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2/26/07
I. General Market Overview
Last week was an interesting week of divergences. Large cap indices displayed relative weakness while small and mid-cap indices rallied to near term new highs. Crude oil rallied on renewed tensions in the Middle East, yet shares of equities in the oil complex failed to rally with any significance. The yield on the Ten-year Bond fell slightly to 4.68% despite higher than expected readings in the C.P.I. report. What is going on here? Although the trends of the major indices all remain to the positive side at this time, it appears that we are in for some choppy, volatile price action.
The Homebuilding group (XHB-37.19) which started this year with a nice rally, continues to look tired. We believe traders should use any price strength in the builders to exit any long positions and look to institute short positions. Shares of Centex (CTX-48.76), Pulte Homes (PHM-31.18), Lennar (LEN-50.97), Toll Brothers (TOL-31.60), and Ryland Homes (RYL-50.56) all appear headed lower.
The large cap Pharmaceutical area continues to show signs of a pause. The weekly charts of Pfizer, Merck, Wyeth and Johnson & Johnson continue to indicate near term weakness. We shall continue to avoid this group until we see signs that the tide has turned. The only charts that are appealing at this time are those of Eli Lilly (LLY-54.21) and Abbott Labs (ABT-53.59).
While we continue to like the technical picture in the Brokerage and Managed Healthcare sectors, it concerns us to note that we are beginning to witness a narrowing of leadership in the Brokerage area.
The Brokerage group shares that are preferred at this time are those of Goldman Sachs (GS-216.50) and Morgan Stanley (MS-80.97). Shares of Merrill Lynch (MER-89.04) appear poised to under perform over the near term. We also believe the shares of Lehman (LEH-79.04) and Bear Stearns (BSC-161.29) are vulnerable to near term price weakness.
Managed Healthcare continues to act well. At this time we would tighten up protective sell stops on current long positions in the shares of Well Point (WLP-81.50), Well Care Group (WCG-80.82) and Humana (HUM-60.86). We shall continue to look for entry on the long side in the shares of United Healthcare (UNH-53.03). Optimal long entry appears to us around the 52.00 price area.
Take note that the VIX-10.58 (CBOE Volatility Index) increased from a reading of 10.02 the previous week. This reading continues to hover at a historically low level reflecting investor complacency.
II. GOLD
GLD (streetTracks gold index) – The GLD-(67.72) increased $1.36 for the week. We stated two weeks ago that any weekly close above the 65.00 level would indicate higher prices. Although our work remains bullish at this time, we have been unable to find a suitable entry point to initiate a long position. For now we shall look for any price pullback to the 65.50-66.00 level.
III. Energy
In previous reports we have stated our preference for shares of companies in the Natural Gas and Coal segments of the energy complex. Shares of Coal companies enjoyed a swift ten percent increase last week. While the shares of ACI-33.58, BTU-44.44, and MEE-25.93 are not at the bargain prices since our recommendation we shall continue to be buyers of any significant price weakness.
We were disappointed by the relative performance of the Oil Service Sector last week considering the strength in crude oil amid heightened Middle East tensions with Iran. Therefore we decided to take our profit on our long position in the shares of Halliburton (HAL-31.55). We liquidated the long position on Friday, 2/23/07, at a price of 31.70, for a gain of 7.3%.
IV. Dow 30 Analysis
Our Weekly Trend Indicator (WTI) measures in at +4, a decrease from the previous week reading of +8. The Dow Jones Industrial average increased 0.92% for the week to 12,649, -117.29. Readers should take notice of fresh weekly sell signals in General Motors (GM-34.26) and Home Depot (HD-40.96). Both GM and HD had been strong performers year to date. The weekly support level for the DIA-126.41 (Dow Industrial Diamonds) will remain at 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, BA, DD, 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 only one Dow component is due to report quarterly earnings, American International Group (AIG). Last week we mentioned that we would look to be a buyer of the shares of American Express (AXP-58.02) on weakness. We went long AXP on Friday, 2-23-07 at a price of 57.90. Our protective sell stop shall be placed at 55.90.
Dow 30 stocks with positive weekly signals:
AA, AIG, AXP, BA, CAT, DD, DIS, HON, JPM, MCD, MMM, PG, T, UTX, VZ, WMT, XOM
Dow 30 stocks with negative weekly signals: C, GE, GM, HD, HPQ, IBM, INTC, JNJ, KO, MO, MRK, MSFT, PFE
· Underline names have changed from previous week*
V. OPEN POSITIONS
Long AXP@57.90 purchased 2/23/07 (sell stop 55.90)
VI. CLOSED TRADES
JNJ- 1/10/07 Long @ 66.20 / exit 1/31 @ 66.98 gain of 1.1% HAL-1/31/07 Long@ 29.54 / exit 2/23/07@ 31.70 gain of 7.3%.
VII. KEY EVENTS IN THE WEEK AHEAD:
Monday, February 26
Economics Tuesday, February 27
Economic
7:45 ICSC-UBS Store Sales Earnings
Before: ASTE,
AZO, BBG, BBI, CSE, CBS, CDI, CMED, CTCM, CZN, DYN, EP, EXR,
FD,
FDP, FST, FTO, FWLT, GEO, HANS, HET, HNZ, HSII, LKQX, MCGC, MGA, MSA, MTCT,
NIHD, OSG, PEI, PFGC, PNCL, QLTY, RDC, RRD, RRI, RSH, SAFM, SCMR, SAH, SGY,
SHMR,
SIRI,
TGT,
THC, TOA, TUES, TW, TWGP, TXU, VIAC, VNO, VTIV, WCI Events
Fed's
Fisher speaks at 8:15 in Austin on Texas Economy
Earnings
Before:
AES, AER, ALD, BLT, BRL, BRY,
BVN, CBI, CHTR, CNP, DLTR, EIX, EV, GTI, GVHR, HAWK, HSP, IART, IPG, IRM, JRCC,
JOYG, JTX, KG, LIZ, LNY, MGLN, MSO, NRG, NT, NVAX, NVL, NX, OATS, OCR, ORA,
PRAI, REV, RNVS,
S,
SLXP, SPW, STN, SUNH, THO, THX, TTI, TVL, VPHM, VRX, VSE, WOLF, WTR
Events
Fed's
Geithner speaks at 8:50 on Financial System in New York Earnings
Before:
AACC, AMCS, BID, BNT, CALP, CDL, CETV, CIEN, CKP,
CTB, DISH, DLM, DRQ, EEE, EEEE, EPL, FAF, GCO, GGL, GLBL, HLS, HNR, ILA, LIFC,
MIC, NAFC, PDE, PDGI, PLLL, PLUG, RHD, SFD, SGK, SHOO, SPLS, SUPG, THE, TLM,
USPH, WMAR, WR, XTEX, XTXI
Prudential Equity Group Midwest Semi & Semi Cap
Equipment Day
Before: HRZ, METH
Events
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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. |
