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3/5/07 Note: Event Calendar has been moved to bottom of page
I. General Market Overview
Has China now displaced the United States as the dog that wags the world’s financial tail? Last week’s one day 9% drop in the Chinese stock market, sent equity markets all over the world into a tailspin. Efforts by Chinese authorities to slow loan demand provided the initial catalyst for a global asset correction. Or can we attribute blame to the fact that an interest rate increase by the Bank of Japan has removed the notorious “carry trade” as the world’s supplier of excess liquidity? Whatever the reason, the fact is that roughly $600 billion in U.S. market equity was vaporized last week. While highly unlikely, only a complete reversal in the coming week of last weeks declines, would repair the damage that has been done. It is our current belief that the markets sent an important message last week. Investors should resist the temptation to rush in and buy at current discount prices, for we believe that this is the beginning of a much larger discounting period. It is now time to shift gears from the “buy the dip” mentality to one of “sell the rally”.
We shall start with the good news. The only sector that we follow that held up fairly well was that of Managed Healthcare. Last week we stated that we would be looking to get long shares of United Healthcare (UNH-54.18) on any price weakness around the 52.00 area. On Tuesday, February 27, we went long UNH at a price of 51.80. Our protective sell stop has been placed at 50.70. Other companies in this space that also continue to appear technically attractive include those of Humana (HUM-59.71) and WellCare Health Plans (WCG-84.01). Shares of WellPoint Health Networks (WLP-80.06) should be avoided at this time for they are signaling near term weakness.
In past letters we have expressed our liking for the shares of Brokerage giants Goldman Sachs (GS-195.67) and Morgan Stanley (MS-73.40). We did mention last week that we were concerned by the narrowing of leadership in this group as shares of Merrill Lynch (MER-82.16), Lehman (LEH-72.10) and Bear Stearns (BSC-147.49) were signaling signs of weakness. It seems that recent concerns over rising sub-prime loan defaults have crept in to the sector. The technical pictures of GS and MS have now turned down and any strength should be used to liquidate long positions.
This column has been negative on the Homebuilding group (XHB-35.10) for the past four weeks. We continue negative on this sector at this time, and would look to be sellers of any significant rallies. We would not be surprised to see a retest of the 30 price level for the XHB.
The large cap Pharmaceutical area, defensive in nature, refused to provide a safe haven in last week’s sell-off. The weekly charts of Pfizer, Merck, Wyeth and Johnson & Johnson continue to signal weakness. The shares of Eli Lilly (LLY-51.77) have now broken down and joined their weak brethren. 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 Abbott Labs (ABT-53.01).
Other previously strong groups that are now signaling weakness include the HHH-54.14 (Internet Holders) and the RTH-100.92 (Retail Holders).
Take note that the VIX-18.61 (CBOE Volatility Index) increased from a reading of 10.58 the previous week. This is a whopping 75% increase from historically low levels. It is safe to say that “fear” has currently overtaken “greed” as the prevailing emotion on Wall Street.
II. GOLD
GLD (streetTracks gold index) – The GLD-(63.71) dropped $4.01 for the week. We have stated in previous letters our desire to be long the GLD, but had been unable to find a suitable entry price. Last week’s 6% price drop has thrown caution into the wind. At this time we would use any price strength to exit long positions as it is becoming more apparent that a Global asset price correction is upon us.
III. Energy
The price of crude oil was able to avoid declining with other commodities last week. The shares of companies in the energy complex (Oil, Oil Service, Coal, Natural Gas) were not so fortunate. What gives here? Are equity traders more intelligent than commodity traders? If we are at the true beginning of a global economic slow down, is it time to dump shares of energy companies? Are the current Middle East tensions with Iran enough to justify $60.00 per barrel of crude? The charts in the energy complex companies are indicating further price weakness ahead. We have been positive on the coal sector in the past few letters. At this time we shall move to the sideline for the energy complex as a whole, until current negative price signals subside.
IV. Dow 30 Analysis
Our Weekly Trend Indicator (WTI) measures in at -22, a violent decrease from the previous week reading of +4. The Dow Jones Industrial average collapsed 4.25% for the week to 12,112.00, -537.00. Our critical weekly support level for the DIA-120.96 (Dow Industrial Diamonds) of 125.48 has been violated. Old support levels now become new resistance levels. It is now time to use any rallies into the 125.00-126.00 price area to exit any long positions or to institute new short positions. The tide has officially turned for now from “buy the dip” to “sell the rally. The strongest chart patterns in the Dow 30 are the following; AA, AIG, BA, and T. The weakest chart patterns in the Dow-30 are as follows, GE, JNJ, MSFT, and PFE.
Readers should take note that there are no Dow components due to report quarterly earnings this week. Last week we went long shares of American Express. We were stopped out of our long AXP on Tuesday, 2-27-07 at a price of 55.90. This is a Loss of 3.45%.
Dow 30 stocks with positive weekly signals:
AA, AIG, BA, T
Dow 30 stocks with negative weekly signals: AXP, C, CAT, DD, DIS, GE, GM, HD, HON, HPQ, IBM, INTC, JNJ, JPM, KO, MCD, MMM, MO, MRK, MSFT, PFE, PG, UTX, VZ, WMT, XOM
· Underline names have changed from previous week*
V. OPEN POSITIONS
Long UNH @ 51.80 purchased 2/27/07 (sell stop 50.70)
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%. AXP-2/23/07 Long@57.90 / exit 2/27/07@ 55.90 Loss of 3.45%
VII. KEY EVENTS IN THE WEEK AHEAD:
Monday, March 5
Economics
Before:
BXG, IFS, OMG, TOA, THO
Fed's Poole speaks at 1:00 on inflation
in Santiago, Chile
Tuesday, March 6
Economic
7:45 ICSC-UBS Store Sales
Earnings
Before:
ACW, ALY, BLTI, ICON, IPGP, ISTA, LINE, OPSW, RTLX, SNHY, VOL, WRES
Events
Fed's Plosser speaks at 1:00 at Havard Club in
New York
7:00 MBA Purchase Applications (3/2):
3.2% prior
Earnings
Before:
AEOS, BJ, CPA, CRMT, EFJI, GCO, HRLY, HYC, LINC, LNY, MIM, POZN, SALM,
SKS,
TLB, TWB, WON
Events
Fed's Moskow speaks at 1:00 on economic outlook
in Chicago
Earnings
Before:
ALJ, ALOG, ALTI, ASVI, BWS, CBM, CBUK, CMN, CNSL, DEBS, DIET, DK, FLE, FS,
GG,
HITK, IFOX, KFY, TON, NOBH, ORCH, POP, RHB, RMX, SOMX, TECD, TOPT, TRGL,
URBN,
OATS
9th Annual DisplaySearch US FPD Conference
8:30 Employment Situation
Before: BKRS, BIG, ENCY
Events
Fed's Bies speaks at 12:30
at Charlotte Risk Management conference
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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. |
