equityletter.com 12/21/09
Note: Event Calendar is located at bottom of page
I. General Commentary
It was a mixed week for the major U.S. equity market averages as the amazing 2009 trading year draws to a close. The Dow Jones Industrial average declined by 1.36%, the S&P 500 was lower by 0.28% while the small-cap Russell 2000 and NASDAQ composite sported gains of 1.68% and 0.98% respectively.
As detailed below the Financial sector was a drag on the equity market last week as the massive amount of secondary equity issuance from the likes of Bank America, Wells Fargo, and Citigroup finally took it’s toll on buyers. Credit card companies also contributed to selling pressure after Capital One Financial (COF-39.50) disclosed a month over month increase in delinquencies from October to November, from 9.04% to 9.60%.
The Federal Open Market Committee (FOMC) left interest rates unchanged as expected from current levels and indicated that they would remain in place for the “foreseeable future”. The only change in language was that the FOMC indicated that some of the “emergency lending facilities” would be allowed to expire on February 1st of 2010. This statement is an indication of the potential removal of the “training wheels” of liquidity that have been a major contributor to the levitation of the U.S. equity market since the panic lows reached in March earlier this year. The FOMC is once again walking on the proverbial high wire by weighing minor general economic improvement versus concern over the ballooning Federal deficit and a potential future sharp increase of price inflation. The architect of the emergency measures, Fed Chairman Ben Bernanke was approved by the Senate for another term as more work needs to be done to clean up the excesses from his predecessor, Alan Greenspan.
As detailed in the subsections below, regardless of the relatively benign trading action last week the equity markets appear to be in flux. As the Fed has indicated the removal of the back-stop of emergency liquidity programs the financial sector appears to be coming under increased selling pressure. We are beginning to see signs of sector rotation out of Financials and Retailers in favor of Oil Service, Home Builders, and small-cap names via the Russell 2000.
We would like to wish a very safe and Happy Holidays to all!!
The major market averages under our coverage that we currently rate with positive weekly technical indications are the SPDR- S&P 500 (SPY-110.21), Diamonds Trust (DIA-103.14), U.S. $ Index (UUP-23.01), NASDAQ Composite (COMP-2211.69), IShares Russell 2000 Index Fund (IWM-61.18) and the Powershares QQQQ Trust (QQQQ-44.46). We currently retain a negative view on the I-share 7-10 year Treasury bond (IEF-90.73). *Take note that the IWM is an upgrade from the previous letter.*
Sector ETF’s within our coverage universe that remain in favor according to our weekly oriented technical analysis include the Transportation (IYT), Homebuilding (XHB) , Oil Service (OIH), Agriculture (MOO), Real Estate (IYR), Coal (KOL), Pharmaceuticals (PPH), and Semiconductors (SMH). *Take note that the XHB, OIH, and KOL are upgrades from prior letter.* Use price weakness to increase long exposure or to initiate long trades.
Sector ETF’s that we currently rate as neutral include the Gold (GLD), Steel (SLX), Internet Related (HHH), Natural Gas (UNG), and Managed Healthcare. * Take note that there are no additions to the neutral list from the previous letter.*
Sector ETF’s that we believe to be currently vulnerable to downside pricing pressure are the Large Integrated Oil (XOI), Crude Oil (USO), and Financials (XLF), and Retailers (RTH). *The XLF and RTH are downgrades 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-90.73 (I-share 7-10 year Treasury bond) advanced 0.07% for the week as the yield on the 10- year treasury remained unchanged at 3.54%. For comparative reference the yield on the 10-year Treasury began the 2009 trading year at 2.24%. The IEF is entering week threeof a “sell” signal. The weekly closing price resistance level in order to maintain our current “sell” signal shall be lowered to 91.18. Any weekly closing price above 91.18 will negate our current “sell” signal for the IEF. It is the third week of a “sell” signal with the 90.00 price level acting as a key price support level. Any failure for the IEF to maintain the 90.00 support level will indicate a further downside move to the 88.00 area.
A. Financials
The Financial Select Sector Index (XLF-14.22) finished the trading week with a 0.81% decline. The XLF is now positive by 13.57% to date for the 2009 trading year. The XLF has closed below our weekly price support level therefore generating a fresh “sell” signal. Our weekly closing price resistance level in order to maintain said “sell” signal shall be set at 14.48. Any weekly closing price above 14.48 will negate our fresh “sell” signal for the XLF. A fresh weekly “sell” signal has been generated in Bank of
B. Builders
The Homebuilder exchange traded fund (XHB-14.90) advanced 2.25% for the week. The 2009 year-to-date performance of the XHB currently stands at a positive 24.37%. The XHB has closed above our weekly price resistance level and has therefore generated a fresh “buy” signal. Our weekly closing price support level in order to maintain our fresh “buy” signal for XHB shall be set at 14.50. Any weekly closing price below the 14.50 support level will negate our fresh “buy” signal in the XHB. Fresh weekly “buy” signals have been generated in XHB components D R Horton (DHI-10.53), Pulte Homes (PHM-9.28), and Ryland Group (RYL-18.97). A weekly “buy” signal remains in place for XHB component Toll Brothers (TOL-18.18). Weekly “sell” signals remain in place for XHB components KB Homes (KBH-13.09) and Lennar (LEN-12.45). A change of weekly trend has been signaled; we would now use extended price weakness in the XHB and above positively mentioned names to increase long exposure and or to initiate long trades.
B. Semiconductor
The Semiconductor group (SMH-27.07) advanced 1.21% for the week. The SMH performance for 2009 to date stands at a positive 53.71%. The SMH is entering week six of a “buy” signal. Our weekly price support level in order to maintain our current “buy” signal shall remain at 25.10. Any weekly closing price below 25.10 will negate our current “buy” signal for the SMH. Weekly “buy” signals remain in place across the board for SMH components Analog Devices (ADI-30.88), Novellus (NVLS-23.94), Texas Instruments (TXN-25.46), Micron Technology (MU-8.78), SanDisk (SNDK-25.08), Applied Materials (AMAT-13.62) and Intel (INTC-19.63). The SMH recaptured the price decline of the prior week. We view the SMH as slightly over bought and near the 28.00 weekly price resistance area. Trade initiation price entry is very important so we would look for lower price levels to initiate long trades. Use extended price weakness in the SMH and above mentioned “favorable” names to increase long exposure and or to initiate long trades.
D. Retailers
The Retail sector (RTH-92.78) finished the trading week with a 2.32% decline. The 2009 performance of the RTH currently stands at a positive 23.45%. The RTH has closed below our weekly price support level and has therefore generated a fresh “sell” signal. Our weekly closing price resistance level for the RTH in order to maintain the fresh “sell” signal shall be set at 95.09. Any weekly closing price above 95.09 will negate our fresh “sell” signal for the RTH. Fresh weekly “sell” signals have been generated in RTH components WalMart (WMT-52.85) and BestBuy (BBY-39.50). A fresh weekly “buy” signal has been generated in Target (TGT-48.24). Weekly “buy” signals remain in place for RTH components Kohl’s (KSS-53.39), Sears Holding’s (SHLD-76.27) and Home Depot (HD-28.65). A weekly “sell” signal continues to remain in place for RTH component Walgreen’s (WAG-36.64). A change of weekly trend has been generated; it is now time to use extended price strength in the RTH and above negatively mentioned names to reduce long exposure and or to initiate short trades.
E. Steels
The Steel sector (SLX-59.90) finished the week with a 0.18% decline. The current 2009 trading year return for the SLX is a positive 103.94%. The SLX is entering week eight of a “sell” signal. Our weekly closing price resistance level for the SLX shall remain at 60.21. Any weekly closing price above 60.21 will negate our current “sell” signal for the SLX. Weekly “buy” signals remain in place for
F. Pharmaceuticals and Healthcare
The Pharmaceutical group (PPH-66.36) increased by 0.02% last week. The current 2009 return for the PPH stands at a positive 8.20%. The PPH is entering week five of a “buy” signal. Our weekly price support level in order to maintain the current weekly “buy” signal shall remain at 65.10. Any weekly closing price below 65.10 will negate our current “buy” signal for the PPH. Weekly “buy” signals remain in place for PPH components Johnson & Johnson (JNJ-64.37), Pfizer (PFE-18.30), Merck (MRK-37.40), Abbott Lab’s (ABT-53.34), and GlaxoSmithKline (GSK-41.80). Eli Lilly (LLY-35.72) is the only PPH component that we would avoid at this time. The weekly trends remain favorable; use extended price weakness in the PPH and above positively mentioned components to increase exposure and or to initiate long trades.
III. Gold
GLD (streetTracks gold index) – The GLD (108.95) declined 0.34% on the week. For the 2009 trading year the GLD currently rests with a positive return of 25.92%. The GLD is entering week two of a “sell” signal. Our weekly closing price resistance level in order to maintain our current “sell” signal shall be lowered to 111.91. Any weekly closing price above 111.91 will negate our current “sell” signal for the GLD. A slight down week for the GLD as it continues to correct from an over-bought condition. The low trade of last week at 107.04 is now viewed as key price support as any downside violation of the price level will indicate further weakness down to the 100.00 area. On the flip side any weekly closing price above 111.91 will indicate a resumption of another “bullish” phase for the GLD. We shall remain neutral at this time until either of our key price levels indicates future direction.
IV. Energy- (Oil, Oil Service, Nat’l Gas, Coal)
The Large-Cap Integrated Oil space (XOI-1043.97) closed out the trading week with a 0.43% decline. The XOI is now positive by 6.56% for the 2009 trading year. The XOI is in the eighth week of a “sell” signal. Our weekly price resistance in order to maintain our current “sell” signal shall remain at 1074.87. Any weekly closing price above 1074.87 will negate our current “sell” signal for the XOI. Weekly “sell” signals remain in place for XOI components Exxon-Mobil (XOM-68.21), British Petroleum (BP-56.18), Suncor Energy (SU-33.70), Conoco-Phillips (COP-49.80) and Chevron-Texaco (CVX-76.90). A test of the 1000.00 area price support level continues to be our near term forecast.
The Oil Service Index (OIH-117.72) advanced 3.01% this past trading week. The 2009 year to date return for the OIH stands at a positive 59.62%. After seven weeks on our “sell” list the OIH has closed above our weekly price resistance therefore generating a fresh weekly “buy” signal. Our weekly closing price support level in order to maintain our fresh “buy” signal shall be set at 115.12. Any weekly closing price below 115.12 will negate our fresh weekly “buy” signal for the OIH. Concurrent “buy” signals have been generated in OIH components Halliburton (HAL-29.62), Schlumberger (SLB-62.95) and Baker Hughes (BHI-40.51). Weekly “sell” signals continue to remain in place for Ensco (ESV-41.82) and Transocean (RIG-82.59). A change of weekly trend has been signaled; it is time to switch course and use extended price weakness in the OIH and above positively mentioned components to increase exposure and or to initiate long trades.
Natural Gas (UNG-10.62) advanced 10.97% this past week. The current 2009 performance of the UNG is a negative 54.16%. The UNG is entering week two of a “buy” signal. Our weekly price support level in order to maintain our current “buy” signal shall be raised to 9.64. Any weekly closing price below 9.64 will negate our current “buy” signal for the UNG. We shall maintain our neutral stance for the UNG at this time but any weekly closing price above the 10.84 price level will further enhance bullish momentum; for now the two-week advance can only be categorized as an over sold bounce.
The Coal Sector (KOL-34.75) advanced by 0.40% this past week. Year-to-date the KOL is positive by 133.37%. The KOL is entering week six of a “buy” signal. Our weekly closing price support level in order to maintain our current “buy” signal shall remain at the 33.90 price level. Any weekly closing price below 33.90 will negate our current “buy” signal for the KOL. Improved technicals in coal equities BTU, MEE, and CNX, indicate that this sector is poised to move higher from current price levels.
V. Dow 30 Analysis
Our Weekly Trend Indicator (WTI) measures in at +4, a decrease from the previous week reading of +12. Currently 56.0% of the thirty Dow Jones Industrial components have favorable weekly chart formations; this is a decrease from 70.0% in the prior week. The Dow Jones Industrial average declined 1.36% for the week to 10328.89. The current return for the 2009 trading year stands at a positive 17.68%.
The S&P 500, as measured by the SPY (110.21), declined 0.28% for the week. The 2009 trading year return for the SPY is positive by 22.12%. Small caps issues, as measured by the IWM (IShares Russell 2000 Index Fund- 61.18), advanced 1.68% for the week. The IWM year to date return is currently a positive 24.24%.
The DIA (103.14) closed out the week with a 1.31% decline and is entering week six of a “buy” signal. Our weekly closing price support level in order to maintain the current “buy” signal shall remain at 102.72. Any weekly closing price below 102.72 will negate our current “buy” signal for the DIA. The DIA once again flirted with the 105.00 trend price resistance level only to be denied as sellers gained the upper hand in late week trade. Despite our five-week buy signal we remain somewhat cautious and now view the 101.75 price level as a critical intra-week price support level as it is the low end of the five-week trading range. Weekly up trend and down trend lines are now converging which is an indication that a sharp move in either direction is coming soon. Any downside penetration of the 101.75 price support level will indicate a sharp downside move to the 99.00 area.
Fresh weekly buy signals generated: MSFT
Fresh negative weekly signals generated: BA, BAC, GE, PG, WMT
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, CAT, CSCO, DIS, HD, HPQ, IBM, INTC, JNJ, KO, MRK, MMM, MSFT, PFE, T, UTX, VZ
Dow 30 stocks with negative weekly signals:
AXP, BA, BAC, CVX, DD, GE, JPM, KFT, MCD, PG, TRV, WMT, XOM
· Underlined names have changed from previous week*
VI. KEY EVENTS IN THE WEEK AHEAD:
Monday, December 21
Economic
Earnings
Before: CAG
After: JBL
Events
FED: $30 bln 3-month and $31 bln 6-month Treasury Bill Auctions
Tuesday, December 22
Economic
Earnings
Before: CMC, LNN, PRGS
After: CTAS, FINL, MU, RHT, TIBX
Events
| No notable events scheduled |
Wednesday, December 23
Economic
Earnings
Before: AM
After: OHB
Events
No notable events scheduled
Thursday, December 24
Economic
Earnings
Before:
After: COMS, CRI
Events
Equity Markets close early for Christmas Eve (
Bond Markets close early for Christmas Eve (
Friday, December 25
Economic
Earnings
Before:
After:
Events
Equity & Bond Markets closed for Christmas
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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