Archived Letters

10/30/06

 Archived Letters 

 

 

I.                  Key Events to Watch In the Week Ahead

 

We are at the midpoint of the third quarter earnings season.  Several key reports which we will be monitoring this week are as follows:

Monday, Oct 30th

HUM (Humana), VZ (Verizon), MET(Met-life), RACK(Rackable Systems)

Tuesday, Oct. 31st

AL (Alcan), ADM (Archer Daniels), BJS (BJ Services), EK (Eastman Kodak), MAS (Masco), PG (Proctor Gamble), X (U.S. Steel), VLO (Valero), EXP (Eagle Materials)

Wednesday, Nov. 1st

CI (Cigna), CLX (Clorox), CAM (Cooper Cameron, GRMN (Garmin), MA (Mastercard), NEM (Nemont Gold), TWX (Time Warner), PRU (Prudential), COL (Rockwell Collins

Thursday, Nov 2nd

CMX (Caremark), CBS (CBS Corp.), IP (International Paper), JEC (Jacobs Engin.), TSO (Tesoro Petrol.), RIG (Transocean Offshore), CA (Computer Assoc.), QCOM (Qualcomm), WDC (Western Digital)

 

The economic calendar will be very active. Tuesday we have the Employment Cost Index (est.0.9%) and Consumer Confidence (est.108).  Wednesday brings Construction Spending (est. 0.0%) and the ISM Index (est.53.1) The ever important Unemployment Report is due Friday. Consensus estimates are for the economy to have created 125,000 jobs with the unemployment rate holding steady at 4.6%.

 

II.               General Market Overview

 

 In the last few letters we have expressed concern over the Financial sector.  We stated it to be our belief that the leadership in this area was beginning to narrow and the sector was vulnerable to a correction.  The primary weekly trends of the RKH-157.31 (Regional Bank Holders Trust) and the XBD-233.73 (Brokerage Index) remain positive. While technically overbought, we must at this time continue to respect the fact that these indices have continued to hold key technical price levels.  Until we see a breach of our key support levels we will remain on the sideline here.

 

Last week we turned negative on the SMH-33.55.  We said to initiate a short position around the 35.00-35.50 area.  We did not see those prices last week, therefore we currently have no position. This week will look to sell short around the 34.50-35.00 price levels.  The individual stocks in the Semiconductor space that have negative price trends are TXN, AMAT, MU, SNDK, and NVLS.  Two issues that are bucking the index and remain positive are INTC and ADI.

 

A weekly buy signal has been triggered in the HHH-52.35 (Internet Holders Trust).  We would be buyers on any weakness around the 49.00- 50.00 price level.  Furthermore we would look to be a buyer of YHOO-25.34 (Yahoo) on any retest of the 23.50-24.00 price level. It is our opinion that many funds have taken their “loss” in YHOO and the past of least resistance is now up.

 

 At this time we would not chase the rally in Financials, and Retailers.  The easy money has been made and these sectors now appear vulnerable to a price correction.

 

Traders should also take note that complacency continues to be reflected by the low reading CBOE volatility index (VIX- 10.80).  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. The benefit of hindsight has now confirmed our view.  While the chart patterns remain positive we would not look to institute long positions in energy stocks at these levels.

 

 

V.               Dow 30 Analysis

 

 Our Weekly Trend Indicator (WTI) measures in at +19.  This continues to be a very strong reading. Once again we reiterate that it is such a strong reading that we feel the Dow Jones Industrial Avg. to be overbought, or in lay-mans terms, ahead of itself.  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-120.86 (Dow Industrial Diamonds) as our trading vehicle, the risk here looks to be on the downside.  A weekly close below 119.70 on the DIA will set off warning signals.

 

Dow 30 stocks with positive weekly trends:

 

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

 

Dow 30 stocks with negative weekly trends:

 

AA, AXP, CAT, GE, GM, 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*

 

 

 

 

    CLOSED POSITIONS

 

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

WAG- (1.0%) 

          JNJ - (1.7%)

          GM – short stopped out 10/23/06 @34.30 (4.2%)

 * 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.