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11/13/06
I. Key Events to Watch In the Week Ahead
This week’s earnings reports will consist primarily of companies from the Retail sector. We will hear from retail giants Wal-Mart, Home Depot, Target, and Sears Holdings. Later in the week, focus will shift to technology, as competitors Hewlett Packard and Dell Computer report numbers.
The economic calendar will be active. On Tuesday, Nov. 14th, we have Retail Sales (est. -0.4%) and PPI (Producer Price Index). The consensus estimate for PPI as of this writing is -0.4%, with the Core PPI at +0.1%. Wednesday, we will get the FOMC (Federal Open Market Committee) minutes from the Oct. 25th meeting. It will be interesting to hear how the Fed plans to deal with their current “conundrum”, that being, how to balance containing inflation risks versus choking off a consumer driven economy by continuing to raise interest rates. We believe that Chairman Bernanke and friends have very real issues in front of them. It remains to be seen whether they are up to the task. Thursday, Nov.16th, the CPI report is due. The current estimate is for a drop of -0.3% with Core CPI at +0.2%. We also have Industrial Production, estimated to have risen 0.2%.
There are three Dow 30 components reporting earnings this week, HD (Home Depot), HPQ (Hewlett Packard), and WMT (Wal-Mart). Other earnings due this week that one should take note of are as follows:
Monday 11-13: DKS (Dick’s Sporting Goods)
Tuesday11-14: HD (Home Depot) TGT (Target) WMT (Wal-Mart) ADI (Analog Devices) JBL (Jabil Circuit)
Wednesday 11-15 TYC (Tyco)) AMAT (Applied Materials)
Thursday 11-16 SHLD (Sears Holdings) DELL (Dell) HPQ (Hewlett Packard) INTU (Intuit) SBUX (Starbucks)
II. General Market Overview
In the past few letters we have expressed our concern over the weakness in the sectors that have provided the leadership to the stock market rally. Specifically we noted concern regarding the Brokerage, Telecom, Retailers and Pharmaceutical areas. The Democratic seizure of control of the House and Senate in this past week’s elections has sent the Pharmaceutical sector in to a tailspin. While short term oversold, we believe that the momentum in the sector has clearly shifted to the downside. Sell rallies in Pharma.
Our concern over the Telecom group (XTC-902.15) is beginning to come to fruition. We are seeing a breakdown in the charts of stalwart performers VZ (Verizon), MOT (Motorola) and T (A T&T). We would now be a seller of strength in the Telecom arena.
Last week our work indicated coming weakness in the Retail sector. With the majority of earnings reports coming from Retailers this week, we will have an excellent barometer as to future price action. The charts are telling us that the “short squeeze” that ensued as the price of gasoline declined has run its course. Watch these stocks closely this week, for if “good news” is met with price declines it will speak volumes.
The Brokerage sector has continued to hold uptrend support levels. We continue to believe that the leadership here has narrowed but until our support levels are violated on a weekly closing basis we will respect the fact that the trend is still positive. Our weekly support level in the XBD-234.62 (Brokerage Index) is 227.43.
The SMH-33.58 (Semiconductor Holders Trust) continues to act poorly. Charts of the stocks that we follow within the group continue to point to further price declines. AVOID THE GROUP.
On the positive side, the price action in the Energy sectors (Oil, Oil Service, Natural Gas, Coals) has the potential to provide price support to the major averages. These groups must continue there post-Amaranth Partners rally for the broader market to avoid a meaningful (10%) correction. Note: We do not like the risk/reward in these sectors at these price levels.
We continue to like the HHH-53.99 (Internet Holders Trust). We will look to initiate a long position on a retest of the 52.00-53.00 support level. Major players in this sector are GOOG, EBAY, YHOO, and AMZN.
Take note that the VIX-10.79 (CBOE Volatility Index) continues to reflect investor complacency.
If readers are alarmed by the “bearishness” of our recent letters, one should take note that is has been our experience that individual stocks begin to signal trouble well ahead of the major averages. At this point in time, we feel that the unseasonably strong action in the month of October may be a prelude to unseasonable weakness in the months of November and December. We have an uncomfortable feeling that the performance race to the end of 2006 could create a liquidity vacuum on the downside.
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 decided to take our profit on the close, Friday, Nov. 3rd at a price of 62.30, a gain of 10.5%. We will look to re-enter at lower price levels. It is interesting to note that last week the GLD-62.49 was up only .19. A very small gain considering the “bullish” news that the Chinese central bank was looking to diversify their holdings.
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 are reluctant to chase these stocks at these levels. The strength in this sector over the last five weeks has provided the fuel to maintain the overall market rally. If weakness develops here look for trouble in the major averages.
V. Dow 30 Analysis
Our Weekly Trend Indicator (WTI) measures in at 0, a slight uptick from -2. This reading is indicative of an index that has begun to “exhale” from overbought levels. Our weekly support level for the DIA-121.11 (Dow Industrial Diamonds) of 119.70 has continued to hold. A weekly close below 119.70 will raise warning flags for the DIA. The five strongest stocks in the Dow are, AIG, IBM, XOM, MSFT and HON. The five weakest are, CAT, WMT, PFE, MRK, and GE.
Dow 30 stocks with positive weekly trends:
AIG, AXP, BA, DD, DIS, GM, HON, HPQ, IBM, JPM, MMM, MO, MSFT, PG, XOM
Dow 30 stocks with negative weekly trends:
AA, C, CAT, GE, HD, INTC, JNJ, KO, MRK, MCD, PFE, T, UTX, VZ, WMT
* Underline names have changed from previous week*
VI. OPEN POSITIONS
WE HAVE NO CURRENT OPEN POSITIONS
CLOSED POSITIONS
XLU – (2.7 %) WAG- (1.0%) JNJ - (1.7%) GM – (4.2%) UNH + 7.7% GLD + 10.5% 5 shorts- 1 long trade 6 trades avg. return of 1.43% * 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.
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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. |
