equityletter.com 01/04/10

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 01/04/10

 

 

     Note:  Event Calendar is located at bottom of page

      

I.                  General Commentary

  At this point in time a year ago there were very few market pundits who boldly dared to predict positive market returns for the 2009 trading year.  After a crisis filled, at times horrific, and historical 2008, a majority of forecasts were for further market declines.  Equity market declines for the 2009 trading year were decidedly probable were it not for the cavalry of extraordinary emergency liquidity measures taken by the U.S. Treasury and the Federal Reserve.  By our own admission our fundamental views failed to discount the enormity of Fed action and resulting beneficial equity market impact.  In early March of last year after the Fed opened the monetary spigots full bore, the headwinds of fear quickly turned in to tailwinds of emergency liquidity provision.  The resulting asset inflation enabled the S&P 500 and NASDAQ to rebound sharply and close out the trading year with impressive gains of 23.49% and 43.89% respectively.  While the Fed actions succeeded in restoring a semblance of sanity to the average investors retirement account the jury shall remain out regarding the effects on the restoration of U.S. economic growth.  The stabilization of a declining housing market and the decline in the pace of job destruction do not necessarily precede a healthy growing economy.  The disappearance of the securitization market has drastically altered bank lending standards.  Lend and extend is no longer fashionable as banks again must exercise due diligence and consider the ability of a borrower to repay a loan.  Those who believe that unemployment is a lagging indicator may want to question their logic.  The U.S. is, without doubt a consumer driven economy.  Debt burdened consumers need employment in order to consume.  Without a securitization market to off load questionable credit risks lenders must now require employment before extending credit.  Ask the simple question, which comes first, a loan or a job? Simply put, a consumer based economy NEEDS job creation.

  As the 2010 trading year commences the equity markets are clearly beginning from drastically different price levels of a year ago.  The market mood feels more like one of amazement rather than pessimism or ebullience.  The Federal Reserve has recently stated that some of the emergency liquidity measures instituted during the height of the financial crisis will be allowed to expire.  The recent rise in interest rates reflects the bond market concern of lack of Fed participation on the buy-side. The rise in interest rates has injected life in to the U.S. Dollar.  If 2010 will be a year of less Fed liquidity and a stronger dollar, the equity markets will demand sustainable corporate profit growth.  In other words the New Year will bring much less room for error when it comes to stock-picking.

 

We would like to wish a very healthy, safe and prosperous 2010 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-111.44), Diamonds Trust (DIA-104.07), U.S. $ Index (UUP-23.08), NASDAQ Composite (COMP-2269.15), IShares Russell 2000 Index Fund (IWM-62.44) and the Powershares QQQQ Trust (QQQQ-45.75).  We currently retain a negative view on the I-share 7-10 year Treasury bond (IEF-88.60).  *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 Homebuilding (XHB), Oil Service (OIH), Agriculture (MOO), Real Estate (IYR), Coal (KOL), Steel (SLX), Pharmaceuticals (PPH), and Semiconductors (SMH).  *Take note that the SLX is an upgrade from the 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), Crude Oil (USO), and Natural Gas (UNG).  * Take note that the USO is a new upgrade 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), Transportation (IYT), Financials (XLF), and Retailers (RTH). *Take note that the IYT is a new downgrade 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-88.60 (I-share 7-10 year Treasury bond) declined 0.31% for the week as the yield on the 10- year treasury increased from 3.80% to 3.84%.  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 89.06.  Any weekly closing price above 89.06 will negate our current “sell” signal for the IEF.  In the past five weeks the yield on the 10-year Treasury has increased roughly 62 basis points, going from 3.22% to the current 3.84%.  The bond market is discounting the coming expiration of some of the emergency liquidity measures instituted by the Federal Reserve.  The 4.00% level appears to be price resistance for the 10-year yield; this would translate in to price support for the IEF at the 86.25 price level. The weekly trend remains a negative one but we are now approaching major price support levels.

 

A.     Financials

 

          The Financial Select Sector Index (XLF-14.40) finished the trading week with a 0.89% decline. The XLF concluded the 2009 trading year with a positive return of 15.01%.  The XLF is entering week three of a “sell” signal.  Our weekly closing price resistance level in order to maintain our current “sell” signal shall remain at 14.53.  Any weekly closing price above 14.53 will negate our current “sell” signal for the XLF.  A fresh weekly “buy” signal has been generated in XLF component Goldman Sachs (GS-168.84).  Weekly “buy” signals currently exist for XLF components Chicago Mercantile Exchange (CME-335.96) and MetLife (MET-35.35).  Weekly “sell” signals continue to remain in place for XLF components Bank of America (BAC-15.06), American Express (AXP-40.52), Morgan Stanley (MS-29.60), Citigroup (C- 3.31), J.P. Morgan (JPM-41.67), Wells Fargo (WFC-26.99), and U.S. Bancorp (USB-22.51).  An indication of positive momentum from GS warrants attention as a potential upside move to the 180.00 area may be in store over the near term.  We would look to get long GS upon price weakness with a protective sell-stop under 160.00.  We would continue to use extended price strength in the XLF and above negatively mentioned components to reduce long exposure and or to initiate short trades.

    

          B.  Builders

 

 The Homebuilder exchange traded fund (XHB-15.11) declined 2.77% for the week. The 2009 year-to-date performance of the XHB concluded at a positive 26.13%.  The XHB is entering week three of a “buy” signal.  Our weekly closing price support level in order to maintain our current “buy” signal for XHB shall remain 14.85.  Any weekly closing price below the 14.85 support level will negate our current “buy” signal in the XHB.  Weekly “buy” signals remain in place for XHB components Toll Brothers (TOL-18.81), D R Horton (DHI-10.87), Pulte Homes (PHM-10.00), KB Homes (KBH-13.68), Lennar (LEN-12.77) and Ryland Group (RYL-19.70).  Take note that XHB component LEN is scheduled to report quarterly earnings in the coming week.   Week three 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-27.92) declined 0.53% for the week.   The SMH performance for the 2009 trading year finished at a positive 58.54%.  The SMH is entering week eight of a “buy” signal.  Our weekly price support level in order to maintain our current “buy” signal shall be raised to 27.54.  Any weekly closing price below 27.54 will negate our current “buy” signal for the SMH.  A fresh weekly “sell” signal has been generated in SMH component Novellus (NVLS-23.34).  Weekly “buy” signals remain in place for SMH components Analog Devices (ADI-31.58), Texas Instruments (TXN-26.06), Micron Technology (MU-10.56), SanDisk (SNDK-28.99), Applied Materials (AMAT-13.94) and Intel (INTC-20.40).  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-93.84) finished the trading week with a 1.11% decline.  The final 2009 return of the RTH ended at a positive 24.87%.  The RTH is entering week three of a “sell” signal.  Our weekly closing price resistance level for the RTH in order to maintain the current “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-53.93), Sears Holding’s (SHLD-83.45), Target (TGT-48.37), and Home Depot (HD-28.93).  Weekly “sell” signals continue to remain in place for RTH components Walgreen’s (WAG-36.72), WalMart (WMT-53.45) and BestBuy (BBY-39.46).  Week three 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-61.52) finished the week with a 1.30% decline.  The final 2009 trading year return for the SLX was a sparkling 109.46%.  The SLX is entering the second week of a “buy” signal.  Our weekly closing price support level for the SLX shall remain at 60.24.  Any weekly closing price below 60.24 will negate our current “buy” signal for the SLX.  Weekly “buy” signals remain in place for U.S. Steel (X-55.12), Arcelor Mittal (MT-45.75), Nucor (NUE-46.65), and Steel Dynamics (STLD- 17.72).  The highly volatile SLX finished a very strong 2009 trading year on a slightly sour note.  While we shall continue to question the fundamental demand equation for this sector the charts continue to indicate strength.  Continue to use price weakness to increase exposure and or to initiate long trades.

 

F.    Pharmaceuticals and Healthcare

 

          The Pharmaceutical group (PPH-66.00) decreased by 0.99% last week. The PPH finished the 2009 trading year with a positive return of 7.61%.  The PPH is entering week seven 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.  A fresh weekly “sell” signal has been generated in PPH component Merck (MRK-36.54).  Weekly “buy” signals remain in place for PPH components Johnson & Johnson (JNJ-64.41), Pfizer (PFE-18.19), Abbott Lab’s (ABT-53.99), and GlaxoSmithKline (GSK-42.25).  Eli Lilly (LLY-35.71) shall remain on our “sell” list 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 (107.31) declined 0.97% on the week.  The GLD finished the 2009 trading year with a positive return of 24.02%.  The GLD is entering week four of a “sell” signal.  Our weekly closing price resistance level in order to maintain our current “sell” signal shall remain at 109.30.  Any weekly closing price above 109.30 will negate our current “sell” signal for the GLD.  The GLD price retreat is now five weeks in duration but the 107.00 trend line support level has yet to be violated on a weekly closing price basis.  Any weekly closing price below 107.00 will indicate further downside for the GLD.  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-1068.21) closed out the trading week with a 0.83% decline.  The XOI completed the 2009 trading year with a positive return of 9.03%.  The XOI is in the tenth week of a “sell” signal.  Our weekly price resistance in order to maintain our current “sell” signal shall remain at 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-68.19), British Petroleum (BP-57.97), Suncor Energy (SU-35.31), Conoco-Phillips (COP-51.07) and Chevron-Texaco (CVX-76.99).  Crude oil had an up week but the XOI neglected to confirm a change of weekly trend.  We would continue to underweight the XOI and related components at this time.

 

The Oil Service Index (OIH-118.88) declined 1.50% this past trading week.  The 2009 year to date return for the OIH finished at a positive 61.19%.  The OIH is entering week three of a “buy” signal.  Our weekly closing price support level in order to maintain our current “buy” signal shall remain at 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-30.09), Schlumberger (SLB-65.09) and Baker Hughes (BHI-40.48).  Weekly “sell” signals continue to remain in place for Ensco (ESV-39.94) and Transocean (RIG-82.80).  Week three 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-10.08) declined 2.33% this past week.  The UNG ended the 2009 trading year with a negative return of 56.49%.  The UNG is entering week four 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 four-week advance can only be categorized as an over sold bounce.

 

The Coal Sector (KOL-36.12) declined by 0.66% this past week.  The KOL ended the 2009 trading year with a positive return of 142.57%.  The KOL is entering week eight of a “buy” signal.  Our weekly closing price support level in order to maintain our current “buy” signal shall be raised to the 35.85 price level.  Any weekly closing price below 35.85 will negate our current “buy” signal for the KOL.  The KOL, the top sector performer of 2009 under our coverage, continues to display positive technical characteristics at this time.  This being stated, the outstanding performance of the 2009 trading year will be much more difficult to replicate.

 

 

V.               Dow 30 Analysis

 

Our Weekly Trend Indicator (WTI) measures in at +6, a decrease from the previous week reading of +8.  Currently 60.0% of the thirty Dow Jones Industrial components have favorable weekly chart formations; this is a decrease from 63.0% in the prior week.  The Dow Jones Industrial average declined 0.87% for the week to 10428.05. The return for the 2009 trading year finished at a positive 18.81%. 

 

The S&P 500, as measured by the SPY (111.44), declined 0.92% for the week.  The final 2009 trading year return for the SPY ended at a positive 23.49%.   Small caps issues, as measured by the IWM (IShares Russell 2000 Index Fund- 62.44), declined 1.45% for the week.  The IWM concluded the 2009 trading year at a positive 26.80%.

 

          The DIA (104.07) closed out the week with a 0.89% decline and is entering week eight 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.  After achieving new high price levels for the 2009 trading year early in the week the DIA succumbed to end of year profit taking once again failing to close above what we would categorize price trend resistance.  The DIA continues to struggle with a weekly close above the 105.00 trend resistance level.  Any weekly close above significantly above 105.00 for the DIA would indicate further upside to the 110.00 area. From a price support perspective we continue to view the 102.72 support level as weekly “buy” signal price support.  Any downside violation of this key level will indicate a troublesome beginning for the 2010 trading year.  

           

Fresh weekly buy signals generated: N/A

 

Fresh negative weekly signals generated: MRK

 

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, MMM, MSFT, PFE, T, UTX, VZ

                 

Dow 30 stocks with negative weekly signals:  

      

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

·        Underlined names have changed from previous week*

                             

 

 

VI.             KEY EVENTS IN THE WEEK AHEAD:

 

Monday, January 4

Economic

10:00 Construction Spending (Nov.): -0.5% cons.

10:00 ISM Index (Dec.): 54.0 cons.

Earnings

Before:

After: ANGO, LNDC, MG, MOS, SONC, SNX, TISI

Events

 FED: Fed's Lockhart moderates financial crisis panel in Atlanta
$25 bln 3-month and $26 bln 6-month Treasury Bill Auctions
Fed's Duke speaks on economic outlook in North Carolina

 

Tuesday, January 5

Economic

10:00 Factory Orders (Nov.): 0.5% cons.

10:00 Pending Home Sales (Nov.): -3.0% cons.

14:00 Auto Sales (Dec.): 3.8M prior

14:00 Truck Sales (Dec.): 4.6M prior

Earnings

Before:

After:

Events

TIVO, EXPE, DTV, TRI at Citi Global Entertainment, Media, and Telecom Conf. FED: Fed's Hoenig to speak on ending government bailouts

Wednesday, January 6

Economic

07:30 Challenger Job Cuts (Dec.): -72.3% prior

08:15 ADP Employment Report (Dec.): -75K cons.

10:00 ISM Services (Dec.): 50.5 cons.

10:30 Crude Inventories: -1.54M prior

Earnings

Before: AYI, FDO, MON, NWPX, RBN, RPM, UNF, WOR

After: BBBY, CBK, BLUD, OHB, RECN, RT, SMSC

Events

S, VZ, CMCSA, DISCA at Citi Global Entertainment, Media, and Telecom Conf.
POWR, ADES, MTZ, GOK at Pritchard Capital Partners Energize Conf.
FED: Fed's Minutes from December FOMC Meeting 

 

Thursday, January 7

Economic

08:30 Initial Claims: 445K cons.

08:30 Continuing Claims: 5040K cons.

Earnings

Before: STZ, LEN, MSM, TXI

After: APOL, CRI, DMAN, DRWI, GPN, HIS, LWSN, NUHC, SCHN

Events

SNIC, MSFT at CEA International Consumer Electronics Show
XLNX, TECD, NVDA, MSFT at JPMorgan Technology Forum
EHTH, LEAP, IMAX, DSCM at Citi Global Entertainment, Media, and Telecommunications

 

Friday, January 8

Economic

08:30 Nonfarm Payrolls (Dec.): 0K cons.

08:30 Unemployment Rate (Dec.): 10.1% cons.

08:30 Average Workweek (Dec.): 33.2 cons.

08:30 Hourly Earnings (Dec.): 0.2% cons.

10:00 Wholesale Inventories (Nov.): -0.3% cons.

15:00 Consumer Credit (Nov.): -$5.0B cons.

Earnings

Before: AZZ, GBX, PSMT

After:

Events

TGE, PKD, UNT at Pritchard Capital Partners Energize Conf.
SIMG, SNIC at CEA International Consumer Electronics Show

 

 

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