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2/19/07
I. General Market Overview
The major stock market indices all enjoyed strong advances last week after testimony before the Senate by Federal Reserve Chairman (Gentle Ben) Bernanke. Chairman Bernanke reinforced those who believe in the “Goldilox” economy by stating that inflation appears “well contained” and also that the Greenspan Fed induced housing bubble has seen the bottom of it’s correction. These comments seem to have affected traditionally hawkish bond traders as the yield on the ten year note dropped 94 basis points to 4.69%. The Fed Chairman is to be applauded for the skillful rhetorical dexterity which he has displayed to date when addressing issues regarding the economy. This “all clear” regarding interest rates should only reinforce current strong technical trends for the major market averages.
It is interesting to note that the previous week sell off that was sparked by sub prime lending issues at HSBC bank (HBC-89.54) and New Century Financial (NEW-19.40) appears to be well contained at this time. It seems that the major banks are immune from this issue for now. One needs only to look at a chart of the Philly Bank Index (BKX-120.52), new all time highs last week.
The Homebuilding group (XHB-37.53) which we identified four weeks ago in this column as a potential short squeeze set up, continues to be in the over bought stage. We have identified Pulte Homes (PHM-32.34) as a potential short trade. We shall be looking to short any rally in PHM to the 34.00-35.00 price level.
The large cap Pharmaceutical area continues to show signs of a pause. The weekly charts of Pfizer, Merck, Wyeth and Johnson & Johnson are indicating near term weakness. We shall continue to avoid this group until we see signs that the tide has turned. The only chart that is appealing at this time is that of Eli Lilly (LLY-54.99).
We continue to like the technical picture in the Brokerage and Managed Healthcare sectors.
The Brokerage group shares that are preferred at this time are those of Goldman Sachs (GS-216.92) and Morgan Stanley (MS-82.36). Shares of Merrill Lynch (MER-92.79) appear poised to under perform over the near term.
In the Managed Healthcare arena we like the technical patterns of WellPoint (WLP-82.25), Humana (HUM-62.23) and Well Care Health Plans (WCG-78.75). Last week we stated that we would avoid the shares of United Healthcare (UNH-53.95). Last week it was announced that Warren Buffett had taken a one million share position in UNH. This news was enough to ignite a significant rally in the shares. We shall admit our mistake and reverse course at this time. UNH is now officially a buy on any price dips to the $52.00 area.
Take note that the VIX-10.02 (CBOE Volatility Index) decreased from a reading of 11.10 the previous week. This reading continues to hover at a historically low level reflecting investor complacency.
II. GOLD
GLD (streetTracks gold index) – The GLD-(66.36) increased .22 for the week. We have stated in previous reports that any weekly close above the 65.00 level would indicate higher prices .We believe that it is time to institute long positions on any pullbacks in the GLD. Optimal entry appears to be any retest of the 64.00 price level.
III. Energy
We continue to prefer the Natural Gas and Coal areas of the Energy complex. Coal companies BTU-41.03, MEE-23.92 and ACI-30.55 are showing indications of strength after enduring substantial price corrections.
The weekly technical patterns of Natural Gas companies continue to be positive. At this time we believe one can buy any price weakness in the shares of El Paso (EP-14.97) and Chesapeake Energy (CHK-29.68).
Before last week, the Oil Service sector (OIH-135.55) had rebounded to essentially unchanged for the year after enduring a ten percent decline in the first two weeks of 2007. It is our concern that a poor earnings report from Baker Hughes (BHI-65.05 -5.76 for the week) has apparently stalled the upside momentum of the sector. We had identified the shares of Halliburton (HAL-30.05) as a low risk long two weeks ago. We have a long position in HAL from 1/31/07 at a price of 29.54. We have raised our protective sell stop to 28.45.
IV. Dow 30 Analysis
Our Weekly Trend Indicator (WTI) measures in at +8, a strong increase from the previous week reading of -2. The Dow Jones Industrial average increased 1.49% for the week to 12,766.29, +187.06. The weekly support level for the DIA-127.57 (Dow Industrial Diamonds) has been raised to 125.48. A weekly close below 125.48 will raise warning flags for the DIA. Traders should continue to buy weakness in the DIA until this support level is violated on a weekly closing basis. The strongest chart patterns in the Dow 30 are the following; AA, DD, GM, HD, HON, JPM, MCD, T, and UTX. The weakest chart patterns in the Dow-30 are as follows, GE, JNJ, MSFT, and PFE. Readers should take note that Dow Industrial components Home Depot (HD), Hewlett Packard (HPQ) and WalMart (WMT) are all due to report quarterly earnings this week.
We should like to point out that the shares of Dow component American Express (AXP-59.02) appear poised for an advance. We shall look to be a buyer of any price dip around the $58.00 level.
Dow 30 stocks with positive weekly signals:
AA, AIG, AXP, BA, CAT, DD, GM, HD, HON, INTC, JPM, MCD, MMM, PG, T, UTX, VZ, WMT, XOM
Dow 30 stocks with negative weekly signals: C, DIS, GE, HPQ, IBM, JNJ, KO, MO, MRK, MSFT, PFE
· Underline names have changed from previous week*
V. OPEN POSITIONS
Long HAL@29.54 purchased 1/31/07 (sell stop 28.45)
VI. CLOSED TRADES
JNJ- 1/10/07 Long @ 66.20 / exit 1/31 @ 66.98 gain of 1.1%
VII. KEY EVENTS IN THE WEEK AHEAD:
Monday, February 19
U.S. Holiday: Presidents' Day Tuesday, February 20
Economic
10:00 State Street Investor Confidence
Index
Before: AT,
AMED, AMT, AMWD, ANSS, BYD, BBW, CBRL, CRY, ELN, EVVV, FE, FOSL, GPC, HD, INFLO,
IN, ITRN, BABY, NFI, OMM, OPTN, ORBK, MALL, ROIAK, SINT, SPSX, UTHR, UNFI, VDSI,
VTAL, WMT, WST, WLK Events
Fed's
Bies speaks at 10:30 on Mortgage Risks at Duke University Earnings
Before:
BRC, EFD, EEFT, FRP, GPI, HL, HSIC, HST, IHP,
JBX, LEXG, LOJN, MHS, MT, NTBK, NICE, ORB, PRFT, POSS, TRK, STXS, TASR, TJX, TWB,
ZLC
Earnings
Fed's Fisher speaks at 10:45 in Los Angeles on
U.S. Economy
Before:
CSAR, CCU, CCO, CTV, DPZ, HTV, JRT, LOW, MCCC, GAS, PAA, WRI,
WON
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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. |
