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12/4/06
I. Key Events to Watch In the Week Ahead
As we enter the final month of 2006 the obvious highlight of the economic calendar this week will be the unemployment figures due on Friday, Dec.8th. Current consensus estimates are for the economy to have created 115,000 jobs in the month of November with the unemployment rate to rise ever so slightly from 4.4% to 4.5%. Also due out on Friday is the Michigan Consumer Sentiment Survey. The consensus is for a reading of 92.5. Earnings reports will continue to be on the light side. The companies that report this week that readers should take note of are as follows. On Tuesday, Dec.5th, AZO (Autozone), KR (Kroger) and homebuilder TOL (Toll Brothers) will report. On Thursday, Dec.7th, NSM (National Semiconductor) is due with numbers.
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 Telecom, Retailers and Pharmaceutical areas. Our work continues to project lower prices for these groups. Recent strength in energy has enabled the major indices to maintain there upward bias. If any weakness begins to develop in the energy complex, look for a corrective phase to begin in the major indices. (S&P, DIA,)
Just last week, we expressed our praise at how the Brokerage group had clearly taken its place as an upside momentum leader. This praise was greeted by a decline last week of approximately 4.6% in the XBD-235.51 (Brokerage Index). The weakness in other sub-sectors of the financial area (namely Bank stocks) finally caught up with the Brokers. We stated in our previous letter that we would continue to buy any weakness in the Brokerage sector. While we still believe the Brokerage group to be in a long term uptrend, last week’s poor performance, if continued in to this week, will cause us to change our view.
Five weeks ago we identified strength in the HHH-53.01(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-480.80 and AMZN-39.41 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.
Two weeks ago we upgraded our view on the Semiconductor (SMH-34.02) group from negative to neutral. Last week the SMH index fell approximately 3.6% to 34.02. 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.
Take note that the VIX-11.66 (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%. We currently remain on the sidelines with the GLD closing the week at 64.12.
IV. Energy
The energy complex (oil, oil service, natural gas) was the area of the market that displayed the most strength last week. Were it not for this strength, we believe the major indices would have sustained much larger declines. It is interesting to note that the energy stocks in general, bottomed out approximately eight weeks ahead of the price of crude oil. It is our view that energy, while technically still strong, is currently in a short term overbought stage. We would not be buyers at these price levels.
V. Dow 30 Analysis
Our Weekly Trend Indicator (WTI) measures in at -2, a drop from the previous week reading of +12. The strong upside momentum is currently in pause mode. Our weekly support level for the DIA-122.05 (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, BA, DIS, HON and XOM. The five weakest stocks in the DOW are as follow, CAT, GM, JNJ, VZ, and WMT.
Dow 30 stocks with positive weekly signals:
AA, AIG, BA, DIS, HD, HON, HPQ, INTC, KO, MCD, MO, PFE, T, XOM
Dow 30 stocks with negative weekly signals: AXP, C, CAT, DD, GE, GM, IBM, JNJ, JPM, MMM, MRK, MSFT, PG, UTX, VZ, WMT
* Underline names have changed from previous week*
VI. OPEN POSITIONS
12/14/06- long MU- 14.38 (closing price 12/01- $14.47)
CLOSED TRADES 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. |
