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11/20/06
I. Key Events to Watch In the Week Ahead
This Thanksgiving holiday week will be relatively light when it comes to economic data and earnings reports. That being said, there are a few earnings reports which one should take note of. On Monday, Nov. 20th, CPB (Campbells), LOW (Lowes Corp.), MDT (Medtronic), and JWN (Nordstrom Inc.). On Tuesday, Nov. 21st, DE (Deere) and GME (GameStop) will issue reports. Key economic reports this week include Leading Economic Indicators (LEI), due Monday, Nov. 20th, estimated to have risen +0.2 % . On Wednesday, Nov. 22nd, Michigan Consumer Sentiment will be released, currently estimated to come in at a reading of 93.00. All should be aware that the markets are closed Thursday, Nov.23rd, and that Friday, Nov.24th, the stock market will close early at 1:00 p.m. e.s.t.
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. Much to our chagrin, the major indices have proven quite resilient and have continued there charge northward.
Our work continues to signal weakness ahead for Telecom (TTH-33.51), Retailers (RTH-99.63) and Pharmaceuticals (PPH-77.35).
The Brokerage sector (XBD-241.89) has maintained its upward momentum. Traders should keep a close eye on the 242.00 price level of the XBD. We view this level as an “inflexion point,” for it could possibly represent a potential double top formation when one views the weekly graph. View chart at this link-(http://stockcharts.com/gallery/?xbd ) Conversely, it could also represent a potential weekly break out which could indicate much higher price levels. A weekly closing price below 234.26 will signal danger ahead. A strong weekly close firmly above the 242.00 level will indicate considerably higher price levels. Keep a close eye on the XBD.
We continue to like the HHH-54.99 (Internet Holders Trust). Major components of this sector are GOOG, EBAY, YHOO, and AMZN. This sector was mentioned positively three weeks ago, but we have been unable to execute a long position at an attractive risk/reward price level. Our inability to “pay up” may have cost us a trade here. We will continue to look for a suitable entry point. GOOG (Google-498.79) and AMZN-42.55 (Amazon) are leading the way in the sector.
In previous reports we have been negative on the Semiconductor (SMH-35.28) group. Last week the SMH index increased roughly 5%, with strength from index components INTC, AMAT, MU, and ADI. I believe it is time to admit we were wrong. We will now remove our “avoid” label from this group. If the previous week’s strong performance can be continued, we may look to initiate a long position here. At this time we must remain neutral at best until more positive evidence is revealed.
Take note that the VIX-10.05 (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 currently remain on the sidelines with the GLD closing the week at 61.78.
IV. Energy
Last week crude oil futures closed at twelve month lows. It appears that the post “Amaranth Partners demise” rally in energy is about to be tested. Oil and Oil service stocks must rebound from last weeks declines or lower prices may follow. We are beginning to see signs of weakness in components of the OIH-136.85 (Oil Service Holders Trust). BHI-68.5, RIG-73.39, and ESV-49.49 are all showing signs of stalling. SLB-63.32 and HAL-32.60 remain the stronger issues in the group. A weekly close below OIH-134.59 will throw caution in to the wind.
The XOI-1158.33 (Amex Oil Index), with key components XOM (Exxon Mobil) and CVX (Chevron-Texaco) held weekly support levels. These support levels will be tested in the coming week. The XNG-447.68 (Natural Gas Index) has the best upside price momentum in the energy complex.
V. Dow 30 Analysis
Our Weekly Trend Indicator (WTI) measures in at +10, an increase from the previous week reading of 0. The upward momentum has resumed after a brief pause. Our weekly support level for the DIA-123.26 (Dow Industrial Diamonds) has been raised to 120.98. A weekly close below 120.98 will raise warning flags for the DIA. The five strongest stocks in the Dow are, AIG, IBM, BA, MSFT and HON. The five weakest are, AA, CAT, PFE, MRK, and WMT .
Dow 30 stocks with positive weekly trends:
AIG, AXP, BA, C, DD, DIS, GE, GM, HD, HON, HPQ, IBM, INTC, JPM, KO, MMM, MO, MSFT, PG, XOM
Dow 30 stocks with negative weekly trends:
AA, CAT, JNJ, MCD, MRK, 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. |
