Archived Letters

10/23/06

 Archived Letters

 

  

I.                  Events to Watch In the Week Ahead

 

This week brings the peak of the third quarter earnings reporting season.  We have roughly six-hundred company reports due this week.  There are eight Dow Industrial components reporting, AXP, BA, DD, GM, MO, MSFT, T, and XOM.    

 

The economic calendar will be dominated by the Oct. 25th Federal Reserve meeting. The consensus opinion is that the Fed will remain on hold.  Once again, look for Bernanke and friends to express their strong resolve in combating inflation.

 

II.               General Market Overview

 

 Last week we expressed our concern about the financial sector. Suspect earnings reports last week from Wachovia Bank (WB) and Washington Mutual (WM) seemed to confirm that expectations in the banking arena were a little ahead of themselves.  The market seemed to applaud the results from Bank America (BAC) and Wells Fargo (WFC), but clearly this sector is not firing on all cylinders. We will be monitoring the RKH-156.64 (Regional Bank Holders Trust) for a breach of its technical support level of 155.5.  A weekly close below this level will signal a correction to the 142.00-145.00 area.

 

We are also concerned about a potential short term top in the XBD-229.14 (brokerage index).  A weekly close below 227.40 will set off warnings of an imminent correction.  The leadership in this sector is narrowing quite dramatically as witnessed by the charts of second tier brokerage firms Jeffries (JEF-29.43) and Legg Mason (LM-86.15).

 

A new sector of concern is technology.  Specifically we will focus on the SMH- 33.62 (Semiconductor Holders Trust). Our weekly analysis is flashing a warning signal for this group.  We will be looking to short any rally to the 35.00-35.50 area.  We believe a correction to the 30.00 level is now at hand.  A protective buy stop will be place at 36.31 upon execution of a short sale.  Strangely enough, if one wanted to spread off some risk in this trade we would look to buy Intel (INTC) around the 20.00- 20.50 area. Be aware that SMH component Texas Instruments (TXN) is due to report earnings Monday, Oct. 23rd after the market close.

 

It remains our opinion that it is time to exit the recently strong sectors: Financials, Technology and Retailers.  We believe that one should rotate back in to Energy and Metals on weakness.

 

Traders should also take note that complacency appears to be setting in as evidenced by the CBOE volatility index (VIX- 10.63).  This index is testing two-year lows.

 

        

 

III.           GOLD

 

GLD (streetTracks gold index) – In our 10-1-06 letter we announced our change of opinion regarding Gold. We said to cover all short positions and look to institute a long position around the $58.00 level using the GLD (gold index fund) as our trading vehicle. On

10-04-06 we went long the GLD on the close of trading at $56.37. We have raised our protective sell stop to $56.40.  The intermediate term price objective is $65.00.

 

IV.            Energy

 

In our 10-01-06 report we stated that the demise of the hedge fund Amaranth Partners, once revealed to the general public, had all the markings of creating a bottom.  I believe we mentioned a possible short squeeze set-up. After a successful test of the recent lows on

10-04-06, this appears to be the case.  This week will bring several earnings reports in the energy sector. While we continue to like this group, we will monitor closely the market reaction to these earnings reports. The OIH- 130.00 (Oil Service Holders Trust) has awaken from its slumber. We will look to institute long positions around the 124.00-126.00 area.

 

 

V.               Dow 30 Analysis

 

A new addition to Equity Letter will be a weekly analysis of the components of the Dow Jones Industrial Average (DJI). Our Weekly Trend Indicator (WTI) measures in at +20.  This is a very strong number, so strong, that it screams short term overbought.  While we are very familiar with the term, “the trend is your friend”, we feel it is time to throw up a near term caution flag.  Using DIA-119.83 (Dow Industrial Diamonds) as our trading vehicle, the risk here looks to be on the downside.  A weekly close below 118.87 on the DIA will set off warning signals.

 

Dow 30 stocks with positive weekly trends:

 

AIG, AXP, BA, C, DD, DIS, GE, HON, HPQ, IBM, INTC, JNJ, JPM, KO, MCD, MMM, MRK, MSFT, PG, T, UTX, VZ, WMT, XOM

 

Dow 30 stocks with negative weekly trends:

 

AA, CAT, HD, GM, MO, PFE

 

* Underline names have changed from previous week*

 

VI.            OPEN POSITIONS

 

UNH- short execution-10-06-06, price 51.80 (buy stop 53.10) price objective 44.

 

GLD- long execution- 10-04-06, price 56.37 (sell stop 56.40) Price objective 65.00 *note sell stop raised*

 

GM- short execution-9/28/06, price 32.90 (buy stop 34.30) Price objective 26.00

 

 

 

    CLOSED POSITIONS

 

XLU – stopped out 35.20 on 10/18 (2.7 %)

WAG- (1.0%) 

          JNJ - (1.7%)

 * 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.