market exposes the fragile nature of the rally which has been directly correlated to the decline of the U.S. Dollar.  Any further strength of the U.S. Dollar in the coming week will cause us to reconsider our current negative view for the anemic currency.  Further dollar appreciation will also threaten to derail the remarkable six-month equity market recovery that has astounded many a market pundit. 

The week ahead brings two potential volatility increasing events, the end of quarter and a monthly jobs report.  While our technical work detailed below has yet to signal a top in place for the major U.S. market indices, pockets of individual sector weakness indicate that the ride is about to get a tad more turbulent.

   The major market averages under our coverage that we currently rate with a positive weekly technical indications are the SPDR- S&P 500 (SPY-104.45), IShares Russell 2000 Index Fund (IWM-59.83), Diamonds Trust (DIA-96.74), NASDAQ Composite (COMP-2090.92), Powershares QQQQ Trust (QQQQ-41.70), and the I-share 7-10 year Treasury bond (IEF-92.18)  We currently have a negative view on the U.S. $ Index (UUP-22.81).

 

Sectors within our coverage universe that remain in favor according to our weekly oriented technical analysis include Semiconductors (SMH), Agriculture (MOO), Oil Service (OIH), Real Estate (IYR), Coal (KOL), Internet Related (HHH), Natural Gas (UNG), Financials (XLF), and Steel (SLX).  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), Managed Healthcare, Retailers (RTH), Gold (GLD), Transportation (IYT) Crude Oil (USO), Homebuilding (XHB).  *Take note that Managed Care, RTH, GLD, IYT, USO, and XHB are all negative opinion changes from the previous letter.*  

 

Sector analysis below will provide information as to where to best allocate funds at this time.

 

For access to Equity Letter individual trading positions and ideas contact Richard Reilly at rreilly123-2@comcast.net

 

Please frequent http://www.equityletter.com/

 

Current Technical Analysis Coverage Universe

 

ETF’s & Indices: SPY, IWM, UUP, IEF, QQQQ, DIA, COMPQ, XLF, IYR, XHB, XOI, OIH, UNG, USO, PPH, IYT, SMH, MOO, HHH, RTH, SLX, GLD

DOW JONES INDUSTRIAL AVERAGE & 30 COMPONENTS

Financial (XLF): JPM, BAC, WFC, C, USB, GS, MS, AXP, CME, MET, BK

Homebuilders (XHB): DHI, PHM, LEN, TOL, RYL, KBH

Semiconductors (SMH): INTC, TXN, AMAT, MU, SNDK, NVLS, ADI

Retailers (RTH): WMT, HD, TGT, WAG, SHLD, BBY, KSS

Steel (SLX): X, NUE, MT, STLD

Pharmaceuticals (PPH): PFE, MRK, JNJ, GSK, ABT, LLY

Oil (XOI): XOM, CVX, COP, BP, SU, PXP

Oil Service (OIH): SLB, HAL, BI, RIG, ESV, II

Natural Gas (UNG): EP, APA, CHK, APC, XTO

Coal (KOL): ACI, BTU, MEE, CNX

Transportation (IYT): FDX, UPS, CHRW, BNI, CSX, NSC

Managed Care: UNH, WLP, HUM, AET

Gold: GLD, NEM, AU

Agriculture (MOO): MOS, MON, POT, DE

High Beta: AAPL, GOOG, RIMM, MA, FSLR

 

II.               Sector Analysis

                                             

The IEF-92.18 (I-share 7-10 year Treasury bond) advanced 1.10% for the week as the yield on the 10- year treasury decreased from 3.47% to 3.32%.  For comparative reference the yield on the 10-year Treasury began the 2009 trading year at 2.24%.  The IEF is entering week seven 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.  A marginal weekly closing price above the 92.00 price level for the IEF this past week leaves it just below an important price resistance level, 92.50.  Price strength in the coming week that results in a weekly closing price above 92.50 will indicate an upward move to the 94.00 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-14.59) finished the trading week with a 3.63% decline. The XLF is now positive by 16.53% to date for the 2009 trading year.  The XLF is entering week two of a “buy” signal.  Our weekly closing price support shall remain 14.33.  Any weekly closing price below 14.33 will negate our current “buy” signal for the XLF.  Fresh weekly “sell” signals have been generated in XLF components MetLife (MET-36.92) and American Express (AXP-34.77).   XLF components that continue to remain in “buy the dip” mode include Goldman Sachs (GS-179.50), Bank of New York (BK-29.07), Wells Fargo (WFC-28.19), J.P. Morgan (JPM-43.65), Morgan Stanley (MS-30.55), Chicago Mercantile Exchange (CME-293.47) and U.S. Bancorp (USB-22.76).   Weekly “sell” signals remain in place for XLF components Bank of America (BAC-16.60) and Citigroup (C- 4.38).  A sharp three-day downside swoon is testing the resolve of the bulls as the trading week closed very near our bullish price support level; continue to use extended price weakness in favorably mentioned names to increase long exposure and or to initiate long trades.

    

          B.  Builders

 

 The Homebuilder exchange traded fund (XHB-14.89) declined 7.52% for the week. The 2009 year-to-date performance of the XHB currently stands at a positive 24.29%.  The XHB has closed below our 15.23 weekly price support level therefore generating a fresh “sell” signal.  Our weekly closing price resistance level in order to maintain our fresh “sell” signal for XHB shall be set at 16.17.  Any weekly closing price above the 16.17 resistance level will negate our fresh “sell” signal in the XHB.  Fresh weekly “sell” signals have been generated in XHB components Ryland Group (RYL-21.09), Toll Brothers (TOL-19.96), KB Homes (KBH-16.96), and Lennar (LEN-14.59).  Weekly “sell” signals remain in place for XHB components D R Horton (DHI-11.57) and Pulte Homes (PHM-11.18).  The past three weeks of trading in this group can only be characterized as violent, whip saw price action. Any downside violation of the 14.00 price support level for the XLF will indicate further weakness down to the 12.50 area.   A change of trend has once again been signaled from positive to negative; use price strength in negatively mentioned names to reduce long exposure and or to initiate short trades.

 

B.     Semiconductor

 

The Semiconductor group (SMH-25.39) declined 0.70% for the week.   The SMH performance for 2009 to date stands at a positive 44.17%.   The SMH is entering week eleven 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-19.37), Applied Materials (AMAT-13.10), Micron Technology (MU-8.10), Novellus (NVLS-20.72), and SanDisk (SNDK-21.25).  A fresh weekly “sell” signal has been generated in SMH component Texas Instruments (TXN-24.06).  Analog Devices (ADI-27.58) shall remain on our “sell” list at this time.  Despite the fact that the SMH has been down marginally the past two weeks, the weekly trend remains a favorable one as the Semi’s continue to appear poised to work higher.  Take note that a quarterly earnings report is due in the coming week from MU.  Continue to use extended price weakness in favorably mentioned names to increase long exposure and or to initiate long trades.

 

D.   Retailers 

 

          The Retail sector (RTH-86.70) finished the trading week with a 2.44% decline.  The 2009 performance of the RTH currently stands at a positive 15.38%.  The RTH has closed below our 87.21 weekly price support level therefore indicating a change of weekly trend from positive to negative.  A fresh “sell” signal has been generated.  Our weekly closing price resistance level for the RTH in order to maintain said “sell” signal shall be set at 89.24.  Any weekly closing price above 89.24 will negate our fresh “sell” signal for the RTH.  Concurrent fresh weekly “sell” signals have been generated in RTH components Home Depot (HD-26.85), Target (TGT-46.29) and Walgreen’s (WAG-33.68).  RTH components that have been, and shall remain on our weekly “sell” list include WalMart (WMT-49.47) and BestBuy (BBY-37.30).  RTH components that continue to enjoy favorable weekly status include Sears Holding’s (SHLD-65.05) and Kohl’s (KSS-54.37).  Take note that a quarterly earnings report is due in the coming week from WAG.  A change of weekly trend has been signaled; use extended price strength in the RTH and above negatively mentioned components to reduce long exposure and or to initiate short trades.

 

E.    Steels

 

The Steel sector (SLX-52.17) finished the week with a 3.75% decline.  The current 2009 trading year return for the SLX is a positive 77.63%.  The SLX is entering the eleventh week of a “buy” signal.  Our weekly closing price support level for the SLX shall be raised to 51.70.  Any weekly closing price below 51.70 will negate our current “buy” signal for the SLX.  Fresh weekly “sell” signals have been generated in Steel Dynamics (STLD- 16.61) and Arcelor Mittal (MT-36.97).  Weekly “buy” signals remain in place for SLX components U.S. Steel (X-46.63) and Nucor (NUE-46.85).  A slight hint of U.S. Dollar strength this past week sent the Steel sector in to a quick three-day slide.  Further U.S. Dollar strength will not be a welcome sight for this highly volatile group.  Although our weekly “buy” signal remains in place for the SLX we are concerned about internal component price weakness from MT and STLD.  We recommend that long positions tighten up protective sell-stops in the coming week as price corrections in this sector can be quite fast and very furious.

 

F.    Pharmaceuticals and Healthcare

 

          The Pharmaceutical group (PPH-64.45) declined 0.17% last week. The current 2009 return for the PPH stands at a positive 5.08%.  The PPH is entering week four 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 “sell” signal has been generated in influential PPH component Merck (MRK-31.25).  Weekly “buy” signals remain in place for Johnson & Johnson (JNJ-60.62), Abbott Lab’s (ABT-47.33), and GlaxoSmithKline (GSK-39.25).  Eli Lilly (LLY-32.68) and Pfizer (PFE-16.40) shall remain on our “sell” list at this time.  It is week four 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 (97.00) declined 1.69% on the week.  For the 2009 trading year the GLD currently rests with a positive return of 12.11%.  The GLD has closed below our 97.56 price support level thereby generating a fresh “sell” signal.  Our weekly closing price resistance level in order to maintain our fresh “sell” signal shall be set at 99.89.  Any weekly closing price above 99.89 will negate our fresh “sell” signal for the GLD.  The price action this past week for the GLD is indicating a near term rejection of the old price high levels around the 100.35 area.  A near term price retreat down to the 94.00 area appears quite probable at this time.

 

 

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

 

The Large-Cap Integrated Oil space (XOI-1018.66) closed out the trading week with a 2.83% decline.  The XOI is now positive by 3.97% for the 2009 trading year.  The XOI is entering week five of a “buy” signal.  Our weekly price support in order to maintain our current weekly “buy” signal shall remain at 1008.97.  Any weekly closing price below 1008.97 will negate our current “buy” signal for the XOI.  Fresh weekly “sell” signals have been triggered in British Petroleum (BP-52.92) and Conoco-Phillips (COP-45.06).  Weekly “buy” signals remain in place for XOI components Chevron-Texaco (CVX-70.66) and Suncor Energy (SU-34.15).  A weekly “sell” signal remains in place for XOI component Exxon-Mobil (XOM-68.70).  The XOI has once again failed to eclipse 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.  Fresh internal component weakness displayed by COP and BP this past week should give notice that a downside price correction may be forthcoming. 

 

The Oil Service Index (OIH-114.75) declined 3.74% this past trading week.  The 2009 year to date return for the OIH stands at a positive 55.59%.  The OIH is entering week eleven of a “buy” signal.  Our weekly closing price support level shall be raised to 113.38.  Any weekly closing price below 113.38 will negate our current weekly “buy” signal for the OIH.  Weekly “buy” signals remain in place for OIH components Halliburton (HAL-26.74), Schlumberger (SLB-59.48), Baker Hughes (BHI-42.37), Ensco (ESV-41.25), and Transocean (RIG-83.19).  It was a down week for the OIH but the trends continue to remain in a favorable state; continue to use extended price weakness in the OIH and above mentioned components to increase long exposure and or to initiate long trades.

 

Natural Gas (UNG-11.97) advanced 2.84% this past week.  The current 2009 performance of the UNG is a negative 48.33%.  The UNG is entering week two of a “buy” signal.  Our weekly price support in order to maintain said “buy” signal shall remain at 10.23.  Any weekly closing price below 10.23 will negate our current “buy” signal for the UNG.  It is week two of a “buy” signal; use any price weakness approaching the 10.23 price level for proper entry to increase long exposure and or to initiate long trades.

 

The Coal Sector (KOL-30.24) declined by 4.76% this past week.  Year-to-date the KOL is positive by 103.08%.  Our weekly closing price support level in order to maintain favorable status shall remain at 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 +8, a decrease from the previous week reading of +16.  Currently 63.0% of the thirty Dow Jones Industrial components have favorable weekly chart formations; this is a decrease from 76.0% in the prior week.  The Dow Jones Industrial average declined 1.58% for the week to 9665.19.  The current return for the 2009 trading year stands at a positive 10.12%. 

 

The S&P 500, as measured by the SPY (104.45), declined 2.13% for the week.  The 2009 trading year return for the SPY is positive by 15.74%.   Small caps issues, as measured by the IWM (IShares Russell 2000 Index Fund- 58.83), declined 3.13% for the week.  The IWM year to date return is currently a positive 21.50%.

 

          The DIA (96.74) closed out the week with a 1.40% decline and is entering the third week of a “buy” signal.  Our weekly closing price support level in order to maintain said “buy” signal shall be raised to 96.38.  Any weekly closing price below 96.38 will negate our current “buy” signal for the DIA.  Another attempt to eclipse the 100.00 price level was met with a bout of selling as the DIA rejected new high price levels and closed down for the week.  While our “buy” signal remains intact we are concerned that the over bought condition that existed just a week ago is subsiding thereby testing the resolve of the bulls to the downside.  Any trade below the 96.00 support level may trigger additional selling which could swiftly carry the DIA lower to the 94.20 area.

           

Fresh weekly buy signals generated:

 

Fresh negative weekly signals generated: AXP, DIS, HD, MRK

 

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, BA, CAT, CSCO, CVX, DD, GE, HPQ, IBM, INTC, JNJ, JPM, KO, MCD, MMM, MSFT, PG, T, UTX

                 

Dow 30 stocks with negative weekly signals:  

      

           AXP, BAC, DIS, HD, KFT, MRK, PFE, TRV, VZ, WMT, XOM

·        Underline names have changed from previous week*

                             

 

 

VI.    KEY EVENTS IN THE WEEK AHEAD:

Monday, September 28

Economic

Earnings

Before:

After: OHB

Events

FDX Shareowners Meeting
FED: $30 bln. 3-month and $29 bln. 6-month Treasury Bill Auctions

 

Tuesday, September 29

Economic

09:00 Case/Schiller Housing Price Index (Jul.): -14.20% cons.

09:00 Consumer Confidence (Sep.): 57.0 cons.

Earnings

Before: GIGM, PBG, PCH, WAG

After: MDRX, DRI, JBL, LNDC, NKE, PSEM, ZZ, WOR

Events

KNXA, BDSI, CBLI, CRIS at Maxim Group Conference FED: Fed's Fisher

Wednesday, September 30

Economic

08:15 ADP Employment (Sep.): -200K cons.

08:30 GDP-Final (Q2): -1.2% cons.

09:45 Chicago PMI (Sep.): 52.0 cons.

10:30 Crude Inventories: +2.85M prior

Earnings

Before: ATU

After: DMND, LWSN, XRTX

Events

BBI, WIN, LEAP, JAH at Deutsche Bank Securities Leveraged Finance Conf.
JMBA, LTM, ZUMZ at Jefferies Consumer Summit
PXD, SWN, DVN, XTO at Independent Petroleum Association of America (IPAA) OGIS San Francisco Conf.

 

Thursday, October 1

Economic

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

08:30 Personal Spending (Aug.): 1.1% cons.

08:30 Initial Claims: 535K cons.

08:30 Continuing Claims: 6178K cons.

10:00 Construction Spending (Aug.): -0.2% cons.

10:00 ISM Index (Sep.): 54.0 cons.

10:00 Pending Home Sales (Aug.): 1.0% cons.

14:00 Auto Sales (Sep.):

14:00 Truck Sales (Sep.):

Earnings

Before: STZ, CRAI

After: CAN, CREL, DMAN, GPN, BLUD, MU, RECN, SMSC, TSCM

Events

AFL, WYNN, XEC at Deutsche Bank Securities Leveraged Finance Conf.
URBN, GRMN, IMAX, ZUMZ at Thomas Weisel Partners Consumer Conf.
FED: Bernanke Testifies Before House on Regulation

 

Friday, October 2

Economic

08:30 Nonfarm Payrolls (Sep.): -180K cons.

08:30 Unemployment Rate (Sep.): 9.8% cons.

08:30 Avg. Workweek (Sep): 33.1 cons.

08:30 Hourly Earning (Sep.): 0.2% cons.

10:00 Factory Orders (Aug.): 0.5% cons.

Earnings

Before:

After:

Events

WRC Investor Day
FED:Geithner in Istanbul for G-7 Meeting