Archived Letters

 8/28/06
Archive Letters

  I.  The Week Ahead

          This week is typically one of the slowest trading weeks of the year. ( kids back to school, Labor Day weekend ) There are two pieces of economic data due this week which could potentially move the market. Tuesday, 8/29, at 2:00p.m. est., will bring us the Federal Open Market Committee Minutes. It presents Chairman Bernanke and his dwarfs another opportunity to inform the markets that they will be vigilant in defending the U.S. consumer against the gaining momentum of inflation. I’m also quite certain that they will not show their hand regarding future rate moves,” Data Dependence” will reign supreme. Be wary Chairman Bernanke, Maria Bartiromo will be listening intently.

         Friday, 9/01, the August Unemployment report is due. The consensus estimate is for the economy to have created 125,000 new jobs. The estimated unemployment rate is 4.7%. I’m curious if the government statisticians have an estimate for all those people who have given up looking for  work. Something tells me this does not figure into their equation.

       There are no earning reports to speak of due this week. But keep your eyes and ears ready for the company that tries to sneak in an earnings warning during this typically slow week.

               II. Sector Rotation

        For all readers who are unfamiliar  with market lingo, sector rotation is when traders, mutual funds , hedge funds or any significant market players move their money out of a certain industry group ( for example: oil stocks) and put their money into another industry group. (for example: semiconductor stocks)

 We continue to feel that the Defensive sectors (Bonds, Utilities and Real Estate Investment Trusts-REITS) will be vulnerable to profit taking. We anticipate that the money taken out of these safe-haven investments will move in to more aggressive areas of the marketplace. The areas that have begun to show strength are Technology , Finance, Capital Goods, Healthcare and up until last week Retail. The profit warning last week from Lowes Corp., (symbol LOW) temporarily derailed this sector. Retail stocks that we would buy weakness in are WalMart (WMT) and Kohls (KSS).

               III. Energy

      This week will be a good test for the strength of the energy sector. With the first potentially major hurricane (Ernesto) on the horizon, Oil Service and Natural Gas stock traded well this past Friday. My chart-work has reversed course on the XNG (Natural Gas Sector) and has flashed a buy signal one week after flashing a sell signal. Natural gas stocks that could potentially be strong this week are the following: El Paso (EP), Chesapeake Energy(CHK), and XTO Energy(XTO). The Oil Service Sector (OIH)has been in corrective mode for the past six weeks. Stocks that have flashed weekly buy signals in this group are Transocean Inc. (RIG) and ENSCO International (ESV).

           IV. Gold

        Our view has not changed on gold. We continue to believe gold has reached a short term peak as evidenced by the chart of the gold exchange trade fund (GLD). We would be a seller of rallies with a short term (3-6 weeks) target in the mid to low 50’s. GLD is currently trading 61.78. Our protective buy-stop (where we would admit we are wrong and exit the trade) is 66.55

         V. Chart of the Week

     Walgreens, symbol WAG, one of the most defensives stocks there are, has given a weekly SELL signal. After  a wonderful 12 week advance that has seen the stock move from 40.50 to almost 50 dollars we would liquidate any long positions and use any strength to institute a short position. Our near term target for WAG is  44-45. Our protective buy-stop would be a trade through 49.50..

 

The following information has been provided for informational purposes only and should not be used or construed as an  offer to sell, a solicitation, or an offer to buy, or a recommendation for any security.  Securities mentioned reflect the author's independent opinion.. Equity Letter does not guarantee that the information supplied is accurate, complete, or timely, or make any warranties with regard to the results obtained from its use. Equity Letter may own or trade investments discussed in this column.

 

 * The following information has been provided for informational purposes only and should not be used or construed as an offer to sell, a solicitation, or an offer to buy, or a recommendation for any security. EquityLetter does not guarantee that the information supplied is accurate, complete, or timely, or make any warranties with regard to the results obtained from its use.