equityletter.com 11/16/09

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 11/16/09

 

 

     Note:  Event Calendar is located at bottom of page

      

I.                  General Commentary

 

The equity markets took an immediate bullish cue from the G-20 meeting of rich and developing nation finance ministers in St. Andrews, Scotland.  The G-20 finance ministers agreed to continue to maintain emergency economic support measures.  They decided that despite some signs of an economic revival it was still far too early to consider the removal of the extraordinary coordinated effort of providing liquidity.  These statements are a clear indication that the “punch bowl” of asset inflation will remain the game for the foreseeable future.  If this is truly the case equity markets will continue to rise despite questionable fundamentals.  Equity market corrections will remain buying opportunities for as long as these accommodative measures remain in place.  As much as we love to question the fundamental logic of this amazing market levitation we certainly do not want to fight a tape that is being supported by a coordinated global effort.  The story will change when the training wheels of emergency liquidity provision is reduced or withdrawn.

 

   The major market averages under our coverage that we currently rate with positive weekly technical indications are the SPDR- S&P 500 (SPY-109.62), Diamonds Trust (DIA-102.91), NASDAQ Composite (COMP-2167.88), Powershares QQQQ Trust (QQQQ-44.01), and the IShares Russell 2000 Index Fund (IWM-58.73).  We currently have a negative views on the U.S. $ Index (UUP-22.83), and the I-share 7-10 year Treasury bond (IEF-91.28).  * Take note that the UUP is a negative change of opinion.* *Take note that the SPY, DIA, QQQQ, IWM, and COMP are upside opinion changes from the previous letter.*

 

Sectors within our coverage universe that remain in favor according to our weekly oriented technical analysis include the Gold (GLD), Transportation (IYT), Retailers (RTH), Semiconductors (SMH), Coal (KOL), and Internet Related (HHH).  *The IYT, RTH, SMH, KOL and HHH are all upgrades 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 Steel (SLX), Pharmaceuticals (PPH), Large Integrated Oil (XOI), and Managed Healthcare.  * The SLX, XOI, and PPH have been upgraded from negative to neutral.*

 

 Sectors that we believe to be currently vulnerable to downside pricing pressure are the Agriculture (MOO), Natural Gas (UNG), Oil Service (OIH), Crude Oil (USO), Financials (XLF), Homebuilding (XHB), and Real Estate (IYR). *There are no additions to the negative list from the prior 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/

 

 

 

II.               Sector Analysis

                                             

The IEF-91.28 (I-share 7-10 year Treasury bond) advanced 0.52% for the week as the yield on the 10- year treasury decreased from 3.50% to 3.43%.  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 “sell” signal.  The weekly closing price resistance level in order to maintain our current “sell” signal shall remain at 91.28.  Any weekly closing price above 91.28 will negate our current “sell” signal for the IEF.  We closed out the trading week smack dab on our price resistance level, 91.28.  Our stance shall remain negative until a weekly closing price above 91.28 occurs. 

 

A.     Financials

 

          The Financial Select Sector Index (XLF-14.66) finished the trading week with a 2.45% advance. The XLF is now positive by 17.09% to date for the 2009 trading year.  The XLF is entering week seven of a “sell” signal.  Our weekly closing price resistance shall remain at 15.14.  Any weekly closing price above 15.14 will negate our current “sell” signal for the XLF.  There were three fresh internal component “buy” signals from the prior week, Bank of America (BAC-15.98), Goldman Sachs (GS-176.76), and Morgan Stanley (MS-33.09). American Express (AXP-40.35) has been and shall remain on our “buy” list at this time.   Weekly “sell” signals continue to remain in place for XLF components Citigroup (C- 4.05), J.P. Morgan (JPM-42.90), Wells Fargo (WFC-27.68), Chicago Mercantile Exchange (CME-313.76), U.S. Bancorp (USB-23.48) and MetLife (MET-34.22).  The XLF remains in distribution mode but upside opportunities now appear to exist for GS, MS, and BAC.  We would definitely steer clear of shorting these names.  The XLF and select related components remain in correction mode, use any extended upside strength approaching above mentioned price resistance to reduce long exposure and or to initiate short trades.

    

          B.  Builders

 

 The Homebuilder exchange traded fund (XHB-14.89) advanced 2.20% for the week. The 2009 year-to-date performance of the XHB currently stands at a positive 24.29%.  The XHB is entering week eight of a “sell” signal.  Even though the XHB closed slightly above our prior week price resistance we are not yet convinced of a definitive trend change.  Our weekly closing price resistance level in order to maintain our current “sell” signal for XHB shall be adjusted to 14.89.  Any weekly closing price above the 14.89 resistance level will negate our current “sell” signal in the XHB.  A weekly “buy” signal has been generated in Toll Brothers (TOL-20.76).  We would look to buy weakness in TOL as it appears to be a sector outlier. Weekly “sell” signals remain in place for XHB components Pulte Homes (PHM-9.69), D R Horton (DHI-11.94), Ryland Group (RYL-19.79), KB Homes (KBH-14.99), and Lennar (LEN-14.47).  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-25.69) advanced 4.95% for the week.   The SMH performance for 2009 to date stands at a positive 45.88%.   The SMH has closed above our weekly closing price resistance therefore indicating a change of trend from negative to positive.  Our weekly price support level in order to maintain our fresh “buy” signal shall be set at 24.73.  Any weekly closing price below 24.73 will negate our fresh “buy” signal for the SMH.  Concurrent weekly “buy” signals have been generated in SMH components Analog Devices (ADI-27.36), Novellus (NVLS-21.63), SanDisk (SNDK-21.95), Texas Instruments (TXN-25.44), Micron Technology (MU-7.51) and Intel (INTC-19.82).  Applied Materials (AMAT-12.72) shall continue to remain on our “sell” list at this time.  A change of weekly trend has been signaled for the SMH and several internal components.  It is once again time to use extended price weakness to increase long exposure and or to initiate long trades.

 

D.   Retailers 

 

          The Retail sector (RTH-94.50) finished the trading week with a 2.13% advance.  The 2009 performance of the RTH currently stands at a positive 25.76%.  The RTH has closed above our weekly price resistance level therefore indicating a change of trend from negative to positive.  Our weekly closing price support level for the RTH in order to maintain the fresh “buy” signal shall be set at 92.75.  Any weekly closing price below 92.75 will negate our fresh “buy” signal for the RTH.  Fresh weekly “buy” signals have been generated in RTH components WalMart (WMT-53.20), Sears Holding’s (SHLD-74.54), BestBuy (BBY-41.88), and Home Depot (HD-27.34).  Weekly “sell” signals remain prevalent for RTH components Kohl’s (KSS-55.52), Walgreen’s (WAG-39.38), and Target (TGT-48.99).  Take note that quarterly earnings reports are due in the coming week from RTH components HD, TGT, and SHLD.  The RTH continues to defy gravity and has negated another one of our calls for a price correction.  We shall respect the strength and temper our bearishness but must also point out the trend line resistance at current weekly closing price levels.  Any further strength from the 94.50 weekly closing price of the RTH will indicate an upside surge to the 100.00 area.

 

E.    Steels

 

The Steel sector (SLX-56.88) finished the week with a 4.18% advance.  The current 2009 trading year return for the SLX is a positive 93.66%.  The SLX is entering week three 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.  Fresh weekly “buy” signals have been generated in U.S. Steel (X-39.49), Arcelor Mittal (MT-37.17), and Steel Dynamics (STLD- 14.97).  A weekly “sell” signal remains in place for SLX component Nucor (NUE-39.34).  Due to internal component strength we shall upgrade the Steel sector to neutral from negative.

 

F.    Pharmaceuticals and Healthcare

 

          The Pharmaceutical group (PPH-62.68) was unchanged last week. The current 2009 return for the PPH stands at a positive 4.61%.  The PPH is entering week four of a “sell” signal.  Our weekly price resistance level in order to maintain the current weekly “sell” signal shall be lowered to 63.02.  Any weekly closing price above 63.02 will negate our current “sell” signal for the PPH.  Weekly “buy” signals have been generated for PPH components Johnson & Johnson (JNJ-61.43), Pfizer (PFE-17.59), and Merck (MRK-33.10).  Weekly “buy” signals continue to remain in place for Abbott Lab’s (ABT-52.95), GlaxoSmithKline (GSK-41.44), and Eli Lilly (LLY-35.36).  Divergent signals now exist as internal component strength is indicating forthcoming strength for the PPH.  We would not be short the PPH at current price levels.

 

III.           Gold

 

GLD (streetTracks gold index) – The GLD (109.74) advanced 2.15% on the week.  For the 2009 trading year the GLD currently rests with a positive return of 26.83%.  The GLD is entering week six of a “buy” signal.  Our weekly closing price support level in order to maintain our current “buy” signal shall be raised to 103.25.  Any weekly closing price below 103.25 will negate our current “buy” signal for the GLD.  Once again slightly overdone to the upside but this train remains northbound one, use any extended price retreats approaching above mentioned support level to increase long exposure or initiate long trades.

 

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

 

The Large-Cap Integrated Oil space (XOI-1085.14) closed out the trading week with a 0.20% advance.  The XOI is now positive by 10.76% for the 2009 trading year.  The XOI is in the third week of a “sell” signal.  Our weekly price resistance in order to maintain our current “sell” signal shall be lowered to 1094.43.  Any weekly closing price above 1094.43 will negate our current “sell” signal for the XOI.  A fresh weekly “buy” signal has been generated for Suncor Energy (SU-35.05).  Weekly “buy” signals remain prevalent for XOI components, British Petroleum (BP-58.35) and Chevron-Texaco (CVX-77.94).  Weekly “sell” signals remain in place for XOI components Exxon-Mobil (XOM-72.47) and Conoco-Phillips (COP-52.83).  The push and pull between weak supply/demand (higher crude inventories) and the declining U.S. Dollar continue to make this sector difficult to handicap.  One never knows which determinant factor will dominate market sentiment on any given day.  Our best guess is to forsake the XOI and play the individual component names as defined above.

 

The Oil Service Index (OIH-122.30) advanced 1.16% this past trading week.  The 2009 year to date return for the OIH stands at a positive 65.83%.  The OIH is entering week three of a “sell” signal.  Our weekly closing price resistance level in order to maintain our current “sell” signal shall be lowered to 122.97.  Any weekly closing price above 122.97 will negate our current weekly “sell” signal for the OIH.  Weekly “sell” signals continue to remain in place across the board for OIH components Halliburton (HAL-30.71), Schlumberger (SLB-65.52), Baker Hughes (BHI-41.45), Ensco (ESV-45.94) and Transocean (RIG-87.31).  No changes from the prior week; use any extended price strength to reduce long exposure and or to initiate short positions.

 

Natural Gas (UNG-9.06) declined 4.93% this past week.  The current 2009 performance of the UNG is a negative 60.89%.  The UNG is entering week three of a “sell” signal.  Our weekly price resistance in order to maintain our current “sell” signal shall be lowered to 9.63.  Any weekly closing price above 9.63 will negate our current “sell” signal for the UNG.  The UNG is testing the lows of the 2009 trading year of 8.94.  This sets up a potential double bottom or a complete downside washout.  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-34.17) advanced by 4.98% this past week.  Year-to-date the KOL is positive by 129.48%.  The KOL has generated a fresh “buy” signal.  Our weekly closing price support level in order to maintain our fresh “buy” signal shall be set at the 33.38 price level.  Any weekly closing price below 33.38 will negate our fresh “buy” signal for the KOL.  We shall respect the price action and that action currently indicates higher prices for the KOL and related equities.

 

 

V.               Dow 30 Analysis

 

Our Weekly Trend Indicator (WTI) measures in at +14, an increase from the previous week reading of -10.  Currently 73.0% of the thirty Dow Jones Industrial components have favorable weekly chart formations; this is an increase from 33.0% in the prior week.  The Dow Jones Industrial average advanced 2.46% for the week to 10270.47.  The current return for the 2009 trading year stands at a positive 17.02%. 

 

The S&P 500, as measured by the SPY (109.62), advanced 2.32% for the week.  The 2009 trading year return for the SPY is positive by 21.47%.   Small caps issues, as measured by the IWM (IShares Russell 2000 Index Fund- 58.73), advanced 1.12% for the week.  The IWM year to date return is currently a positive 19.28%.

 

          The DIA (102.91) closed out the week with a 2.53% advance and has closed above our weekly price resistance level thereby negating our “sell” signal.  Once again a new “buy” signal has been triggered.  Our weekly closing price support level in order to maintain the fresh “buy” signal shall be set at 100.91.  Any weekly closing price below 100.91 will negate our fresh “buy” signal for the DIA.  We have once again been stopped out of our “crying wolf” call for a sustained, corrective price decline for the DIA.  The two-week 6.00% snap back advance of the DIA has left us running for cover.  Despite our fresh “buy” signal we shall categorize ourselves as a very skeptical, reluctant bull.  At current price levels the DIA is at or very near weekly trend line price resistance around the 104.50 level which dates back to the September 2007 market highs.  The weekly up trend line drawn from the March 2009 lows indicates price support down around the 96.50 area for the DIA.  It is our belief that we will be entering a trading range defined by 104.50 on the upside and 96.50 on the downside.  Any violation of either parameter will be a key indication of further direction. 

           

Fresh weekly buy signals generated: BA, DD, DIS, GE, HD, IBM, INTC, JNJ, MRK, PFE, T, UTX

 

Fresh negative weekly signals generated: N/A

 

Readers should take note that Dow Jones Industrial component HD is scheduled to report quarterly earnings in the coming week.

 

Dow 30 stocks with positive weekly signals:

 

 AXP, BA, CAT, CVX, DD, DIS, GE, HD, HPQ, IBM, INTC, JNJ, KO, MCD, MRK, MSFT, PFE, PG, T, TRV, UTX, WMT

                 

Dow 30 stocks with negative weekly signals:  

      

           AA, BAC, CSCO, JPM, KFT, MMM, VZ, XOM

·        Underline names have changed from previous week*

                             

 

 

VI.    KEY EVENTS IN THE WEEK AHEAD:

Monday, November 16

Economic

08:30 Retail Sales (Oct.): 0.9% cons.

08:30 Retail Sales Ex.-Auto (Oct.): 0.4% cons.

08:30 Empire Manufacturing (Nov.): 30.00 cons.

10:00 Business Inventories (Sep.): -0.7% cons.

Earnings

Before: ADES, ADY, COWN, CYPB, FTK, FREE, LOW, ORBK, PWRD, SOL, SCR

After: AOB, AGO, CHINA, CDCS, LFT, PSUN, SINA

Events

DV Education Day

KO Analyst Meeting

FED: Fed's Bernanke speak about U.S. economic outlook

 

Tuesday, November 17

Economic

08:30 PPI (Oct.): 0.5% cons.

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

09:00 Net Long Term TIC Flows (Sep.): $35.0B cons.

09:15 Capacity Utilization (Oct.): 70.8% cons.

09:15 Industrial Production (Oct.): 0.4% cons.

Earnings

Before: CSIQ, COV, EJ, HD, ITRN, JEC, MEDX, MPEL, SKS, TGT, TJX, VIT

After: ADSK, DL, CNQR, HNSN, LZB, NM, CRM, SNS

Events

STEC Analyst Day RYL, BZH, HOV at UBS Building and Building Products Conf. CVS, MHS, DNDN, ISRG at Lazard Capital Healthcare Conf.

Wednesday, November 18

Economic

08:30 Housing Starts (Oct.): 600K cons.

08:30 Building Permits (Oct.): 580K cons.

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

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

10:30 Crude Inventories: 1.76M prior

Earnings

Before: BJ, CHS, CSUN, DHT, LDK, PERY, SOLF

After: CHIC, CYBX, DCI, GYMB, HOTT, JACK, LTD, NTAP, NTES, PETM, PVH, SMTC, WGOV

Events

MSFT Analyst Briefing at the Microsoft Professional Developers Conf.

ONXX, XRAY, MYGN, HGSI at Lazard Capital Healthcare Conf.

HERO, NBL, XOM, DVR at Bank of America Securities Energy Conf.

 

Thursday, November 19

Economic

08:30 Initial Claims: 504K cons.

08:30 Continuing Claims: 5600K cons.

10:00 Leading Indicators (Oct.): 0.4% cons.

10:00 Philadelphia Fed (Nov.): 12.0 cons.

Earnings

Before: BONT, BRC, PLCE, CMED, CIT, DKS, GME, HP, KLIC, NWY, NJR, PDCO, ROST, SBH, SCHS, SHLD, SCVL, SI, SSI, GASS, SMRT, STP, SCMR, BKE, TDG, TSL, TWB

After: APWR, ARUN, CHRD, DELL, DBRN, FL, GPS, HIBB, INTU, MTSC, OHB, TSCM, VRGY, WTSLA, ZUMZ

Events

AMSC Analyst Meeting

WAG, CAKE, ADM, BJ at Morgan Stanley Global Consumer & Retail Conf.

NED, COGO, ATV, CBAK at Brean Murray China Growth Conf.

 

Friday, November 20

Economic

Earnings

Before: CRMT, ANN, DHI, SJM, KIRK, MPR

After:

Events

MHS Analyst Meeting

GFRE, HRBN, TSTC, SDTH at Brean Murray China Growth Conf.

CBY Investor Relations Seminar

 

 

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