equityletter.com 11/09/09
Note: Event Calendar is located at bottom of page
I. General Commentary
The trading week began with a boost courtesy of legendary investor Warren Buffett who announced a deal to purchase railroad concern Burlington Northern (BNI). In unusual fashion, the historically value oriented, vulture like Mr. Buffett, is paying a thirty percent premium for the company. Many have stated that this purchase is a long term bet on the rising price of crude oil which would make rail transport much more attractive over the longer term as opposed to less fuel efficient freight transport. The deal helped light a fire under the recently sagging transportation sector.
The Federal Open Market Committee (FOMC) released their decision for interest rate direction and no surprises were revealed. The FOMC decided to leave interest rates at historically low crisis levels (0%-.25%) and retained the phrase “for an extended period” that many had speculated could possibly be omitted. The FOMC did reveal that they would begin to pare back on the purchases of agency debt and agency mortgage-backed-securities making a symbolic effort to appease the hawkish contingent. The FOMC will not raise rates anytime soon simply because they cannot, the economy simply remains too fragile and any removal of FED liquidity would deflate the equity bubble that they have worked so feverishly to restore. In the eyes of the FED the economy remains in intensive care with the continued substantial printing of dollars required for life support. The Friday release of a 10.2% unemployment rate displayed that the FED liquidity surge has had little success in the all important creation of jobs. The other area of concern is consumer credit, or the willingness for banks to lend. Consumer credit continues to decline as financial institutions once again must take in to account creditworthiness. Creditworthiness and employment, can there be one without the other? Unfortunately, a consumer driven economy without meaningful job creation will not generate longer term sustainable growth over an “extended period”. We remain of the opinion that the Federal Reserve crisis actions have succeeded in re-inflating a decimated stock market by supporting one of the greatest “short squeezes” in stock market history. Key structural issues remain a longer term concern, meaningful job growth, house depreciation, and pension liabilities for the baby boomer generation have yet to be addressed by the short term thinkers in Washington, D.C..
The major market averages under our coverage that we currently rate with positive weekly technical indications is the
Sectors within our coverage universe that remain in favor according to our weekly oriented technical analysis include the Gold (GLD). Use price weakness to increase long exposure or to initiate long trades.
Sectors that we currently rate as neutral include the Internet Related (HHH) and Managed Healthcare. *Managed Healthcare (UNH, WLP, HUM, AET) has been upgraded from negative to neutral.*
Sectors that we believe to be currently vulnerable to downside pricing pressure are the Steel (SLX),Retailers (RTH), Agriculture (MOO), Pharmaceuticals (PPH), Coal (KOL), Natural Gas (UNG), Oil Service (OIH), Large Integrated Oil (XOI), and Crude Oil (USO), Transportation (IYT), Financials (XLF), Homebuilding (XHB), Semiconductors (SMH), Real Estate (IYR). *There are no changes of opinion from the prior letter.*
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-90.81 (I-share 7-10 year Treasury bond) declined 0.45% for the week as the yield on the 10- year treasury increased from 3.39% to 3.50%. 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 “sell” signal. The weekly closing price resistance level in order to maintain our current “sell” signal shall be lowered to 91.28. Any weekly closing price above 91.28 will negate our current “sell” signal for the IEF. The weekly trend remains a negative one; use price strength approaching above stated price resistance to reduce long exposure or to initiate short trades.
A. Financials
The Financial Select Sector Index (XLF-14.31) finished the trading week with a 1.85% advance. The XLF is now positive by 14.29% to date for the 2009 trading year. The XLF is entering week six of a “sell” signal. Our weekly closing price resistance shall be lowered to 15.14. Any weekly closing price above 15.14 will negate our current “sell” signal for the XLF. There were no internal component changes from the prior week. The lone weekly “buy” signal of the top ten XLF components is American Express (AXP-37.21). Weekly “sell” signals continue to remain in place for XLF components Bank of
B. Builders
The Homebuilder exchange traded fund (XHB-14.57) advanced 5.66% for the week. The 2009 year-to-date performance of the XHB currently stands at a positive 21.61%. The XHB is entering week seven of a “sell” signal. Our weekly closing price resistance level in order to maintain our current “sell” signal for XHB shall be lowered to 14.75. Any weekly closing price above the 14.75 resistance level will negate our current “sell” signal in the XHB. Weekly “sell” signals remain in place for XHB components Pulte Homes (PHM-9.65), R Horton (DHI-12.03), Ryland Group (RYL-19.23), Toll Brothers (TOL-18.14), KB Homes (KBH-14.91), and Lennar (LEN-14.14). The extension of the government tax subsidy for first time homebuyers provided a small lift for the builders but the weekly charts continue to look less than enthusiastic. 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-24.51) advanced 1.55% for the week. The SMH performance for 2009 to date stands at a positive 39.18%. The SMH is entering week six of a “sell” signal. Our weekly price resistance level in order to maintain said “sell” signal shall be lowered to 24.91. Any weekly closing price above 24.91 will negate our current “sell” signal for the SMH. Analog Devices (ADI-26.52), Applied Materials (AMAT-12.40), Novellus (NVLS-20.37), SanDisk (SNDK-20.82),
D. Retailers
The Retail sector (RTH-92.58) finished the trading week with a 3.10% advance. The 2009 performance of the RTH currently stands at a positive 23.21%. The RTH is entering week two of a “sell” signal. Our weekly closing price resistance level for the RTH in order to maintain the current “sell” signal shall be lowered to 93.00. Any weekly closing price above 93.00 will negate our current “sell” signal for the RTH. Weekly “sell” signals remain prevalent across the board for RTH components WalMart (WMT-51.25), Sears Holding’s (SHLD-67.65), BestBuy (BBY-40.24), Kohl’s (KSS-56.68), Walgreen’s (WAG-39.57), Home Depot (HD-26.08) and Target (TGT-49.70). The RTH is another sector that bounced nicely last week but not enough to warrant a change of opinion. We would continue to use any extended price appreciation to reduce long exposure and or to initiate short trades.
E. Steels
The Steel sector (SLX-54.60) finished the week with a 7.27% advance. The current 2009 trading year return for the SLX is a positive 85.90%. The SLX is entering week two of a “sell” signal. Our weekly closing price resistance level for the SLX shall remain at 58.20. Any weekly closing price above 58.20 will negate our current “sell” signal for the SLX. Weekly “sell” signals remain in place for SLX components
F. Pharmaceuticals and Healthcare
The Pharmaceutical group (PPH-62.68) advanced 2.83% last week. The current 2009 return for the PPH stands at a positive 4.61%. The PPH is entering week two of a “sell” signal. Our weekly price resistance level in order to maintain the current weekly “sell” signal shall remain at 63.15. Any weekly closing price above 63.15 will negate our current weekly “sell” signal for the PPH. Weekly “sell” signals remain in place for PPH components Johnson & Johnson (JNJ-60.30), Pfizer (PFE-16.96), and Merck (MRK-32.59). Weekly “buy” signals continue to remain in place for Abbott Lab’s (ABT-51.53), GlaxoSmithKline (GSK-40.52), and Eli Lilly (LLY-34.50). Use extended price appreciation in the PPH and above negatively mentioned names to reduce long exposure and or to initiate short trades.
III. Gold
GLD (streetTracks gold index) – The GLD (107.43) advanced 4.78% on the week. For the 2009 trading year the GLD currently rests with a positive return of 24.16%. The GLD is entering week five of a “buy” signal. Our weekly closing price support level in order to maintain our current “buy” signal shall be raised to 102.50. Any weekly closing price below 102.50 will negate our current “buy” signal for the GLD. After a three-week respite the GLD sprinted to new all-time high price levels. The announcement from the central bank of
IV. Energy- (Oil, Oil Service, Nat’l Gas, Coal)
The Large-Cap Integrated Oil space (XOI-1082.92) closed out the trading week with a 2.86% advance. The XOI is now positive by 10.53% for the 2009 trading year. The XOI is in the second week of a “sell” signal. Our weekly price resistance in order to maintain our current “sell” signal shall remain at 1127.06. Any weekly closing price above 1127.06 will negate our current “sell” signal for the XOI. There are no component changes of opinion from the prior week. Weekly “buy” signals remain prevalent for XOI components, British Petroleum (BP-58.43) and Chevron-Texaco (CVX-77.53). Weekly “sell” signals remain in place for XOI components Exxon-Mobil (XOM-72.58), Conoco-Phillips (COP-52.11) and Suncor Energy (SU-32.94). One should continue to use extended upside appreciation that approaches the above mentioned price resistance area to reduce long exposure and or to initiate short trades.
The Oil Service Index (OIH-120.90) advanced 3.29% this past trading week. The 2009 year to date return for the OIH stands at a positive 63.93%. The OIH is entering week two of a “sell” signal. Our weekly closing price resistance level in order to maintain our current “sell” signal shall remain at 130.20. Any weekly closing price above 130.20 will negate our fresh weekly “sell” signal for the OIH. Weekly “sell” signals continue to remain in place across the board for OIH components Halliburton (HAL-31.03), Schlumberger (SLB-64.40), Baker Hughes (BHI-41.18), Ensco (ESV-48.03) and Transocean (RIG-85.40). No changes from the prior week; use any extended price strength to reduce long exposure and or to initiate short positions.
Natural Gas (UNG-9.53) declined 7.51% this past week. The current 2009 performance of the UNG is a negative 58.86%. The UNG is entering week two of a “sell” signal. Our weekly price resistance in order to maintain our current “sell” signal shall be lowered to 10.19. Any weekly closing price above 10.19 will negate our current “sell” signal for the UNG. The UNG, one commodity that appears to accurately reflect supply/demand, tells us that there is plenty of supply. Use extended price appreciation approaching our above mentioned price resistance level to reduce long exposure and or to initiate short trades.
The Coal Sector (KOL-32.55) advanced by 8.14% this past week. Year-to-date the KOL is positive by 118.60%. The KOL is entering week two of a “sell” signal. Our weekly closing price resistance level in order to maintain our current “sell” signal shall remain at the 33.81 price level. Any weekly closing price above 33.81 would negate our current “sell” signal for the KOL. Week two of correction mode; continue to use extended price appreciation to reduce long exposure and or to initiate short trades.
V. Dow 30 Analysis
Our Weekly Trend Indicator (WTI) measures in at -10, a slight increase from the previous week reading of -14. Currently 33.0% of the thirty Dow Jones Industrial components have favorable weekly chart formations; this is an increase from 26.0% in the prior week. The Dow Jones Industrial average advanced 3.20% for the week to 10023.42. The current return for the 2009 trading year stands at a positive 14.20%.
The S&P 500, as measured by the SPY (107.13), advanced 3.45% for the week. The 2009 trading year return for the SPY is positive by 18.27%. Small caps issues, as measured by the IWM (IShares Russell 2000 Index Fund- 58.08), advanced 3.11% for the week. The IWM year to date return is currently a positive 17.95%.
The DIA (100.37) closed out the week with a 3.41% advance and is entering week two of a “sell” signal. Our weekly closing price resistance level in order to maintain the current “sell” signal shall remain at 100.77. Any weekly closing price above 100.77 will negate our current “sell” signal for the DIA. Things never come easy in the markets these days as our “sell” signal issued for the DIA in our previous letter was greeted with a 3.41% week over week advance. It remains within the realm of possibility that our “sell” call is premature and the DIA could have a blow-off advance up to the gap-filling 103.09 level. If this is indeed the case we shall readily accept the criticism of “crying wolf” once again. In spite of the potential for such an occurrence we will remain skeptical and concerned regarding the existing risk/reward scenario from current price levels. The quality of last week’s upswing also brings hesitance due to the low number of confirming signals from internal DIA components. Despite the prior week advance our “sell” signal shall remain in place as our closing price resistance level of 100.77 has yet to be violated. In addition we have identified what we feel to be a critical price support level that is worthy of price alert status. The 94.86 level for the DIA is a six-week low close and also coincides with weekly trend line price support. Any downside penetration of this key level will indicate a swift price decline. For now we shall reiterate our “sell the rally” stance for the DIA.
Fresh weekly buy signals generated: HPQ, KO, WMT
Fresh negative weekly signals generated: KFT
Readers should take note that Dow Jones Industrial components DIS and WMT are scheduled to report quarterly earnings in the coming week.
Dow 30 stocks with positive weekly signals:
AXP, CAT, CVX, HPQ, KO, MCD, MSFT, PG, TRV, WMT
Dow 30 stocks with negative weekly signals:
AA, BA, BAC, CSCO, DD, DIS, GE, HD, IBM, INTC, JNJ, JPM, KFT, MMM, MRK, PFE, T, UTX, VZ, XOM
· Underline names have changed from previous week*
VI. KEY EVENTS IN THE WEEK AHEAD:
Monday, November 9
Economic
Earnings
Before: AMRI, AOB, ALC, WEL, BPZ, CALP, GIB, CFSG, CHDX, CNK, CCOI, CODI, COMV, COWN, DISH, SATS, ENER, ENG, EVEP, GTXI, HWK, HPT, HWCC, NHP, NNI, NOOF, NWPX, PCAP, KGS, KWK, ROK, SRE, SEPR, STRL, ELOS, TBSI, TSO, TTI, TWP, WCRX, WNR, WIN
After: ARNA, ARRY, BIDZ, CDCS, CLNE, CCO, DGI, DIVX, DTSI, DGW, ERTS, EPE, FLR, FRPT, GEOI, SOLR, HOLX, HMIN, IMMR, IPAR, KEYN, LGF, LYV, MBI, MDR, MIDD, MR, NTY, PIKE, PCLN, QGEN, RAX, RENT, SLXP, SGK, SQNM, SDTH, SLW, SF, TMRK, UNCA
Events
CSCO Collaboration Summit 2009
HXL, NCIT at Stifel, Nicolaus & Company Aerospace/Defense/Airline Conf.
FED:3-month and 6-month Treasury Bill Auctions
Tuesday, November 10
Economic
Earnings
Before: APP, ARM, ATN, BZH, CPIX, DWSN, DSX, FTK, FOSL, GIGM, HRBN, HEW, JASO, MEDX, MV, PGNX, TYC, HOGS
After: AONE, AMCN, ATO, BOBE, STV, CLWR, EM, ETP, FMCN, HNSN, INXI, MFB, PAAS, RAH, SNS, VM, WTW
Events
| BAC, GS, MS, TD at Bank of America Merrill Lynch Banking and Financial Services Conf. |
Wednesday, November 11
Economic
Earnings
Before: ALLT, APU, CAE, CAAS, FLO, M, UGI, ZOLL
After: AAP, ANW, AMAT, CHIC, CGA, CTFO, CSC, CTRP, DAC, DNDN, GMCR, HRC, KONG, MDTH, OHB, TTEK, WES
Events
K Analyst Day
AMD Analyst Day
GR, TNB, NSC, UNP at Citi Industrial Manufacturing & Transportation Conf.
Thursday, November 12
Economic
Earnings
Before: ACM, ATK, BCE, BPHX, BRKS, ECA, FCSX, FUQI, GSOL, GBX, KSS, MMS, MPEL, VIVO, NAFC, RRST, SI, GASS, SPH, TEF, URBN, WMT
After: AFCE, BBI, BEAT, CRI, CPA, DAR, ESE, FREE, GA, ICXT, MATW, MDSO, MSCC, JWN, URS, DIS, WGL
Events
CSX, DHR, GE, CAT at Citi Industrial Manufacturing & Transportation Conf.
BPI, COCO, LRN, CPLA at Signal Hill Education Preview Investor Conference
FED: $16 bln 30-yr Treasury Bond Auction
Friday, November 13
Economic
Earnings
Before: ANF, A, CRYP, JCP, TK, YGE
After: SINA
Events
WMGI, DNDN, POZN, LLY Credit Suisse Healthcare Conference
FED: Fed's Evans;
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,
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,
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