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9/24/06
I. Events to Watch In the Week Ahead
This week brings the end of the third quarter. Typically, equity volume should be robust, as fund managers rebalance their portfolios for the fourth quarter. One should be prepared to hear the media emphasize the term “window dressing” throughout the week. “ Window Dressing” is defined as an end of the quarter event when fund managers buy additional shares in their outperforming issues and liquidate their underperforming equities.
The highlight on the economic calendar this week will be Thursday morning’s Gross Domestic Product (GDP) report. Consensus is for the economy to have grown by 2.9 %. The surprise here will be a stronger report than estimated.
The earnings calendar is very light this week. However, there are two companies reporting which we will view with scrutiny. Walgreens (WAG), will announce their earnings before the opening Monday. The stock was hammered last week on the news that WalMart is set to offer $4.00 generic prescriptions. Will a strong report put this stock back on track or will it be an opportunity to exit a company facing stiff competition from WalMart ?
The other report we will be watching closely is that of homebuilder Lennar Corp. (LEN). More than likely the news will not be good, but the reaction of the stock relative to its earnings report is what one should take note of. Recently, the homebuilding stocks as a group have refused to lose ground upon releasing less than flattering earnings and guidance. This is one sign that a sector is finished going down.
II. General Market Overview
We continue to be of the opinion that investors use current strength in defensive sectors (BONDS, REIT’s, Utilities) to exit long positions. Banks and Brokerage stocks along with Technology can be bought on extreme weakness. Previously we have liked buying the Retailers. (KSS, WMT) These stocks have advanced considerably in the last two weeks. DO NOT CHASE THEM AT THESE LEVELS.
Utilities, as evidenced by the price action in XLU (Utilities Select Sector Fund), have put in a short term top. We will be looking to institute a short position in the XLU around the 34.00 area. A protective buy stop will be placed at 34.80. Our downside target is 32.50.
III. GOLD
GLD (streetTracks gold index) gained $1.10 to 58.50 last week. Our work remains negative, but we would look to begin covering shorts in the 55.00-56.00 area. Our protective buy stop will be lowered to 62.02. Take note that we are advising covering short position’s, we do not advise initiating long positions at this time.
IV. Energy
Energy and all commodity related issues continue to be under selling pressure. In previous letters we have warned of a possible “liquidity” issue in this sector. We now know what the liquidity issue is, the unfortunate demise of Amaranth Partners, a hedge fund which lost 65% of its assets speculating in the natural gas markets. This event has spawned worries of “whom else “. We believe this sector has seen its highs, but the deeply oversold short term condition is ripe for “bear market “ bounce. If traded from the long side keep yours sell-stops very tight.
V. Weekly Charts Of Note
General Motors (GM), the weekly chart is troublesome. Exhaustion is the word that best describes my view. Look to exit any long positions and try to short-sell GM around the 32.50-33.00 level. A protective buy stop should be placed at 35.05. Our price target is 26.00-28.00. General Motors has been the best performing stock in the DOW-30. The leadership in the DOW-30 appears to be moving to the Financial area. We are looking for continued price appreciation in GE, AIG, AXP, C, and JPM.
Boeing (BA) appears to have ended its price correction. The stock closed the week at $77.25. We would be buyers on a dip around the 74-75 area. A protective sell stop will be placed under 72. Our price target is 84.00.
United Heathcare (UNH) has flashed a weekly sell signal, current price 48.97. We would look to sell-short on any bounce to the 51-52 area. Our price target is 45. If the short is executed our protective buy stop will be placed at 53.03.
VI. OPEN POSITIONS
JNJ (Johnson & Johnson) - short execution-9/15/06, price 63.95 (buy stop 65.10) Price objective 60.00 level. Closing price as of 9/22/06 is 63.96.
CLOSED POSITIONS
WAG (Walgreens) short execution-8/28/06, price 48.90. Covered 8/31/06 at 49.52, a loss of 1%.
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* 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. |
