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11/6/06
I. Key Events to Watch In the Week Ahead
With third quarter earnings season beginning to wind down the markets will shift focus to this weeks elections. There are two Dow 30 components reporting earnings this week, AIG (American International Group) and DIS (Disney). Other earnings due this week that one should take note of are as follows: Monday: FLR (Fluor Corp.) Tuesday: BZH (Beazer Homes) Wednesday: FD (Federated Dept. Stores) CSCO (Cisco Systems) Thursday: HANS (Hansen Natural) JCP (J.C. Penny) VIA.B (Viacom) AIG (American Int’l Group) KSS (Kohls) DIS (Disney)
The economic calendar is virtually non-existent this week. We do not see any potential market moving reports due this week. Traders should be aware that next week (Nov13th) we have inflation reports due (CPI & PPI).
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 bearish sales news from WMT (WalMart) last week proved to be the catalyst for a broad sell-off of the Retailer sector. Our weekly analysis of this sector is has officially turned negative. We would look to be a seller of any rallies here. Key resistance in the RTH-96.82 (Retail Holders Trust) will be found around the 100.00 area. We do not see significant support until the 88.00-89.00 price level. Individual stocks within the sector that we now see vulnerable to further price corrections are as follows: WMT, TGT, WAG, SHLD, BBY and KSS. Note that there are many other companies in this sector, these are the ones that we follow. The only chart we deem as mildly positive is that of HD-37.20 (Home Depot). Although we like the price action here, we do not like the risk/reward of instituting a long position at this time.
While they have not officially given sell signals, we would consider the Brokerage, Telecom, and Pharmaceutical sectors as “hanging on by a thread”. These groups must show resilience this week or trouble is on the horizon.
The SMH-32.96 continues to act poorly. INTC (Intel Corp.) can now be added to the negative weekly charts of TXN, AMAT, MU, SNDK , and NVLS. The only intriguing chart in the group is that of ADI-31.22 (Analog Devices). Although interesting, we see major price resistance for ADI at the 33.00 level. 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-52.70 (Internet Holders Trust). We will look to initiate a long position on a retest of the 49.00-50.00 support level.
Take note that the VIX-11.16 (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 will look to re-enter at lower price levels. Stay tuned.
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 -2, a drop from +19. We are beginning to correct from overbought levels. Our weekly support level for the DIA-119.78 (Dow Industrial Diamonds) of 119.70 held for the time being. A weekly close below 119.70 will raise warning flags for the DIA.
Dow 30 stocks with positive weekly trends:
AIG, BA, DD, DIS, GM, HD, HON, IBM, JPM, MMM, MO, MSFT, PG, XOM
Dow 30 stocks with negative weekly trends:
AA, AXP, C, CAT, GE, HPQ, INTC, JNJ, KO, MCD, MRK, PFE, T, UTX, VZ, WMT
* Underline names have changed from previous week*
VI. OPEN POSITIONS
UNH- short execution-10-06-06, price 51.80 –We Decided To Buy in Our Short Position on the close of trading Friday, Nov.3rd, at a price of 47.83, for a gain of 7.7%.
GLD- long execution- 10-04-06, price 56.37 – sold long position Nov.3rd@ 62.30, a gain of 10.5%.
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% 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. |
