equityletter.com 01/11/10

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 01/11/10

 

 

     Note:  Event Calendar is located at bottom of page

      

I.                  General Commentary

  The new trading year has begun with a positive bias as the major U.S. equity averages surged on average of 2.00%-3.00% last week.  Are the markets reflecting improving business conditions?  Is the U.S. economy really doing that well?  Are U.S. consumers finished de-levering and poised to spend, spend, and spend, once again?  From a fundamental perspective we continue to stare in amazement as the equity markets creep higher.  Our technical insight on equities continues to prevent losses from fundamental analysis short trades as for the most part the technical trends remain constructive. Current technical analysis of equity markets reveal that it is certainly not time to “fight the tape”, yet.

  There were three news items of interest last week that we deem worthy of comment.

  The first item was a special report issued by a respected research firm named TrimTabs.  TrimTabs is well followed by institutional investors as well as by the hedge fund community.  The firm brings in to question the sources of capital behind the roughly $6.0 trillion increase in market capitalization of U.S. equities since March of 2009.  The report stated that “traditional sources of capital did not create the recent boom in equities”.  Corporate America has been a net seller, U.S. equity funds saw minimal net inflows of only $20.0 billion, foreign inflows were only $109.0 billion, Hedge Funds had negative outflow of roughly $9.0 billion (April 2009 thru November 2009), and pension funds displayed no evidence of asset allocation out of bonds and in to equities.  Who is buying and driving the market higher?  TrimTabs intimates that the U.S. Federal Reserve in concert with the U.S. Government could possibly be the influential force in the equity surge through the active purchase of S&P 500 futures contracts.  If this is truly the case it is no coincidence that Fed Chairman Bernanke has resisted increased transparency of Fed operations.  Drastic times call for drastic measures but the manipulation of supposedly “free markets” questions the integrity of free market capitalism as a whole.  Does the Fed really believe in the term, “bid it and they will buy”?  All that can be stated is there better be one hell of an exit strategy.

  The second item of interest is the Consumer Credit report issued late Friday afternoon.  Analysts had estimated a further contraction of credit of $5.0 billion.  In November Consumer Credit contracted by an alarming $17.50 billion.  This is the largest one-month decline in credit since the index was created in 1943.  Consumers are still de-leveraging and bank lending standards remain stringent due to poor employment and an unstable housing market.  With interest rates currently in an upward trend the credit figures will continue to contract.  As we have stated in the past, the U.S. derives approximately 60.0% of GDP from consumer activity.  This cannot be fundamentally bullish for the U.S. economy.

  Our third news item of interest comes courtesy of the world’s most voracious consumer of energy and materials, China.  When in doubt China will consume it has been the story for some time now.  Last week the Chinese raised a key inter-bank interest rate for the first time in five months.  This action reflects a shift in policy for the Chinese authorities from pure economic growth to one that balances the management of inflation risks with economic growth.  Will the voracious Chinese appetite for energy and materials begin to decline? 

  All three news items covered above are certainly not bullish developments yet the U.S. equity markets continue to creep higher.  Fundamentally we remain very cautious but technically the amazing market levitation remains intact.  Don’t fight the tape, yet.

 

   The major market averages under our coverage that we currently rate with positive weekly technical indications are the SPDR- S&P 500 (SPY-114.57), Diamonds Trust (DIA-106.11), U.S. $ Index (UUP-22.84), NASDAQ Composite (COMP-2317.17), IShares Russell 2000 Index Fund (IWM-64.52) and the Powershares QQQQ Trust (QQQQ-46.55).  We currently retain a negative view on the I-share 7-10 year Treasury bond (IEF-88.96).  *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), Gold (GLD), Managed Care, Oil Service (OIH), Agriculture (MOO), Real Estate (IYR), Coal (KOL), Steel (SLX), Pharmaceuticals (PPH), and Semiconductors (SMH).  *Take note that the GLD and Managed Care sectors are upgrades 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 Financials (XLF), Large Integrated Oil (XOI), Transportation (IYT), Crude Oil (USO), and Natural Gas (UNG).  * Take note that the XLF, IYT, and XOI are upgrades to the neutral list from the previous letter.*

 

 Sector ETF’s that we believe to be currently vulnerable to downside pricing pressure are the Retailers (RTH). *Take note that there are no new additions to downgrade 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

 

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II.               Sector Analysis

                                             

The IEF-88.96 (I-share 7-10 year Treasury bond) advanced 0.41% for the week as the yield on the 10- year treasury decreased from 3.84% to 3.80%.  For comparative reference the yield on the 10-year Treasury began the 2010 trading year at 3.84%.  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 89.06.  Any weekly closing price above 89.06 will negate our current “sell” signal for the IEF.  In the past six weeks the yield on the 10-year Treasury has increased roughly 58 basis points, going from 3.22% to the current 3.80%.  The bond market is discounting the pending 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-15.22) finished the trading week with a 5.69% advance. The 2010 trading year return of the XLF is a positive 5.69%.  The XLF has closed above our weekly price resistance level therefore generating a fresh “buy” signal.  Our weekly closing price support level in order to maintain our fresh “buy” signal shall be set at 14.49.  Any weekly closing price below 14.49 will negate our fresh “buy” signal for the XLF.  Fresh weekly “buy” signals have been generated in XLF components J.P. Morgan (JPM-44.68), Wells Fargo (WFC-28.86), U.S. Bancorp (USB-24.21), Bank of America (BAC-16.78) and Morgan Stanley (MS-32.25).  Weekly “buy” signals remain current for XLF components Goldman Sachs (GS-174.31), Chicago Mercantile Exchange (CME-349.32) and MetLife (MET-38.25).  Weekly “sell” signals continue to remain in place for XLF components American Express (AXP-41.95) and Citigroup (C- 3.59).  The new trading year has commenced with notable sector rotation benefiting the financial sector.  An earnings report due from JPM in the coming week will be a determinant factor in whether the positive momentum of the financials can be maintained.  We would not “pay up” for the sector at current market prices but shall respect the current strength and upgrade the XLF from negative to neutral.  A potential change of trend from negative to positive gives us reason to temper our bearish stance at this time, we shall move from negative to neutral.

    

          B.  Builders

 

 The Homebuilder exchange traded fund (XHB-16.22) advanced 7.35% for the week. The 2010 year-to-date performance of the XHB currently rests at a positive 7.35%.  The XHB is entering week four of a “buy” signal.  Our weekly closing price support level in order to maintain our current “buy” signal for XHB shall be raised to 14.99.  Any weekly closing price below the 14.99 support level will negate our current “buy” signal in the XHB.  Weekly “buy” signals remain in place for XHB components Toll Brothers (TOL-20.03), D R Horton (DHI-12.17), Pulte Homes (PHM-11.03), KB Homes (KBH-15.97), Lennar (LEN-15.95) and Ryland Group (RYL-21.71).  Take note that XHB component KBH is scheduled to report quarterly earnings in the coming week.   Week four 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-28.522) advanced 2.15% for the week.   The current SMH performance for the 2010 trading year is a positive 2.15%.  The SMH is entering week nine of a “buy” signal.  Our weekly price support level in order to maintain our current “buy” signal shall be raised to 27.76.  Any weekly closing price below 27.76 will negate our current “buy” signal for the SMH.  Weekly “buy” signals remain in place for SMH components Analog Devices (ADI-31.49), Texas Instruments (TXN-26.34), Micron Technology (MU-11.10), SanDisk (SNDK-31.13), Applied Materials (AMAT-14.55) and Intel (INTC-20.83).  The only SMH component that we would currently avoid is Novellus (NVLS-24.06).  The SMH, a top performer in 2009 has begun the 2010 trading year in similar strong fashion.  The early strength displayed by the SMH closing price above the 28.00 resistance level indicates further upside to the 30.00-32.00 area.  Take note that influential SMH component INTC is scheduled to report quarterly earnings in the coming week.  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-94.39) finished the trading week with a 0.60% advance.  The current 2010 return of the RTH stands at a positive 0.60%.  The RTH is entering week four 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.  A fresh weekly “sell” signal has been generated in RTH component Kohl’s (KSS-52.83).  Weekly “buy” signals continue to remain in place for RTH components Sears Holding’s (SHLD-99.17), Target (TGT-50.07), and Home Depot (HD-28.98).  Weekly “sell” signals continue to remain in place for RTH components Walgreen’s (WAG-36.99), WalMart (WMT-53.33) and BestBuy (BBY-39.91).  Week four 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-67.55) finished the week with a 9.80% advance.  The current 2010 trading year return for the SLX measures in at a positive 9.80%.  The SLX is entering the third week of a “buy” signal.  Our weekly closing price support level for the SLX shall be raised to 63.06.  Any weekly closing price below 63.06 will negate our current “buy” signal for the SLX.  Weekly “buy” signals remain in place for U.S. Steel (X-65.34), Arcelor Mittal (MT-48.96), Nucor (NUE-49.93), and Steel Dynamics (STLD- 20.19).  The highly volatile SLX started the 2010 trading year on a very strong note benefiting from an approximate 20.0% one-week upside move from U.S. Steel (X-65.34).  While the trend remains positive the SLX and related components now appear extended to the upside which drastically alters the risk/reward equation of entering long trades at current price levels.  The story of this sector continues to revolve around Chinese demand and a weaker U.S. Dollar.  We shall remain fundamentally cautious but shall concede that momentum currently trumps fundamentals.  Continue to use price weakness to increase exposure and or to initiate long trades.

 

F.    Pharmaceuticals and Healthcare

 

          The Pharmaceutical group (PPH-66.68) increased by 1.03% last week. The PPH 2010 trading year return stands at a positive 1.03%.  The PPH is entering week eight 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 GlaxoSmithKline (GSK-41.10).  A fresh weekly “buy” signal has been generated in PPH component Merck (MRK-37.70).  This signal for MRK reverses a “sell” signal issued in our prior letter.  Weekly “buy” signals remain in place for PPH components Johnson & Johnson (JNJ-64.21), Pfizer (PFE-18.68), and Abbott Lab’s (ABT-55.05).  Eli Lilly (LLY-35.00) 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 (111.37) advanced 3.78% on the week.  The GLD current return for the 2010 trading year is a positive 3.78%.  The GLD has closed above our weekly price resistance level and has therefore generated a fresh weekly “buy” signal.  Our weekly closing price support level in order to maintain our fresh “buy” signal shall be set at 109.26.  Any weekly closing price below 109.26 will negate our fresh “buy” signal for the GLD.  After a five week price retreat which served to temper bullish euphoria the GLD is once again indicating a resumption of an upward path.  A change of trend has been signaled; the price correction appears to have concluded, time to once again use price weakness to increase exposure and or to initiate long trades.

 

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

 

The Large-Cap Integrated Oil space (XOI-1116.19) closed out the trading week with a 4.49% advance.  The XOI 2010 trading year return is a positive 4.49%.  After spending the past ten weeks on our “sell” list the XOI has closed above our weekly price resistance level, 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 1068.21.  Any weekly closing price below 1068.21 will negate our fresh “buy” signal for the XOI.  Concurrent weekly “buy” signals have been generated in XOI components Chevron-Texaco (CVX-79.47), Conoco-Phillips (COP-53.26), British Petroleum (BP-60.00) and Suncor Energy (SU-37.55).  A weekly “sell” signal shall remain in place for XOI component Exxon-Mobil (XOM-69.52) at this time.  The price strength of the past week shall give us cause to upgrade the XOI and above favorably mentioned components to neutral from negative.  We see near term upside potential for the XOI to the next area of price resistance, the 1200.00 area. 

 

The Oil Service Index (OIH-132.82) advanced 11.73% this past trading week.  The 2010 year to date return for the OIH stands at a positive 11.73%.  The OIH is entering week four of a “buy” signal.  Our weekly closing price support level in order to maintain our current “buy” signal shall be raised to 121.15.  Any weekly closing price below 121.15 will negate our current “buy” signal for the OIH.  Fresh weekly “buy” signals have been generated in OIH laggards Ensco (ESV-44.92) and Transocean (RIG-93.00).  Weekly “buy” signals remain in place for OIH components Halliburton (HAL-34.12), Schlumberger (SLB-70.65) and Baker Hughes (BHI-47.10).  The OIH surged out of the gates to start the New Year with a near term upside target now being the 140.00 resistance area.  Week four 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-10.41) advanced 3.27% this past week.  The UNG current 2010 trading year return is a positive 3.27%.  The UNG is entering week five of a “buy” signal.  Our weekly price support level in order to maintain our current “buy” signal shall be raised to 9.98.  Any weekly closing price below 9.98 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 the time being the five-week advance can be categorized as nothing more than an over sold bounce.

 

The Coal Sector (KOL-40.50) advanced by 12.13% this past week.  The KOL 2010 trading year performance stands at a positive 12.13%.  The KOL is entering week nine of a “buy” signal.  Our weekly closing price support level in order to maintain our current “buy” signal shall be raised to the 36.72 price level.  Any weekly closing price below 36.72 will negate our current “buy” signal for the KOL.  The KOL starts the New Year full steam ahead with near term upside being the next level of price resistance, the 45.00 area.

 

 

V.               Dow 30 Analysis

 

Our Weekly Trend Indicator (WTI) measures in at +12, an increase from the previous week reading of +6.  Currently 70.0% of the thirty Dow Jones Industrial components have favorable weekly chart formations; this is an increase from 60.0% in the prior week.  The Dow Jones Industrial average advanced 1.82% for the week to 10618.19. The return for the 2010 trading year stands at a positive 1.82%. 

 

The S&P 500, as measured by the SPY (114.57), advanced 2.81% for the week.  The current 2010 trading year return for the SPY is a positive 2.81%.   Small caps issues, as measured by the IWM (IShares Russell 2000 Index Fund- 64.52), advanced 3.33% for the week.  The IWM current 2010 trading year return is a positive 3.33%.

 

          The DIA (104.07) closed out the week with a 1.96% advance and is entering week nine of a “buy” signal.  Our weekly closing price support level in order to maintain the current “buy” signal shall be raised to 104.07.  Any weekly closing price below 104.07 will negate our current “buy” signal for the DIA.  The new trading year started out with a positive bias as the DIA gained roughly 2.00% and closed achieved a close above the 105.00 trend resistance area.  The strength of the DIA now projects upward to the next level of price resistance, the 110.00 area.  Any negative reversal of fortune for the DIA that results in a weekly close below 104.07 would negate our near term bullish stance.

           

Fresh weekly buy signals generated: BA, BAC, CVX, GE, JPM, KFT, MRK

 

Fresh negative weekly signals generated: KO, MCD, T, VZ

 

Readers should take note that Dow Jones Industrial components AA, INTC, and JPM are scheduled to report quarterly earnings in the coming week.

 

Dow 30 stocks with positive weekly signals:

 

AA, BA, BAC, CAT, CSCO, CVX, DD, DIS, GE, HD, HPQ, IBM, INTC, JNJ, JPM, KFT, MMM, MRK, MSFT, PFE, UTX

                 

Dow 30 stocks with negative weekly signals:  

      

          AXP, KO, MCD, PG, T, TRV, VZ, WMT, XOM

·        Underlined names have changed from previous week*

                             

 

 

VI.             KEY EVENTS IN THE WEEK AHEAD:

 

Monday, January 11

Economic

Earnings

Before: MDRX, HELE

After: AA, WDFC

Events

BWLD, BKE, FOSL, FUQI at Cowen and Company Consumer Conf.

FED: Fed's Lockhart to speak on U.S. economic outlook in Atlanta
$24 bln 3-month and $25 bln 6-month Treasury Bill Auctions

 

Tuesday, January 12

Economic

08:30 Trade Balance (Nov.): -$34.5B cons.

Earnings

Before: GAP, INFY, KBH, SVU

After: EXFO, FUL, LLTC, XRTX

Events

PCS Analyst Day FED:$40 bln 3-year Treasury Notes Auction and $26 bln 1-year Notes Auction Fed's Fisher and Plosser speak on U.S. economy

Wednesday, January 13

Economic

10:30 Crude Inventories: 1.33M prior

14:00 Treasury Budget (Dec.): -$92.0B cons.

14:00 Fed’s Beige Book

Earnings

Before: NWPX

After: CLC, OHB, ZZ

Events

CVS, MYGN, GRPO, THOR at JPMorgan Healthcare Conf.
FED: $21 bln 10-year Treasury Notes Auction
Fed's Beige Book

 

Thursday, January 14

Economic

08:30 Initial Claims: 433K cons.

08:30 Continuing Claims: 4800K cons.

08:30 Retail Sales (Dec.): 0.5% cons.

08:30 Retail Sales Ex.-Auto (Dec.): 0.3% cons.

08:30 Export Prices Ex.-Ag. (Dec.): 0.7% prior

08:30 Import Prices Ex-Oil (Dec.): 0.4% prior

10:00 Business Inventories (Nov.): 0.2% cons.

 

Earnings

Before: BGG, SCHW, CRAI, SEED

After: INTC, SHFL

Events

BLUD, JAZZ, TSON, BCRX at JPMorgan Healthcare Conference
TRLG, ZUMZ, FUQI, FOSL at ICR XChange

FED: $13 bln 30-year Treasury Bonds Auction

 

Friday, January 15

Economic

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

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

08:30 Empire Manufacturing Survey (Jan.): 11.25 cons.

09:15 Capacity Utilization (Dec.): 71.8% cons.

09:15 industrial Production (Dec.): 0.6% cons.

09:55 Michigan Sentiment (Jan): 73.8 cons.

 

Earnings

Before: JPM

After:

Events

GRMN at Needham & Company 12th Annual Growth Conference

FED: Fed's Lacker speaks on economic outlook in Richmond

 

 

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