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11/27/06
I. Key Events to Watch In the Week Ahead
This week brings us to the end of the month of November. The earnings calendar is virtually non existent. The economic calendar contains a few reports that should be noted. On Tuesday, Nov.28th, we have the Durable Goods Orders. The consensus estimate is for a drop of -4.5%. On Wednesday, Nov.29th, preliminary GDP will be disclosed. The current consensus estimate is for Q3 growth of 1.8%. The final economic report to take note of comes on Friday, Dec.1st. The ISM Index (Institute for Supply Management) is due, with a consensus estimate of 52.00.
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 have 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. Of the four industry sectors mentioned above, our work remains positive only on the Brokerage group.
Our work continues to signal weakness ahead for Telecom (TTH-33.33), Retailers (RTH-98.55) and Pharmaceuticals (PPH-76.15). The Democratic election victories have cast a cloud of uncertainty over the Pharmaceutical group. We would continue to avoid large-cap Pharmaceutical names such as JNJ, PFE, MRK, WYE, and LLY until this uncertainty is adequately discounted.
The Brokerage sector (XBD-247.00) has maintained its upward momentum. The strong price performance of the likes of GS-201.80 (Goldman Sachs), MER-92.59 (Merrill Lynch) and MS-78.95 (Morgan Stanley) has propelled this index to uncharted territory. This group has clearly established itself as the strongest upside momentum leader in the stock market. As the year draws to a close we believe there will continue to be a flurry of mergers and acquisitions which should enable this sector to maintain strong upside momentum. Continue to buy any weakness in these names.
We continue to like the HHH-55.77 (Internet Holders Trust). Major components of this sector are GOOG, EBAY, YHOO, and AMZN. This sector was mentioned positively four 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 see near term price resistance for the HHH at 56.50. GOOG (Google-498.79) and AMZN-42.55 (Amazon) are leading the way in the sector.
Last week we upgraded our view on the Semiconductor (SMH-35.34) group from negative to neutral. The SMH finished the holiday shortened week relatively unchanged. We have identified MU-14.79 (Micron Technology) as a low risk trade. Traders should look to purchase MU around the 14.00-14.50 area. We shall place a protective sell-stop at 13.69. Our price objective is 17.00-17.50.
Take note that the VIX-10.73 (CBOE Volatility Index) continues to reflect investor complacency.
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 63.50.
IV. Energy
With crude oil trading at roughly fourteen month lows, the energy complex (refiners, oil service, natural gas) has continued to hold weekly price support levels. We have begun to identify pockets of weakness in energy. Current names that concern us are BP-66.50, BHI-70.39, RIG-75.22, and ESV-50.78. If strong names such as XOM-72.38 and CVX-68.84 begin to display weakness, one should be prepared to jump ship quickly. It is also interesting to note that the “hedge fund” problems from earlier in the year were the direct result of overzealous long bets on energy. At this time, we advise that long positions in energy should tighten up sell-stops or purchase puts to protect profits.
V. Dow 30 Analysis
Our Weekly Trend Indicator (WTI) measures in at +12, a slight increase from the previous week reading of 10. The upward momentum remains with the bulls. Our weekly support level for the DIA-122.71 (Dow Industrial Diamonds) will remain 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 DD. The five weakest DOW stocks are, CAT, JNJ, PFE, MRK, and WMT.
Dow 30 stocks with positive weekly trends:
AA, AIG, AXP, BA, C, DD, DIS, GE, HD, HON, HPQ, IBM, INTC, JPM, KO, MCD, MMM, MO, MSFT, PG, XOM
Dow 30 stocks with negative weekly trends:
CAT, GM, JNJ, 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% |
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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. |
