equityletter.com 10/19/09

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 10/19/09

 

 

     Note:  Event Calendar is located at bottom of page

      

I.                  General Commentary

 

All should pay homage the great 2009 liquidity driven equity bull market.  At the beginning of this trading year there were very few who predicted (yours truly included) the astonishing recovery in equity prices that we have experienced to date.  While the financial press and local nightly news reports celebrated the return to the 10,000 level for the Dow Jones Industrial average, many also heaped praise upon President Obama, Treasury Secretary Geithner, and Federal Reserve Chairman Bernanke for their bold actions in restoring order and sanity to the marketplace.  The above mentioned gentlemen continue to run the monetary printing press at full bore while trumpeting the over used company line “a strong Dollar is in the best interest of the United States”.  Meanwhile the real celebrations are taking place at the mega-banking institutions where tax-payer funded bail outs have succeeded in the return of lucrative bonus payouts to the very folks who almost brought the U.S. economy to the brink.  The large banking institutions have grown bigger, taking on more risk as the smaller regional banks that did not receive government assistance continue to fail at an unsettling rate.  We seem to recall a once omnipotent Federal Reserve Chairman Greenspan who during his tenure was heralded as a financial wizard boy genius whose easy money policies had somehow tamed the business cycle.  When the housing market bubble finally burst, the curtain was pulled back and the wizard was exposed as a mere mortal whose policies did nothing more than inflate bubble after bubble.  We have all heard this story before and unfortunately the ending is always very similar.  Mr. Obama, Geithner, and Bernanke, we encourage you to bask in the rays of sunshine while you can before the storm clouds of your policies pull back the curtain on your wizardry.

 

   The major market averages under our coverage that we currently rate with positive weekly technical indications are the SPDR- S&P 500 (SPY-108.89) and Diamonds Trust (DIA-99.99), NASDAQ Composite (COMP-2156.80), Powershares QQQQ Trust (QQQQ-42.78).  The COMP and QQQQ 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), and the I-share 7-10 year Treasury bond (IEF-91.82).  

 

Sectors within our coverage universe that remain in favor according to our weekly oriented technical analysis include Coal (KOL), Natural Gas (UNG), Retailers (RTH), Agriculture (MOO), Pharmaceuticals (PPH), Transportation (IYT), Gold (GLD), Oil Service (OIH), Large Integrated Oil (XOI).  and Crude Oil (USO).  *Take note that the IYT, MOO, OIH, and XOI 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), and Internet Related (HHH).  

 

 Sectors that we believe to be currently vulnerable to downside pricing pressure are the Managed Healthcare, Homebuilding (XHB), Semiconductors (SMH) 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-91.79 (I-share 7-10 year Treasury bond) declined 0.03% for the week as the yield on the 10- year treasury increased from 3.38% to 3.41%.  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 “sell” signal.  The weekly closing price resistance level in order to maintain our current “sell” signal shall be lowered to 92.36.  Any weekly closing price above 92.36 will negate our current “sell” signal for the IEF.  A mild consolidation for the IEF last week as the 10-year yield crept up ever so slightly to 3.41%.  The 91.00 price support level appears very important at this time as any downside penetration will violate weekly line-trend support.  The next price support level after 91.00 is the 88.50 area.  Week two of a “sell” signal, use price strength to reduce long exposure or to initiate short trades.

 

A.     Financials

 

          The Financial Select Sector Index (XLF-15.22) finished the trading week with a 0.13% decline. The XLF is now positive by 21.56% to date for the 2009 trading year.  The XLF closed three cents 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.  Weekly “buy” signals remain prevalent for XLF components J.P. Morgan (JPM-46.06), Wells Fargo (WFC-30.02), Morgan Stanley (MS-32.99), Citigroup (C- 4.59), American Express (AXP-34.95), Goldman Sachs (GS-184.37), Chicago Mercantile Exchange (CME-312.86) and U.S. Bancorp (USB-23.41).   Weekly “sell” signals continue to remain in place for XLF components Bank of America (BAC-17.26), MetLife (MET-37.28) and Bank of New York (BK-27.24).  Take note that the coming week brings quarterly earning reports from XLF components WFC, USB, MS, AXP, and BK.  Generally positive earnings reports this past week from the reigning kings of the financial world, Goldman Sachs and J.P. Morgan were not enough to propel the XLF northward as both stocks were met with a “sell the fact’ response from market participants.  The second wave of earnings this week from the lower tier XLF components may bring a similar response as the “news” is unlikely to get much better.  The sharp pre-earnings run-up of the financial sector appears to have adequately priced in the “good news” of increased investment banking revenues while ignoring the continued deterioration from the consumer side of the business. 

    

          B.  Builders

 

 The Homebuilder exchange traded fund (XHB-15.47) advanced 2.18% for the week. The 2009 year-to-date performance of the XHB currently stands at a positive 29.13%.  The XHB is entering week four 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.  Fresh weekly “buy” signals have been generated in XHB components D R Horton (DHI-12.20) and Ryland Group (RYL-22.18). Despite the two-week rally “sell” signals remain in place for XHB components, Pulte Homes (PHM-10.70), Toll Brothers (TOL-19.60), KB Homes (KBH-15.82), and Lennar (LEN-14.65).  This sector remains at the mercy of the potential extension of the expired first-time home buyer tax credit government program.  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-25.66) declined 0.89% for the week.   The SMH performance for 2009 to date stands at a positive 45.71%.   The SMH is entering week three 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.  Weekly “buy” signals remain in place for SMH components Micron Technology (MU-7.95) and Intel (INTC-20.18).    Analog Devices (ADI-27.66), Applied Materials (AMAT-13.38), Novellus (NVLS-21.24), SanDisk (SNDK-20.98) and Texas Instruments (TXN-22.75) all continue to remain on our “sell” list at this time.  Take note that TXN, SNDK, and NVLS are due to report quarterly earnings in the coming week.  Another strong earnings report from semiconductor bell-weather INTC failed to ignite the SMH as early week gains were met with profit-taking.  A downside test of the 19.00 price support area for the SMH appears likely.

 

D.   Retailers 

 

          The Retail sector (RTH-92.75) finished the trading week with a 2.39% advance.  The 2009 performance of the RTH currently stands at a positive 23.43%.  The RTH is entering the second week of a “buy” signal.  Our weekly closing price support level for the RTH in order to maintain the current “buy” signal shall be raised to 90.32.  Any weekly closing price below 90.32 will negate our current “buy” signal for the RTH.  “Buy” signals remain in place for RTH components WalMart (WMT-51.22), Target (TGT-50.08), Sears Holding’s (SHLD-70.08), BestBuy (BBY-40.73),Kohl’s (KSS-59.68) and Walgreen’s (WAG-40.37).   The only RTH component that remains on our weekly “sell” list is Home Depot (HD-27.26).  The RTH and related components recent upside price surge seems to be reflecting the joyous return of the U.S. consumer.  The duration of this disconnect with reality is the sixty-four thousand dollar question. For now, though in an over bought stage, the weekly charts remain favorable, so the fairy tale has yet to conclude.

 

E.    Steels

 

The Steel sector (SLX-57.41) finished the week with a 4.38% advance.  The current 2009 trading year return for the SLX is a positive 95.47%.  The SLX is entering week two of a “buy” signal.  Our weekly closing price support level for the SLX shall be raised to 54.20.  Any weekly closing price below 54.20 will negate our current “buy” signal for the SLX.  Arcelor Mittal (MT-38.98) has generated a weekly “buy” signal.  Weekly “sell” signals remain in place for SLX components U.S. Steel (X-43.44), Nucor (NUE-45.23), and Steel Dynamics (STLD- 15.39).  Take note that quarterly earnings reports are due in the coming week from STLD and NUE.  The SLX remains in a favorable pattern but increased volatility should be expected with above mentioned earnings reports forthcoming.  It is interesting to note that the last time NUE reported earnings their accompanying conference call was quite bearish yet the stock went straight up after a gap down opening.

 

F.    Pharmaceuticals and Healthcare

 

          The Pharmaceutical group (PPH-67.33) advanced 1.63% last week. The current 2009 return for the PPH stands at a positive 9.78%.  The PPH is entering week two of a “buy” signal.  Our weekly price support level in order to maintain the current weekly “buy” signal shall be raised to 65.78.  Any weekly closing price below 65.78 will negate our current weekly “buy” signal for the PPH.  Fresh weekly “buy” signals have been generated in PPH components Eli Lilly (LLY-34.44) and Merck (MRK-33.21).   Weekly “buy” signals continue to remain in place for Abbott Lab’s (ABT-51.43), Johnson & Johnson (JNJ-60.46), Pfizer (PFE-17.77) and GlaxoSmithKline (GSK-41.20).  Take note that LLY is due to report quarterly earnings in the coming week.  The PPH continues to appear destined for an upside assault on the 70.00 area.

 

III.           Gold

 

GLD (streetTracks gold index) – The GLD (103.18) advanced 0.33% on the week.  For the 2009 trading year the GLD currently rests with a positive return of 19.25%.  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 remain at 98.36.  Any weekly closing price below 98.36 will negate our current “buy” signal for the GLD.  Old price resistance becomes new price support and so the 100.00 price level is now the area to watch in case of a near term price retreat.  At this point in time, with the GLD at all-time high price levels price resistance is nothing but blue sky, that is, unless one lives in Chicago, in which case it would be grey, cloudy sky.  The strength of the GLD continues to reflect the blanket global disdain for the U.S. Dollar.  Somewhat over bought but still headed higher for the GLD.

 

 

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

 

The Large-Cap Integrated Oil space (XOI-1104.79) closed out the trading week with a 4.78% advance.  The XOI is now positive by 12.77% for the 2009 trading year.  The XOI is entering week two of a “buy” signal.  Our weekly price support in order to maintain our current “buy” signal shall be raised to 1053.00.  Any weekly closing price below 1053.00 will negate our current “buy” signal for the XOI.  Fresh weekly “buy” signals have been triggered in Exxon-Mobil (XOM-73.12) and British Petroleum (BP-55.01).  Chevron-Texaco (CVX-76.81), Conoco-Phillips (COP-51.96) and Suncor Energy (SU-38.52) are all in the second week of “buy” signals.  Having decisively closed above the 1050.00 resistance area, the XOI appears on track for further appreciation at minimum, up to the 1250.00 area.  A fresh weekly “buy” signal from industry laggard XOM may be just the vehicle to help drive the XOI higher.  We see XOM heading up to the 77.00-78.00 area.  Use price declines in the XOI and related internal components to increase long exposure or to initiate long trades.

 

The Oil Service Index (OIH-128.64) advanced 5.28% this past trading week.  The 2009 year to date return for the OIH stands at a positive 74.72%.  The OIH is in the second week of a “buy” signal.  Our weekly closing price support level in order to maintain said “buy” signal shall be raised to 120.94.  Any weekly closing price below 120.94 will negate our current weekly “buy” signal for the OIH.  Weekly “buy” signals remain in place for OIH components Halliburton (HAL-30.40), Schlumberger (SLB-69.08), and Baker Hughes (BHI-47.03), Ensco (ESV-47.29) and Transocean (RIG-91.08).  Take note that SLB and ESV are due to report quarterly earnings in the coming week.  A favorite of the momentum crowd, the OIH is in full steam forward mode.  Although subject to sharp, violent price corrections, the OIH and upside potential appears to be the 155.00 – 160.00 area.  Go with the positive momentum, use price retreats to increase long exposure and to initiate long trades.

 

Natural Gas (UNG-11.57) declined 0.17% this past week.  The current 2009 performance of the UNG is a negative 50.06%.  The UNG is entering week five 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-32.56) advanced by 2.55% this past week.  Year-to-date the KOL is positive by 118.67%.  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 +22, an increase from the previous week reading of +6.  Currently 86.0% of the thirty Dow Jones Industrial components have favorable weekly chart formations; this is an increase from 60.0% in the prior week.  The Dow Jones Industrial average advanced 1.33% for the week to 9995.91.  The current return for the 2009 trading year stands at a positive 13.89%. 

 

The S&P 500, as measured by the SPY (108.89), advanced 1.52% for the week.  The 2009 trading year return for the SPY is positive by 19.88%.   Small caps issues, as measured by the IWM (IShares Russell 2000 Index Fund- 61.68), advanced 0.42% for the week.  The IWM year to date return is currently a positive 25.26%.

 

          The DIA (99.99) closed out the week with a 1.41% advance and is entering the second week of a “buy” signal.  Our weekly closing price support level in order to maintain the current “buy” signal shall be raised to 98.22.  Any weekly closing price below 98.22 will negate our current “buy” signal for the DIA.  It should be another interesting week for the DIA as 43.0% of the thirty components are due to report quarterly earnings.  For the time being the momentum remains with the bulls with a near term upside target for the DIA being the weekly chart, gap-filling, 103.09 price level.

           

Fresh weekly buy signals generated: DD, HPQ, KFT, MMM, MRK, MSFT, UTX, XOM

 

Fresh negative weekly signals generated: N/A

 

Readers should take note that Dow Jones Industrial components AXP, BA, CAT, DD, KO, MCD, MMM, MRK, MSFT,PFE, T, TRV, and UTX are 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, HPQ, KFT, IBM, INTC, JNJ, JPM, KO, MCD, MMM, MRK, MSFT, PFE, PG, TRV, UTX, WMT, XOM

                 

Dow 30 stocks with negative weekly signals:  

      

           BAC, HD, T, VZ

·        Underline names have changed from previous week*

                             

 

 

VI.    KEY EVENTS IN THE WEEK AHEAD:

Monday, October 19

Economic

Earnings

Before: BBT, ETN, GCI, HAS, MMR, PETS, BPOP, WFT

After: ALGT, AAPL, ATHR, BMI, BSX, BRO, ELS, ICUI, IEX, JBHT, JDAS, LNCR, PKG, RLRN, RLI, SWI, STLD, TXN, UDR, VLTR, WERN, WTNY, ZION

Events

BMY, HURN, BAX, JEC at Incisive Media Litigation Summit
MA, WFC, DBD, NCR at SourceMedia ATM, Debit & Prepaid Forum
FED: $30 bln 3-month and 6-month Treasury Bill Auctions
Bernanke on Financial Crisis and Asia

 

 

Tuesday, October 20

Economic

08:30 Building Permits (Sep.): 590K cons.

08:30 Housing Starts (Sep.): 610K cons.

08:30 PPI (Sep.): 0.0% cons.

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

Earnings

Before: AIT, ARB, ASTE, ALV, BK, BIIB, BLK, EAT, CSL, CAT, CPC, CRUS, COH, KO, CMA, DRH, DD, FCFS, FRX, GIGM, GAP, IIVI, ITW, IMN, JEF, JRN, LAB, LNY, LXK, LMT, MTB, EDU, OXPS, PH, BTU, PNR, PFE, PCP, DGX, RF, SHW, STT, SVU, UAUA, UTX, UNH, WU

After: AGNC, AMLN, CHRW, CNI, CREE, CYMI, DSCM, FULT, GILD, HBHC, IBKC, IGTE, INFN, ISRG, MANH, MRTN, NBR, NUVA, PNFP, PLCM, RCRC, SNDK, STX, SLM, SONC, STM, SYK, SUPX, TUP, VASC, VOCS, WLT, YHOO, ZNT

Events

GE Healthcare Analyst Meeting HGSI Analyst Meeting RIGL Analyst Briefing

Wednesday, October 21

Economic

10:30 Crude Inventories: 0.33M prior

14:00 Fed’s Beige Book

Earnings

Before: APD, AAI, ATI, MO, AMB, ACAT, ABFS, ATMI, BA, CNH, CAL, CFR, DHX, ELN, LLY, FLIR, FCX, GNTX, GENZ, HCBK, ICLR, KEY, KCI, NITE, LCRY, LII, LNN, MAN, MFBI, MCD, MEG, MS, MSM, NTRS, NOC, NVR, OMC, PENN, PJC, RIMG, SEIC, SLGN, STJ, SWK, TCB, SNAK, USB, USG, WFC

After: AAN, AFFX, ADS, ACF, AMP, AMGN, BPSG, BCR, CTXS, CNS, COHU, CPTS, CLB, CSGP, CVD, DST, EBAY, EDR, EW, ESIO, WIRE, EFX, EQIX, FFIV, FNF, FIS, FWRD, GGG, HNI, HUBG, IFSIA, ISIL, IRBT, KMP, KNX, LRCX, LHO, LOGI, MLNX, MCRI, NFX, NE, NVLS, NVEC, OHB, OSIP, PTV, PTP, QLGC, RRC, RJF, RHI, RUSHA, SKX, TEX, TMK, TSCO, TQNT, TBI, VMW

Events

WMT Investment Community Day 1
UTEK Analyst Day

 

Thursday, October 22

Economic

08:30 Initial Claims: 517K cons.

08:30 Continuing Claims: 5990K cons.

10:00 Leading Indicators (Sep.): 0.9% cons.

10:00 FHFA Housing Price Index (Aug.): 0.3% cons.

Earnings

Before: FLWS, MMM, AEIS, AKNS, ALK, ALXN, T, AUO, BDK, BGG, BMY, BG, CCMP, CSH, CELG, CHKP, CIT, CXG, CNMD, CNX, CBE, DHR, DAL, DLX, DO, DOW, EXP, EMC, ESV, ETR, FITB, FCF, FCL, GMT, GR, GRC, GHL, HSY, HUB/B, HBAN, RX, IIIN, IVC, ESI, JNS, JBLU, KNSY, KMB, KVHI, LH, LM, LTM, ERIC, LYTS, MI, MJN, MRK, MKSI, NCR, NYT, NIHD, NWPX, NVS, NUE, OXY, ODFL, ORI, ORB, PTI, PFCB, PM, PTEC, PNC, POOL, POT, PDS, PLD, PFS, RTN, RGC, RS, RAI, R, SGP, SIAL, SON, SPAR, HOT, STFC, STI, SY, SYNT, TASR, TDY, TIN, TRA, TMO, TNB, TRAD, TRV, UNP, UPS, LCC, USAK, WBS, WCC, XRX, ZMH

After: ACTG, ALGN, AMZN, AXP, AMSG, AVID, AVCT, BXS, BJRI, EPAY, BRCM, BUCY, BLDR, BNI, CA, COF, CHRT, CAKE, CMG, CB, CYN, CPWR, CRTX, EXBD, CYBS, DECK, DDR, EMN, ELX, FII, GDI, HNSN, HWAY, HITT, HOKU, INFA, IBKR, JNPR, LSCC, LEG, WFR, MCRL, MTX, MPWR, NFLX, NTGR, NTCT, OMCL, PMCS, PGI, RMBS, RNOW, RVBD, RCKY, SCSC, CKH, SIMG, SNWL, STMP, SPWRA, SYNA, SNV, TSCM, WOOF, WRE, WDC

Events

TPX Investor Meeting
PBR, CIG, SBS, TAM at New York Society of Security Analysts Investing in Brazil Conf.

 

Friday, October 23

Economic

10:00 Existing Home Sales (Sep.): 5.35M cons.

Earnings

Before: ACO, AVX, CACH, CMCO, DOV, EMCI, EXC, FO, HON, IDXX, IR, IVZ, FSTR, MSFT, POWI, SAIA, SLB, TROW, VVI, WHR, WL

After: CLS, COLM

Events

FED: Bernanke at Boston Fed Conf.