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4/2/07
Note: Event Calendar has been moved to bottom of page
I. General Market Overview
Last week the major U.S. stock market indices all retreated approximately 1% as the price of oil continued to surge amid current geo-political tensions with Iran. Also contributing to the weakness was the Commerce Department announcement of trade sanctions against China. The ramifications of this protectionist development could prove to be extremely negative over the longer term. The Chinese have already indicated a desire to diversify their sizeable foreign exchange holdings. If this action offends the Chinese and they retreat from buying U.S. treasuries, U.S. consumers will be facing dramatically higher interest rates. It does not take a rocket scientist to deduce that higher interest rates will not sit well with an already wobbly housing market. It shall be very interesting to witness how this issue plays out in the coming weeks.
We remain concerned that the stock market has failed to adequately discount a number of looming negative issues. There is the removal of global liquidity via the unwind of the Japanese Yen “carry trade”. There is the sub-prime mortgage lending default issue. Will the defaults spread as adjustable rate mortgages adjust to higher interest rates? Inflation continues to creep higher although the Federal Reserve continues to jawbone the public by assuring investors that things will get better. We are entering the prime earnings pre-announcement period as the first quarter has drawn to a close. We are well aware that markets like to climb a wall of worry but this time the wall may be too steep to ascend. This week we shall receive an earnings report from BestBuy (BBY-48.65). This will be an excellent gauge as to the spending appetite of the U.S. consumer. We do not like the technical set up for BBY approaching this quarterly report. A disappointment here and we will be looking at a $40.00 stock. This earnings report will set the tone for the Retail sector in general.
At this time we would continue to use market rallies as an opportunity to raise cash positions. Were it not for the recent rally in the energy sectors due to geo-political tensions, we believe the major market indices would be dramatically lower at this time. Sectors with favorable technical trends at this time include Oil, Oil Service, Natural Gas, Railroads and the Steels. Sectors with negative technical trends include Regional Banks, Brokerage, Builders, Managed Health Care, Semiconductors, Retailers, and Large Cap Pharmaceuticals.
Take note that the VIX-14.64 (CBOE Volatility Index) increased from a reading of 12.95 the previous week. This is a 13% increase 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-(65.74) advanced $0.59 for the week. The minimal price advance in gold last week is quite perplexing considering the geo-political turmoil we are currently experiencing. At this time we shall continue to be on the sidelines in the GLD until a more discernable trend emerges.
III. Energy
Strength in the energy sectors (Oil, Oil Service, Coal and Natural Gas) amid geo-political tensions with Iran continued to buoy the major stock market indices. Since March 20th crude oil futures have rallied approximately 11%. While we admittedly missed this rally in energy we shall refuse to jump in at these elevated prices. Just as the Iran situation has produced a lack of sellers in the sector, any resolution to the British sailors being held captive, will produce a lack of buyers. At this time we do not like the risk reward of being long equities in the energy complex.
IV. Dow 30 Analysis
Our Weekly Trend Indicator (WTI) measures in at +6, unchanged from the previous week reading of +6. The Dow Jones Industrial average declined 1.02% for the week to 12,354.35 -126.82. Our critical weekly support level for the DIA-123.59 (Dow Industrial Diamonds) of 125.48 was violated four weeks ago. It continues to be our belief that the 125.48 price level should prove to be a formidable hurdle of resistance. We were not executed on our short position as the high for the week in the DIA was 124.75. 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.
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, April 2
Economics
10:00
ISM Mfg Index (Mar): 51.1 cons
Earnings
Before:
ARD
Events
Fed’s Poole speaks at 12:30 to Economists in New
York
Tuesday, April 3
Economic
7:45
ICSC-UBS Store Sales
Earnings
Before:
ISCA, POP
Events
Howard Weil Energy Conference
Wednesday, April 4
Economic
7:00
MBA Mortgage Applications (3/30): 12.5% cons
Earnings
Before:
AYI, BBY, BTH, CC, GBX, MON, MSM
Events
Fed’s Fisher speaks at 1:15 in Austin on U.S.
economy
6:00
Monster Employment Index
Earnings
Before:
CYCL, MTRX, RPM, SHLM, STZ
Events
Howard Weil Energy Conference
Friday, April 6
8:30 Change in non-farm
payrolls (Mar): 125 k cons
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. |
