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4/9/07
Note: Event Calendar has been moved to bottom of page
I. General Market Overview
Last week the major U.S. stock market indices all advanced approximately 1.5% in a holiday shortened trading week. The Iranian release of British sailors being held captive helped ease heightened geopolitical tensions. Crude oil declined approximately 2.5%, removing a portion of the premium that was added since the beginning of this crisis. It is interesting to note that equities in the “energy complex” did not decline along with the price of crude oil. This could be a function of fund buying as individual retirement funds get put to work before the April 15th tax deadline.
The major U.S. stock market indices have managed to recoup a majority of the losses endured six weeks ago. It remains our opinion that investors should be utilizing this current market advance as an opportunity to raise cash positions. We continue to believe that the markets have yet to discount several negative developments. The ISM report of last week seemed to confirm that the U.S. economy is in a period of “stagflation”, slowing growth accompanied with increasing inflation. Along with slowing growth in the manufacturing sector, the report also displayed inflationary characteristics through the increase in the “prices paid” index. We remain concerned about the sub-prime mortgage default issue spreading to the Alt-A debtors. Despite repeated attempts of Federal Reserve governors to declare an end to the housing market correction, we shall beg to disagree. We continue to believe that we are witnessing the removal of global liquidity that has been provided by the Japanese Yen carry-trade. It also remains our concern that the Chinese desire to diversify their foreign exchange holdings could adversely impact U.S. consumers with dramatically higher interest rates. These issues having been pointed out, we must respect the price action of the markets. If the markets are able to extend the recent advance and ascend to new highs we shall revise our opinions.
In past letters we have been negative on the large-cap pharmaceutical sector, only the shares of Abbott Laboratories (ABT-57.02) have drawn our favor. We are now seeing positive weekly price indications in Wyeth (WYE-52.86), Merck (MRK-45.54) and Johnson& Johnson (JNJ-61.55). We feel it is now time to use any price weakness to initiate long positions in any of these three companies. We would continue to avoid the shares of Pfizer (PFE-25.86).
The sectors that we follow that have positive weekly momentum are energy, steel, large-cap pharma, and the railroads. Sectors that have negative weekly momentum include the regional banks, brokers, builders, and retailers.
Take note that the VIX-13.23 (CBOE Volatility Index) decreased from a reading of 14.64 the previous week. This is a 1% 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 continue to brace for more turbulence.
II. GOLD
GLD (streetTracks gold index) – The GLD-(66.86) advanced $1.12 for the week. The current price action here appears to be bullish. We shall look to initiate a long position upon any price weakness around the $64.00 price level.
III. Energy
Strength in the energy sectors (Oil, Oil Service, Coal and Natural Gas) persisted despite the decline in crude oil for the week. This strength may be attributed to recent forecasts of an active coming hurricane season or increased fund buying with the beginning of the second quarter. We are reluctant to join the momentum crowd in the energy complex at this time as we feel the current risks outweigh the potential rewards.
IV. Dow 30 Analysis
Our Weekly Trend Indicator (WTI) measures in at +14, increasing from the previous week reading of +6. The Dow Jones Industrial average advanced 1.66% for the week to 12,559.47 +205.12. Our critical weekly support level for the DIA-125.46 (Dow Industrial Diamonds) of 125.4 was violated five weeks ago. It continues to be our belief that the 125.48 price level should prove to be a formidable hurdle of resistance. We have executed a short position in the DIA at 125.18 on 4/03/07. 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 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, AIG, DD, HD, and PFE.
Readers should take note that Dow components Alcoa (AA) and General Electric (GE) are due to report quarterly earnings this week.
Dow 30 stocks with positive weekly signals:
AA, AXP, BA, C, CAT, GE, GM, HPQ, INTC, JNJ, KO, MCD, MMM, MO, MRK, MSFT, PG, T, UTX, VZ, WMT, XOM
Dow 30 stocks with negative weekly signals: AIG, DD, DIS, HD, HON, IBM, JPM, PFE
· Underline names have changed from previous week*
V. OPEN POSITIONS
DIA- 4/03/07 Short@ 125.18 / Buy Stop 127.20
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 9
Economics
11:00
4-week T-bill Announcement Earnings
Before:
DLP, QMED, SCHN
Events
Knight Institutional Corporate
Access Preferred Bank Los Angeles (PFBC) Non-Deal Roadshow
Tuesday, April 10
Economic
7:45
ICSC-UBS Store Sales
Earnings
Before:
AZZ, BKRS, PACT, TTWO
Events
Fed’s Mishkin speaks at 9:30 at Bridgewater
College in VA
Wednesday, April 11
Economic
7:00
MBA Mortgage Applications (4/6): -3.2% prior
Earnings
Before:
ACGY, APOL, JOSB, PGR
Events
Fed’s Lacker speaks at 12:00 to Economists in NC
Thursday, April 12
7:45 ECB Announcement
Earnings
Before:
MTG, PTMK, PII, PIR, RAD
Events
Credit Suisse 2007 Real Estate
Conference
Friday, April 13
8:30
International Trade Balance (Feb): -$60.0 bln cons
Before: GE, INFY
Events
FRA's Energy Efficiency Finance Forum
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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. |
