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3/12/07
Note: Event
Calendar has been moved to bottom of page I. General Market Overview
Last week the major stock market indices staged a small relief rally as the Japanese yen retreated, easing concerns regarding the unwind of the notorious “carry trade”. We view this short term bounce as a reflex rally from a short term deeply oversold condition. It continues to be our opinion that a near term top is in place and that investors should look to raise cash positions into any such market rallies.
We are certainly troubled by that fact that Chinese officials last week reiterated that they were looking to diversify some of their roughly three trillion in foreign exchange holdings. If this is truly the case, the U.S. markets could be facing dramatically higher interest rates. After all, it has been the voracious Chinese appetite for U.S. treasury debt that has helped keep interest rates inordinately low for the past decade. If the Chinese become net sellers, it will become a situation that the U.S. Federal Reserve can do little to counteract.
In our last letter we praised the performance of the managed healthcare sector. We reported the purchase of the shares of United Healthcare (UNH-53.00) at a price of 51.80. At this time we are raising our protective sell stop to 52.40. We are doing this to protect the trade and are concerned with recent technical deterioration within the group as a whole. The shares of WellCare Group (WCG-83.55) remain the most appealing. We have near term concerns regarding the shares of WellPoint (WLP-78.32) and Humana (HUM-59.05).
This week will be very interesting for the Brokerage stocks. Earnings reports are due from major brokerage houses Goldman Sachs (GS-201.70), Lehman (LEH-75.83), and Bear Stearns (BSC-151.98). The brokerage arena has recently experienced sharp ten percent declines as sub-prime lending concerns have crept in to the sector. Readers should take note that the shares of Merrill Lynch were highlighted five weeks ago as displaying troubling signs of weakness. It is our belief that any “good news” in this sector should be sold at this time.
This column has been negative on the Homebuilding group (XHB-34.95) for the past five 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, Eli Lilly, and Johnson & Johnson continue to signal 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 Abbott Labs (ABT-54.39).
Our overall feeling is that a Global asset correction has begun and we currently believe that investors should use any market strength to raise cash positions
Take note that the VIX-14.09 (CBOE Volatility Index) decreased from a reading of 18.61 the previous week. This is a 24% drop from the previous week volatility spike. We believe that the extended run of low volatility has come to an end and that investors should be bracing for more turbulence.
II. GOLD
GLD (streetTracks gold index) – The GLD-(64.25) advanced $0.54 for the week. At this time we shall continue to be on the sidelines in the GLD until a more discernable trend emerges. The current atmosphere of a Global asset correction remains a significant concern to us here.
III. Energy
Shares in the energy complex (Oil, Oil Service, Coal, Natural Gas) all enjoyed what can be categorized as relief rally advances last week. From a technical standpoint the picture is blurry. Current companies that are acting well in the space include Halliburton (HAL-32.02), Valero (VLO-60.23), Tesoro (TSO-94.88) and Chesapeake (CHK-30.13). We view the shares of Exxon-Mobil (XOM-71.12), Chevron (CVX-68.47), British Petroleum (BP-61.19) and Conoco Phillips (COP-67.80) as currently having less favorable technical patterns, therefore we would use any strength in these issues to reduce net long exposure.
IV. Dow 30 Analysis
Our Weekly Trend Indicator (WTI) measures in at -20, a slight increase from the previous week reading of -22. The Dow Jones Industrial average advanced 1.36% for the week to 12,276.16, +164.16. We view the tepid bounce as a reflex rally from a short term deeply oversold condition. Our critical weekly support level for the DIA-122.99 (Dow Industrial Diamonds) of 125.48 was violated a week ago. We shall reiterate that old support levels have now become new resistance levels. It is 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, MO and T. The weakest chart patterns in the Dow-30 are as follows, GE, JNJ, MSFT, and PFE.
The shares of Altria Group (MO-86.86) are indicating signs of near term strength. It appears that one should look to buy the shares as a defensive play around the $85.00 level. If executed we would use a very tight sell stop just under the $84.00 price level.
Readers should take note that there are no Dow components due to report quarterly earnings this week.
Dow 30 stocks with positive weekly signals:
AA, AIG, BA, MO, 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, 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 52.40)
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 12
Economics
11:00
4-week T-bill Announcement
Before:
CCOI, FS, GRRF, MTN ROC, SHE, SHMR, STP, TNPUWN, VITA
Events
Fed's Kroszner speaks at 12:20 at Washington
Economics Conference Tuesday, March 13
Economic
7:45
ICSC-UBS Store Sales
Earnings
Before:
ABP, CHCI, DKS, GDP, GIGM, GS, HNR, IFOX, KR, MEK, REV, SAM, SBSA, SOMX, STEI,
SWHC, TMR
Events
Fed's Paulson speaks at 8:00 on Capital Markets
at Washington Conference
7:00
MBA Purchase Applications (3/9): 7.3% prior Earnings
Before:
BLTI, CLHB, DSW, ESLT, FBST, GMTN, HWCC, LEH, LNY, MNTG, NVAX, OATS, SMTS, SSI,
SURW, TRGL, TRL, TWP
Events
Credit
Suisse Group Global Services Conference
8:30 Producer Price Index m/m (Feb): 0.4%
Earnings
Before:
ARD, BDY, BSC, BORL, BVF, CLE, CRAI, HEES, HSOA, HTZ, IAG, LINE, NT, NWY, POP,
SCVL, STRL, SUP, TOMO, WGO
Fed’s former chair Greenspan speaks at 12:30 at
Futures Industry Association
8:30 Consumer Price Index m/m (Feb): 2.3% cons
Before:
ANN, CNTY, CYPB, IMAX, JRCC, KIRK, KWD, ROHI
Events
SID Asia
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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. |
