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12/11/06
I. Key Events to Watch In the Week Ahead
The economic calendar in the week ahead contains a few highlights that shall be noted. On Tuesday, Dec.12th, we have the FOMC (Federal Open Market Committee) policy statement. We expect more of the same, interest rates will remain steady with further rhetoric in regards to containing inflation. On Wednesday, Dec.13th, November Retail Sales will be reported. The consensus is for an increase of 0.2%, with Retail Sales, ex-automobiles, to come in at +0.3%. On Friday, Dec.15th, the November Consumer Price Index (CPI) is due to be reported. The current consensus is for a rise of 0.2%, with the Core CPI estimated to come in at +0.2% as well. Also due Friday is Industrial Production, estimated to be +0.2%.
The earnings picture this week will continue to be very minimal. On Tuesday, Dec.12th Best-Buy (BBY) and Goldman Sachs (GS) will be the highlight. Other notable reports will come on Thursday, Dec.14th, Bear Stearns (BSC), Costco (COST), Lehman (LEH) and Adobe Systems (ADBE) are due.
II. General Market Overview
This will be a very interesting week for a sector that has provided major upside leadership for the stock market in general. We are speaking of the Brokerage group. This week three major components of the XBD-244.14 (Brokerage Index) will report earnings. The trading action of Goldman Sachs (GS-205.10), Bear Stearns (BSC-158.88), and Lehman (LEH-77.03) will a major focus this week. The earning reports must come in much better than expected, for the expectations appear to be quite grand. We anticipate major volatility in these names this week.
In the past few letters we have expressed our dislike for the Pharmaceutical sector. The negative news from Pfizer (PFE) last week helped to confirm our view of the group as a whole. Although we continue to have a negative bias towards the Pharmaceutical Group (PPH-76.31) as a whole, we have identified two companies that are beginning to show signs of strength. Abbott Labs (ABT-47.96) is the direct beneficiary of the failure of Pfizer’s next generation cholesterol drug. We also like the current technical set up of Wyeth (WYE-50.41). We would be a buyer of WYE on any dips to the $48.00 area.
It is beginning to become apparent that the correction in Managed Care companies is coming to an end. Whatever reason one must choose, the Democratic election victories or the stock option back- dating scandal at United Healthcare, the group has underperformed the market. Our weekly technical work is indicating renewed strength in companies such as UNH-49.91, HUM-56.47, and WLP-76.46. Look to buy dips in these names.
Five weeks ago we identified strength in the HHH-53.30 (Internet Holders Trust). Our reluctance to pay up caused us to miss a trade from 53.00 to a high trade of 56.50. We now believe the HHH to entering a corrective phase. Recent price weakness in HHH component stalwart performers, GOOG-484.12 and AMZN-38.46 must be respected. We would sell any bounce to the 55.00-56.00 price level. Our short term target is 49.00-50.00. If executed, our protective buy stop shall be placed at 56.60.
Three weeks ago we upgraded our view on the Semiconductor (SMH-34.02) group from negative to neutral. Last week the SMH index was essentially unchanged for the week, closing at 34.19 +.17. We see 33.15 as a key price support level for this index. We mentioned MU-14.47(Micron Technology) as a potential low risk trade. On 12/01/06 we went long MU at 14.38. We shall place a protective sell-stop at 13.59. Our price objective is 17.00-17.50. MU (Micron Technology) is due to report earnings on Dec.21st.
Take note that the VIX-12.07 (CBOE Volatility Index) is beginning to exhibit signs of upward potential. We will continue to monitor the action here and try to determine if a new trend is developing.
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%. Our work for this week is indicating possible near term weakness in the GLD. It is our view that the 60.00 price level is a critical support area for this exchange traded fund. We currently remain on the sidelines with the GLD closing the week at 62.05.
IV. Energy
The energy complex (oil, oil service, natural gas, coal) was basically unchanged for the week. Although our weekly technical work continues to remain positive, we are still of the view that the energy complex is in a short term overbought stage. Therefore, it would be our recommendation that long positions tighten up sell-stops to protect profits. We will continue to wait for an optimal entry point for initiating new long positions.
V. Dow 30 Analysis
Our Weekly Trend Indicator (WTI) measures in at +2, a small increase from the previous week reading of -2. The strong upside momentum is currently in pause mode. Our weekly support level for the DIA-123.00 (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 30 are the following; BA, DIS, KO, MCD and XOM. The five weakest stocks in the Dow-30 are as follows, CAT, GM, JNJ, PFE, and WMT.
Dow 30 stocks with positive weekly signals:
AA, AIG, BA, C, DIS, HD, HPQ, IBM, INTC, KO, MCD, MO, PG, T, VZ, and XOM
Dow 30 stocks with negative weekly signals: AXP, CAT, DD, GE, GM, HON, JNJ, JPM, MMM, MRK, MSFT, PFE, UTX, WMT
* Underline names have changed from previous week*
VI. OPEN POSITIONS
12/14/06- long MU- 14.38 (closing price 12/08- $14.64)
CLOSED TRADES 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. |
