equityletter.com 12/28/09

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 12/28/09

 

 

     Note:  Event Calendar is located at bottom of page

      

I.                  General Commentary

  As the year 2009 draws to a conclusion we look in the rear view mirror and see what a truly historical market year it was.  The first few months of the year were filled with chaos and fear as the future of the U.S. financial system was in doubt due to the unraveling of the black hole called the securitization market.  The securitization market with it’s various ingenious inventions such as Collateralized Debt Obligations (CDO’s) and so forth proved to be nothing more than a giant Ponzi scheme which eventually would leave the U.S. taxpayer holding the hot potato.  The infamous Bernie Madoff, convicted swindler, must chuckle in his prison cell when comparing the magnitude of the securitization scam versus his own indiscretion.  In the midst of all the chaos the Treasury Chief, Tim Geithner and the Federal Reserve Chairman Ben Bernanke used everything in their arsenal and more to prevent the impending financial Armageddon.  Their actions were not taken because of want; they were taken because of need.  The response to the panic was a familiar bureaucratic response, print more money.  The various emergency FED bail out programs were lavished upon the troubled financial institutions that spent the most money on lobbyists in Washington,D.C..  Banks whose executives also served on Federal Boards were also treated receptively. Why? Because that is business as usual in our nation’s capitol.  I’m sure these facts are received well by the multitude of small regional bank employees who are now out of a job due to the record number of regional bank failures. The extreme measures taken by the FED have succeeded in terms of asset inflation.  Retirement accounts which were cut in half by the panic sell-off have recouped approximately 60.0% of there losses.  Despite this success we get the feeling that the FED is pumping air in to a leaky balloon.  The unemployment rate remains stubbornly high at a generously reported 10.0% and the housing market remains on shaky ground as late payments on prime mortgages were recently reported to have doubled from a year ago.  We understand the fact that these extreme measures by the FED were taken out of need but pumping massive amounts of liquidity in to the system does nothing more than extend this country’s problems in to the future.  Sound familiar, business as usual in our nation’s capitol.

 

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 there are no changes 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 there are no changes 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). *Take note that there are no changes 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-89.04 (I-share 7-10 year Treasury bond) declined 1.86% for the week as the yield on the 10- year treasury increased from 3.54% to 3.80%.  For comparative reference the yield on the 10-year Treasury began the 2009 trading year at 2.24%.  The IEF is entering week four of a “sell” signal.  The weekly closing price resistance level in order to maintain our current “sell” signal shall be lowered to 90.33.  Any weekly closing price above 90.33 will negate our current “sell” signal for the IEF.  It is the fourth week of a “sell” signal with interest rates climbing higher as the trading year draws to a close.  The weekly closing price below the key 90.00 support level indicates a forthcoming test of 87.50 price support level.

 

A.     Financials

 

          The Financial Select Sector Index (XLF-14.53) finished the trading week with a 2.18% advance. The XLF is now positive by 16.05% to date for the 2009 trading year.  The XLF has closed five cents above our weekly price resistance level after generating a fresh “sell” signal a week ago.  Regardless of this occurrence we shall maintain our negative opinion at this time.  Our weekly closing price resistance level in order to maintain our current “sell” signal shall be readjusted to 14.53.  Any weekly closing price above 14.53 will negate our current “sell” signal for the XLF.  Weekly “buy” signals currently exist for XLF components Chicago Mercantile Exchange (CME-331.17) and MetLife (MET-35.39).  Weekly “sell” signals continue to remain in place for XLF components Bank of America (BAC-15.25), American Express (AXP-41.68), Goldman Sachs (GS-163.97), Morgan Stanley (MS-29.60), Citigroup (C- 3.35), J.P. Morgan (JPM-41.89), Wells Fargo (WFC-27.09), and U.S. Bancorp (USB-22.58).  A hint of strength from the XLF is not enough to warrant a change of opinion as the internal components continue to reflect a distribution trend.  We would continue to use extended price strength to reduce long exposure and or to initiate short trades.

    

          B.  Builders

 

 The Homebuilder exchange traded fund (XHB-15.54) advanced 4.30% for the week. The 2009 year-to-date performance of the XHB currently stands at a positive 29.71%.  The XHB is entering week two of a “buy” signal.  Our weekly closing price support level in order to maintain our current “buy” signal for XHB shall be raised to 14.85.  Any weekly closing price below the 14.85 support level will negate our current “buy” signal in the XHB.  Fresh weekly “buy” signals have been generated in XHB components KB Homes (KBH-14.08) and Lennar (LEN-13.36).  Weekly “buy” signals remain in place for XHB components Toll Brothers (TOL-19.16), D R Horton (DHI-11.12), Pulte Homes (PHM-10.15), and Ryland Group (RYL-20.66).   Week two of a “buy” signal; we would continue to 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-28.07) advanced 3.69% for the week.   The SMH performance for 2009 to date stands at a positive 59.39%.   The SMH is entering week seven of a “buy” signal.  Our weekly price support level in order to maintain our current “buy” signal shall be raised to 27.22.  Any weekly closing price below 27.22 will negate our current “buy” signal for the SMH.  Weekly “buy” signals remain in place across the board for SMH components Analog Devices (ADI-31.69), Novellus (NVLS-23.60), Texas Instruments (TXN-25.83), Micron Technology (MU-10.16), SanDisk (SNDK-30.13), Applied Materials (AMAT-14.00) and Intel (INTC-20.33).  We continue to view the SMH as slightly over bought and now at 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-94.91) finished the trading week with a 2.31% advance.  The 2009 performance of the RTH currently stands at a positive 26.29%.  The RTH is entering week two of a “sell” signal.  Our weekly closing price resistance level for the RTH in order to maintain the fresh “sell” signal shall remain at 95.09.  Any weekly closing price above 95.09 will negate our current “sell” signal for the RTH.  Weekly “buy” signals remain in place for RTH components Kohl’s (KSS-54.65), Sears Holding’s (SHLD-83.86), Target (TGT-48.65), and Home Depot (HD-29.17).  Weekly “sell” signals continue to remain in place for RTH components Walgreen’s (WAG-37.48), WalMart (WMT-53.60) and BestBuy (BBY-40.70).  Week two of a sell signal; continue 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-62.33) finished the week with a 5.75% advance.  The current 2009 trading year return for the SLX is a positive 112.22%.  The SLX has closed the week above our price resistance level and is therefore indicating a change of weekly trend from negative to positive.  Our weekly closing price support level for the SLX shall be set at 60.24.  Any weekly closing price below 60.24 will negate our fresh “buy” signal for the SLX.  Weekly “buy” signals remain in place for U.S. Steel (X-56.86), Arcelor Mittal (MT-45.55), Nucor (NUE-47.10), and Steel Dynamics (STLD- 18.22).  The SLX, one of the top year-to-date upside performers, is attempting to close out the trading year in grand fashion.  Although appearing somewhat over bought and ahead of fundamentals at this point in time, the SLX and related components are poised to move higher.

 

F.    Pharmaceuticals and Healthcare

 

          The Pharmaceutical group (PPH-66.72) increased by 0.54% last week. The current 2009 return for the PPH stands at a positive 8.78%.  The PPH is entering week six 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-64.70), Pfizer (PFE-18.60), Merck (MRK-36.99), Abbott Lab’s (ABT-54.15), and GlaxoSmithKline (GSK-42.29).  Eli Lilly (LLY-36.08) 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 (108.36) declined 0.54% on the week.  For the 2009 trading year the GLD currently rests with a positive return of 25.24%.  The GLD 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 109.30.  Any weekly closing price above 109.30 will negate our current “sell” signal for the GLD.  Another slight down week for the GLD as it continues to correct from an over-bought condition.  The GLD traded as low as 105.31 last week but managed to recover and close above the 107.00 weekly trend line price support level.  In the coming week we shall watch the 107.00 support level intently for if held may signal an end to the three-week price correction.  We shall remain neutral at this time for we are negative in the short term but remain positive over the longer term.

 

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

 

The Large-Cap Integrated Oil space (XOI-1077.20) closed out the trading week with a 3.18% advance.  The XOI is now positive by 9.95% for the 2009 trading year.  The XOI is in the ninth week of a “sell” signal.  Our weekly price resistance in order to maintain our current “sell” signal shall be recalibrated to 1077.95.  Any weekly closing price above 1077.95 will negate our current “sell” signal for the XOI.  Weekly “sell” signals remain in place for XOI components Exxon-Mobil (XOM-68.66), British Petroleum (BP-58.24), Suncor Energy (SU-35.84), Conoco-Phillips (COP-50.87) and Chevron-Texaco (CVX-77.43).  An up week for the XOI but we remain of the opinion that a test of the 1000.00 area price support level is in the near future.

 

The Oil Service Index (OIH-120.69) advanced 2.52% this past trading week.  The 2009 year to date return for the OIH stands at a positive 63.64%.  The OIH is entering week two of a “buy” signal.  Our weekly closing price support level in order to maintain our current “buy” signal shall be raised to 118.30.  Any weekly closing price below 118.30 will negate our current “buy” signal for the OIH.  Weekly “buy” signals remain in place for OIH components Halliburton (HAL-30.27), Schlumberger (SLB-65.35) and Baker Hughes (BHI-41.02).  Weekly “sell” signals continue to remain in place for Ensco (ESV-42.24) and Transocean (RIG-84.31).  Week two of a buy signal; continue to use extended price weakness in the OIH and above positively mentioned components to increase exposure and or to initiate long trades.

 

Natural Gas (UNG-10.32) declined 2.82% this past week.  The current 2009 performance of the UNG is a negative 57.74%.  The UNG is entering week three of a “buy” signal.  Our weekly price support level in order to maintain our current “buy” signal shall remain at 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 three-week advance can only be categorized as an over sold bounce.

 

The Coal Sector (KOL-36.36) advanced by 5.55% this past week.  Year-to-date the KOL is positive by 144.19%.  The KOL is entering week seven of a “buy” signal.  Our weekly closing price support level in order to maintain our current “buy” signal shall be raised to the 34.56 price level.  Any weekly closing price below 34.56 will negate our current “buy” signal for the KOL.  The strong get stronger as the KOL and related equities look to finish 2009 as the top performers of our research universe.

 

 

V.               Dow 30 Analysis

 

Our Weekly Trend Indicator (WTI) measures in at +8, an increase from the previous week reading of +4.  Currently 63.0% of the thirty Dow Jones Industrial components have favorable weekly chart formations; this is an increase from 56.0% in the prior week.  The Dow Jones Industrial average advanced 1.85% for the week to 10520.10. The current return for the 2009 trading year stands at a positive 19.86%. 

 

The S&P 500, as measured by the SPY (112.48), advanced 2.06% for the week.  The 2009 trading year return for the SPY is positive by 24.64%.   Small caps issues, as measured by the IWM (IShares Russell 2000 Index Fund- 63.36), advanced 3.98% for the week.  The IWM year to date return is currently a positive 28.67%.

 

          The DIA (105.00) closed out the week with a 1.80% advance and is entering week seven 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 closed right on the 105.00 trend price resistance level, the best close of the 2009 trading year.  Despite our six-week buy signal we continue to remain somewhat cautious and view the 101.75 price level as a critical intra-week price support level as it is the low end of the six-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: DD, MCD

 

Fresh negative weekly signals generated: N/A

 

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, DD, DIS, HD, HPQ, IBM, INTC, JNJ, KO, MCD, MRK, MMM, MSFT, PFE, T, UTX, VZ

                 

Dow 30 stocks with negative weekly signals:  

      

          AXP, BA, BAC, CVX, GE, JPM, KFT, PG, TRV, WMT, XOM

·        Underlined names have changed from previous week*

                             

 

 

VI.             KEY EVENTS IN THE WEEK AHEAD:

 

Monday, December 28

Economic

Earnings

Before: NWPX

After:

Events

 FED: $44 bln 2-year Treasury Notes Auction
 $28 bln 3-month Treasury Notes Auction
 $29 bln 6-month Treasury Notes Auction

 

Tuesday, December 29

Economic

08:30 Case/Schiller 20 City (Oct.): -7.30% cons.

10:00 Consumer Confidence (Dec.): 53.0 cons.

Earnings

Before:

After:

Events

FED: $46 bln 5-year Treasury Notes Auction

Wednesday, December 30

Economic

09:45 Chicago PMI (Dec.): 55.1 cons.

10:30 Crude Inventories: -4.84M prior

Earnings

Before:

After: OHB

Events

 FED: $32 bln 7-year Treasury Notes Auction

 

Thursday, December 31

Economic

08:30 Initial Claims: 465K cons.

08:30 Continuing Claims: 5076K cons.

Earnings

Before: PNY

After: CRI

Events

No notable events are scheduled

 

Friday, January 1

Economic

Earnings

Before:

After:

Events

Equity & Bond Markets closed for New Year's Day    

 

 

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