equityletter.com 10/12/09

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

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 10/12/09

 

 

     Note:  Event Calendar is located at bottom of page

      

I.                  General Commentary

 

Suffice to say that our attempt at calling for a tradable rally for the U.S. Dollar last week was inaccurate as the greenback failed miserably and gold prices soared to new all-time highs.  As far as the U.S. equity markets are concerned what we perceived as a near term, rolling over, potential imminent correction, quickly reversed course and left hoof prints across our bearish backside.  While the hoof prints of the bull were excruciatingly painful we were not terminally gored due to our protective use of “stop” discipline.  The whip-saw price action of the past four weeks has given us cause to move to the sidelines for the time being.  We want to sit back and digest the market response to the slew of third quarter earnings reports that are about to come streaming in.  Will there be any significant revenue growth this quarter to accompany the never-ending serial cost cutting?  Does “better than expected” really mean a good earnings report?  Keep in mind that the same Wall Street analysts who are issuing buy recommendations at current price levels are the same ones who issued” sell” calls at or around the bottom.  The equity market keeps vaulting higher as mutual fund cash levels have decreased, insiders are selling at a record pace, and companies continue to issue secondary stock offerings while the window is still open.  In spite of these factors we shall not “fight the tape” at this time, we will just observe and wait for the next opportunity.

 

   The major market averages under our coverage that we currently rate with positive weekly technical indications are the SPDR- S&P 500 (SPY-107.26) and Diamonds Trust (DIA-98.69).U.S. $ Index (UUP-22.90) and the I-share 7-10 year Treasury bond (IEF-92.77).  The DIA and SPY are positive changes of opinion from the prior letter.  We currently have a negative views on the IShares Russell 2000 Index Fund (IWM-61.42), U.S. $ Index (UUP-22.72), I-share 7-10 year Treasury bond (IEF-91.82), NASDAQ Composite (COMP-2139.28), Powershares QQQQ Trust (QQQQ-42.48).  *Take note that the IEF and UUP are negative changes of opinion from our prior letter.*

 

Sectors within our coverage universe that remain in favor according to our weekly oriented technical analysis include Coal (KOL), Natural Gas (UNG), Retailers (RTH), Pharmaceuticals (PPH), Gold (GLD), and Crude Oil (USO).  *Take note that the RTH, PPH, GLD, and USO are all opinion changes from the prior letter.* Use price weakness to increase long exposure or to initiate long trades.

 

Sectors that we currently rate as neutral include the Financials (XLF), Steel (SLX), Internet Related (HHH), Oil Service (OIH), and Large Integrated Oil (XOI).  *Take note that the XLF, SLX, HHH, OIH, and XOI are all opinion upgrades from the previous letter.*

 

 Sectors that we believe to be currently vulnerable to downside pricing pressure are the Managed Healthcare, Transportation (IYT), Homebuilding (XHB), Semiconductors (SMH), Agriculture (MOO), Real Estate (IYR).   

 

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, SII

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-91.82 (I-share 7-10 year Treasury bond) declined 1.02% for the week as the yield on the 10- year treasury increased from 3.22% to 3.38%.  For comparative reference the yield on the 10-year Treasury began the 2009 trading year at 2.24%.  The IEF has closed below our price support level therefore negating our “buy” signal that lasted for the past eight weeks.  The new weekly closing price resistance level in order to maintain our fresh “sell” signal shall be set at 93.20.  Any weekly closing price above 93.20 will negate our fresh “sell” signal for the IEF.  Supply finally caught up with the bond market as less than stellar auction results brought an eight-week rally to a conclusion.   While we do not see interest rates skyrocketing from current levels it appears that a marginal rise is in the offing.  With a change of weekly trend having been signaled it is time to use price strength to reduce long exposure or to initiate short trades.

 

A.     Financials

 

          The Financial Select Sector Index (XLF-15.24) finished the trading week with a sharp 6.65% advance. The XLF is now positive by 21.72% to date for the 2009 trading year.  The XLF closed one cent below our weekly price resistance level of 15.25 therefore our current “sell” signal remains in place.  Our weekly closing price resistance shall remain at 15.25.  Any weekly closing price above 15.25 will negate our current “sell” signal for the XLF.  Fresh weekly “buy” signals have been generated in XLF components J.P. Morgan (JPM-45.85), Wells Fargo (WFC-29.21), Morgan Stanley (MS-32.09), Citigroup (C- 4.63) and American Express (AXP-34.94).  XLF components that continue to remain in “buy the dip” mode include Goldman Sachs (GS-189.30), Chicago Mercantile Exchange (CME-294.74) and U.S. Bancorp (USB-22.93).   Weekly “sell” signals continue to remain in place for XLF components Bank of America (BAC-17.50), MetLife (MET-38.25) and Bank of New York (BK-28.68).   Take note that the coming week brings quarterly earning reports from XLF components JPM, BAC, C, and GS.  Crosscurrents galore as the XLF barely remains in “sell” mode but internal component strength is trumpeting a bullish tone.  With a host of influential components reporting earnings in the coming week we will step aside and let the dust settle as violent whip saw price action appears to be forthcoming.

    

          B.  Builders

 

 The Homebuilder exchange traded fund (XHB-15.14) advanced 6.17% for the week. The 2009 year-to-date performance of the XHB currently stands at a positive 26.37%.  The XHB is entering week three of a “sell” signal.  Our weekly closing price resistance level in order to maintain our current “sell” signal for XHB shall remain at 15.49.  Any weekly closing price above the 15.49 resistance level will negate our current “sell” signal in the XHB.  Despite the rally of the past week “sell” signals remain in place for XHB components D R Horton (DHI-11.70), Pulte Homes (PHM-10.54), Ryland Group (RYL-21.14), Toll Brothers (TOL-19.46), KB Homes (KBH-16.46), and Lennar (LEN-14.33).  Market rumors regarding the extension of the expiring tax credit for “first time” home-buyers fueled the advance of the builders last week.   The weekly trend remains one of distribution; use price strength in negatively mentioned names to reduce long exposure and or to initiate short trades.

 

B.     Semiconductor

 

The Semiconductor group (SMH-25.89) advanced 6.02% for the week.   The SMH performance for 2009 to date stands at a positive 47.01%.   The SMH is entering week two of a “sell” signal.  Our weekly price resistance level in order to maintain said “sell” signal shall remain at 26.11.  Any weekly closing price above 26.11 will negate our current “sell” signal for the SMH.  A fresh weekly “buy” signals has been generated in SMH component Micron Technology (MU-8.78) reversing a “sell” issued just one week ago.  The only other SMH component that remains in weekly “buy” mode is Intel (INTC-20.17).  Take note that INTC is due to report quarterly earnings in the coming week.  Analog Devices (ADI-27.41), Applied Materials (AMAT-13.22), Novellus (NVLS-21.23), SanDisk (SNDK-21.44) and Texas Instruments (TXN-23.64) all continue to remain on our “sell” list at this time.  The 24.00 critical support price level held last week as the SMH participated in the broad equity market advance.  The earnings report from INTC will dominate the action in the coming week.  Expectations for INTC appear to be somewhat ebullient setting the stock up for a potential “sell the fact” trade.

 

D.   Retailers 

 

          The Retail sector (RTH-90.61) finished the trading week with a 4.86% advance.  The 2009 performance of the RTH currently stands at a positive 20.58%.  The RTH has closed above our weekly price resistance therefore negating our “sell” signal that lasted a meager two weeks.  Our weekly closing price support level for the RTH in order to maintain the fresh “buy” signal shall be set at 86.42.  Any weekly closing price below 86.42 will negate our fresh “buy” signal for the RTH.  Fresh “buy” signals have been triggered in RTH components WalMart (WMT-49.97), Target (TGT-49.89), Sears Holding’s (SHLD-68.00), and BestBuy (BBY-38.44).  The only RTH component that remains on our weekly “sell” list is Home Depot (HD-26.96).  Kohl’s (KSS-60.03) and Walgreen’s (WAG-39.45) continue to enjoy favorable status at this time.  The RTH is another example of a complete reversal in price action, what looked like the beginning of a price retreat quickly reversed course and turned in to a bull stampede.  It appears that a 10% unemployment rate has no influence on the Retail sector for now.

 

E.    Steels

 

The Steel sector (SLX-55.00) finished the week with a 9.34% advance.  The current 2009 trading year return for the SLX is a positive 87.26%.  Our fresh weekly “sell” signal issued last week for the SLX has been negated.  Our weekly closing price support level for the new SLX “buy” signal shall be set at 50.56.  Any weekly closing price below 50.56 will negate our fresh “buy” signal for the SLX.  In a strange divergence weekly “sell” signals remain in place for SLX components U.S. Steel (X-43.85), Nucor (NUE-45.06), Steel Dynamics (STLD- 15.47) and Arcelor Mittal (MT-37.42).  Take note that a quarterly earnings report is due in the coming week from STLD.  A volatile sector coupled with divergent component trends makes this sector too tough to call at this time, we shall move to the sidelines for the time being.

 

F.    Pharmaceuticals and Healthcare

 

          The Pharmaceutical group (PPH-66.25) advanced 2.81% last week. The current 2009 return for the PPH stands at a positive 8.02%.  After five weeks of a “sell” signal the PPH has closed above our price resistance level therefore indicating a change of weekly trend from negative to positive.  Our weekly price support level in order to maintain the fresh weekly “buy” signal shall be set at 6407.  Any weekly closing price below 64.07 will negate our fresh weekly “buy” signal for the PPH.  Concurrent fresh weekly “buy” signals have been generated in influential PPH components Johnson & Johnson (JNJ-61.74) and Pfizer (PFE-16.92).   Weekly “buy” signals continue to remain in place for Abbott Lab’s (ABT-50.08), and GlaxoSmithKline (GSK-39.67).  Eli Lilly (LLY-32.51) and Merck (MRK-31.65) shall remain on our “sell” list at this time.  Take note the JNJ and ABT are due to report quarterly earnings in the coming week.  After five weeks of sleepy consolidation the PPH has awoken and appears headed north to the 68.00 – 70.00 area.

 

III.           Gold

 

GLD (streetTracks gold index) – The GLD (102.84) advanced 4.54% on the week.  For the 2009 trading year the GLD currently rests with a positive return of 18.86%.  The GLD blew through our weekly price resistance level therefore negating our “sell” signal that lasted a mere two weeks.  An obvious change of trend has been triggered as the GLD has surged to new all-time high price levels.  Our weekly closing price support level in order to maintain our fresh “buy” signal shall be set at 98.36.  Any weekly closing price below 98.36 will negate our fresh “buy” signal for the GLD.  We received well deserved criticism last week from a few readers for missing the upside surge in the GLD.  We humbly apologize and readily accept criticism but also reiterate that one should always trade with self- determined, protective stops to keep losses to a manageable minimum.  This being stated the upside break-out of the GLD is quite disconcerting as the strength of the yield-less precious metal reflects a complete disillusionment with future prospects for the U.S. Dollar.  It is no wonder that the sales of guns and ammunition are on the rise for if gold is to become the currency of choice in this country one better be prepared for coming social unrest.

 

 

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

 

The Large-Cap Integrated Oil space (XOI-1054.36) closed out the trading week with a 6.51% advance.  The XOI is now positive by 7.62% for the 2009 trading year.  The XOI has closed above our weekly price resistance level therefore generating a fresh “buy” signal.  Our weekly price support in order to maintain our fresh weekly “buy” signal shall be set at 987.68.  Any weekly closing price below 987.68 will negate our fresh “buy” signal for the XOI.  Fresh weekly “buy” signals have been triggered in Chevron-Texaco (CVX-72.76), Conoco-Phillips (COP-50.78) and Suncor Energy (SU-35.97).  Weekly “sell” signals remain in place for XOI components Exxon-Mobil (XOM-69.27) and British Petroleum (BP-52.27).  This sector has experienced extremely choppy trading over the last four weeks.  One week increased inventories and decreasing demand send them in to a tailspin and low and behold the next week a declining U.S. Dollar sends energy prices soaring.  We shall move to a neutral stance once again until a more discernible trend emerges.

 

The Oil Service Index (OIH-122.19) advanced 9.45% this past trading week.  The 2009 year to date return for the OIH stands at a positive 65.68%.  The OIH is another example of whip-saw trading action as our weekly “sell” signal issued last week has quickly been aborted.  A fresh “buy” signal is once again in place with our weekly closing price support level being set at 111.39.  Any weekly closing price below 111.39 will negate our fresh weekly “buy” signal for the OIH.  Concurrent fresh weekly “buy” signals have been generated in OIH components Halliburton (HAL-28.22), Schlumberger (SLB-62.89), and Baker Hughes (BHI-44.88).  Weekly “buy” signals continue to remain in place for OIH components Ensco (ESV-45.06) and Transocean (RIG-90.28).  Take note that HAL is due to report quarterly earnings in the coming week.  The OIH, in similar fashion to the above mentioned XOI, has reversed direction abruptly giving us cause us to move to the sideline until a more discernable trend develops.  Despite our weekly “buy” signal, the risk/reward equation pulls us in a neutral direction. 

 

Natural Gas (UNG-11.59) advanced 1.76% this past week.  The current 2009 performance of the UNG is a negative 49.97%.  The UNG is entering week four of a “buy” signal.  Our weekly price support in order to maintain said “buy” signal shall remain 11.01.  Any weekly closing price below 11.01 will negate our current “buy” signal for the UNG.  The UNG continues to maintain favorable status with our near term upside target the 15.00 area.

 

The Coal Sector (KOL-31.75) advanced by 9.14% 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 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 trend remains favorable; we would continue to monitor the 28.90 price support level as it is a crucial price support.

 

 

V.               Dow 30 Analysis

 

Our Weekly Trend Indicator (WTI) measures in at +6, an increase from the previous week reading of -8.  Currently 60.0% of the thirty Dow Jones Industrial components have favorable weekly chart formations; this is an increase from 36.0% in the prior week.  The Dow Jones Industrial average advanced 3.98% for the week to 9864.94.  The current return for the 2009 trading year stands at a positive 12.40%. 

 

The S&P 500, as measured by the SPY (107.26), advanced 4.65% for the week.  The 2009 trading year return for the SPY is positive by 18.86%.   Small caps issues, as measured by the IWM (IShares Russell 2000 Index Fund- 61.42), advanced 5.90% for the week.  The IWM year to date return is currently a positive 24.73%.

 

          The DIA (98.69) closed out the week with a 4.04% advance and has closed above our weekly price resistance level therefore reversing our “sell” signal issued just one week ago.  Our weekly closing price resistance level in order to maintain the fresh “buy” signal shall be set at 94.80.  Any weekly closing price below 94.80 will negate our fresh “buy” signal for the DIA.  Dumbfounded, embarrassed, and lighter in the wallet.  These are the adjectives that best describe the current state of mind regarding our recent prognostications issued over the past few letters.  The violent, one-week, 4.00% upside reversal has once again humbled the bears and put the DIA back on track for an upside move to the weekly chart, gap-filling, 103.00 price level.  Wall Street analysts have lowered the bar significantly enough that one will continue to hear the annoying phrase “better than expected” as third quarter earnings reports begin to flood in over the next few weeks.  Regardless of fundamentals like increasing revenue growth, it appears that the upside equity market game of “chicken” is back on for now.

           

Fresh weekly buy signals generated: AXP, CAT, CVX, DIS, JNJ, JPM, PFE, WMT

 

Fresh negative weekly signals generated: T

 

Readers should take note that Dow Jones Industrial components BAC, GE, IBM, INTC, JNJ, and JPM are scheduled to report quarterly earnings in the coming week.

 

Dow 30 stocks with positive weekly signals:

 

 AA, AXP, BA, CAT, CSCO, CVX, DIS, GE, IBM, INTC, JNJ, JPM, KO, MCD, PFE, PG, TRV, WMT

                 

Dow 30 stocks with negative weekly signals:  

      

           BAC, DD, HD, HPQ, KFT, MMM, MRK, MSFT, T, UTX, VZ, XOM

·        Underline names have changed from previous week*

                             

 

 

VI.    KEY EVENTS IN THE WEEK AHEAD:

Monday, October 12

Economic

Earnings

Before: FAST

After: ELS

Events

Bond Markets Close for Columbus Day Holiday
CADC, CHINA, CREG, CRTP at Roth Capital Partners China Conf.

 

Tuesday, October 13

Economic

Earnings

Before: DPZ, GIGM, JNJ

After: ALTR, CSX, EXFO, HCSG, IMMR, INTC, LLTC

Events

JCI Analyst Presentation WATG, ADY, HRBN, CTFO @ Roth Capital Partners China Conf. FED: $30 bln 3-month and 6-month Treasury Bill Auctions

Wednesday, October 14

Economic

08:30 Retail Sales (Sep.): -2.1% cons.

08:30 Retail Sales Ex.-Auto (Sep): 0.2% cons.

08:30 Export Prices Ex.-Ag. (Sep.): 0.8% prior

08:30 Import Prices Ex.-Oil (Sep.): 0.4% prior

10:00 Business Inventories (Aug.): -0.9% cons.

14:00 FOMC Minutes (Sep.)

Earnings

Before: ABT, ADTN, ASML, CBSH, HST, JPM, LCRY, LUFK, MTOX, PGR, GWW

After: ATR, CCK, LSTR, OHB, PLCM, SPTN, STLY, STLD, WDFC, XLNX

Events

CHK Analyst Meeting
QCOM, SY at Dow Jones Newswires VentureWire Showcase Conf.
FED: Fed's Tarullo Testifies Before Senate on Banking Industry

 

Thursday, October 15

Economic

08:30 Initial Claims: 525K cons.

08:30 Continuing Claims: 6060K cons.

08:30 CPI (Sep.): 0.2% cons.

08:30 Core CPI (Sep): 0.1% cons.

10:00 Philadelphia Fed (Oct.): 12.3 cons.

10:30 Crude Inventories: 0.98M prior

Earnings

Before: APH, BAX, SCHW, CIT, C, CY, DRH, FCS, GS, HOG, HOMB, KNL, NOK, ORB, PII, BPOP, PPG, SWY, LUV, TBNK, UTEK, UMPQ, USAK, WSO, WGO

After: AMD, CBST, CYT, GOOG, HRLY, IBM, MTG, OMTR, PBCT, TPX, TSCM, UFPI

Events

ORCL Analyst Meeting
PETM Analyst Day

 

Friday, October 16

Economic

09:00 Net Long Term TIC Flows (Aug.): 15.3B prior

09:15 Capacity Utilization (Sep.): 69.7% cons.

09:15 Industrial Production (Sep.): 0.1% cons.

09:55 Michigan Sentiment-Prel. (Oct.): 73.5 cons.

Earnings

Before: AOS, BAC, FHN, GE, GPC, HAL, MAT, PRSP, SXT

After:

Events

LINTA Investor's Meeting
FED: Fed's Fisher