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3/26/07
I. General Market Overview
Last week the major U.S. stock market indices staged broad advances following the Federal Reserve decision to leave interest rates unchanged. The omission of “additional firming may be needed” in the Fed rate decision statement sparked a roughly three percent rally. It is interesting to note that while stock markets rallied, the bond market did not rejoice as well. The yield on the ten-year bond rose on the week to 4.61% from 4.54%. There appears to be a difference of opinion between stock and bond traders. While admittedly surprised by the extent of last week’s stock market advance, we continue to view it as an opportunity to raise cash positions. Our best explanation of the activity last week would be that we are experiencing end of first quarter window dressing by the mutual and hedge fund community.
We remain concerned regarding the removal of liquidity on a global basis. It is our belief that the mortgage default issue and the Japanese Yen carry trade unwind, have yet to be adequately discounted in the markets.
It is our opinion that the extreme volatility of the past few weeks can be construed as a lack of liquidity in either direction and is a warning signal for further declines to come over the intermediate term. This being stated, a strong follow up advance by the stock indices in this coming week will certainly cause us to reevaluate our opinions.
We view the coming week as critical in the grand scheme. We fully expect continued strength early next week as the Fund community executes their end of quarter shenanigans. If by the end of this coming week the markets can sustain recent gains, we will be forced to reevaluate our opinions.
Take note that the VIX-12.95 (CBOE Volatility Index) decreased from a reading of 16.79 the previous week. This is a 22% decrease from the previous week volatility reading. 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-(65.15) advanced $0.53 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 of significant concern to us here.
III. Energy
Last week the energy sectors (Oil, Oil Service, Coal and Natural Gas) all advanced sharply. The Oil service group (OIH-147.00) was able to shrug off a profit warning from Halliburton and post a whopping six percent increase on the week.
Shares of oil refiners Tesoro (TSO-100.84) and Valero (VLO-63.65) continued their recent meteoric rise as sporadic, and convenient refinery shut downs affect the supply of gasoline. Can profit margins get any better for these two companies?
Natural Gas companies also performed admirably, apparently bucking the end of winter seasonality and possibly beginning to discount the upcoming hurricane season.
While we admittedly missed this recent energy rally we remain concerned with the demand issue as the U.S. economy continues to show signs of contraction.
IV. Dow 30 Analysis
Our Weekly Trend Indicator (WTI) measures in at +6, a strong increase from the previous week reading of -22. The Dow Jones Industrial average rocketed 3.07% for the week to 12,481.17 +371.80. Our critical weekly support level for the DIA-124.69 (Dow Industrial Diamonds) of 125.48 was violated three weeks ago. Despite the strong performance last week it is our belief that the 125.48 price level should prove to be a formidable hurdle of resistance. We shall look to institute a short position this week upon any price action above the 125.00 area. If executed our protective buy stop will be placed at 127.20. Our downside price objective is the 116.00 area. A weekly close above 125.48 would also make us exit this position. We like the risk/reward ratio of this trade.
Readers shall notice several buy signals this week in numerous Dow components. We shall remain suspect of the current rally unless the price action in the coming week is able to confirm higher prices ahead.
The strongest chart patterns in the Dow 30 are the following; AA, BA, KO, MO, and T. The weakest chart patterns in the Dow-30 are as follows, HD, INTC, JNJ, and PFE.
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, AXP, BA, C, CAT, GE, GM, KO, MCD, MMM, MO, MSFT, PG, T, UTX, VZ, WMT, XOM
Dow 30 stocks with negative weekly signals: AIG, DD, DIS, HD, HON, HPQ, IBM, INTC, JNJ, JPM, MRK, PFE
· Underline names have changed from previous week*
V. OPEN POSITIONS
NONE
VI. CLOSED TRADES
UNH- 2/27/07 Long@51.80 / exit 3/15/07 @ 54.00 gain of 4.2% MO- 3/13/07 Long@ 85.00 / exit 3/14/07 @ 83.85 Loss of 1.3% JNJ- 1/10/07 Long@ 66.20 / exit 1/31/07 @ 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%
2007 NET RESULTS ASSUMING EQUAL DOLLAR AMOUNT INVESTED IN EACH TRADE: 5 trades, net return of + 7.85%
VII. KEY EVENTS IN THE WEEK AHEAD:
Monday, March 26
Economics
10:00
New Home Sales (Feb): 985 k cons
Before:
DG, JADE, TIF, TWP, WAG
Events
5th Annual RFID World Conference
& Exhibition Tuesday, March 27
Economic
7:45
ICSC-UBS Store Sales
Earnings
Before:
GME, LEN, MKC
Events
Fed’s Pianalto speaks at 5:00 in Prague on
Currencies
7:00
MBA Mortgage Applications (3/23): -2.7% prior
Earnings
Before:
APOL, GMTN, LINE, UNF
Events
Fed’s Bernanke testifies at 9:30 before Joint
Economic Committee
8:30 GDP Annualized (4Q
F): 2.2% cons
Earnings
Before:
AGE, AM, CHINA, CMRG, CONN, FDO, HMX, KMX, MOV, MSM, SCS, SRR, TXI, UTIW, WTSLA,
WOR
Fed’s Lacker delivers opening remarks at 8:30 at
Washington conference
Friday, March 30
8:30
Personal Income (Feb): 0.3% cons
Before: ARD, GPN
Events
Fed’s Plosser delivers opening remarks at 8:30
at Washington 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. |
