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5/07/07
Note: Event Calendar has been moved to bottom of page
I. General Market Overview
The bull stampede on Wall Street maintained full force last week as the major U.S. stock market indices tacked on gains of anywhere from 0.75% to 1.00%. Large cap stocks continue to outperform their smaller brethren. Year to date, the S&P 500 is up 6.5% versus a 5.1% gain for the Russell 2000. The strong upward momentum persisted last week, aided by heightened M&A activity (News Corp. bid for Dow Jones) and first quarter earnings reports that continue to eclipse analyst’s expectations. Accompanying said earnings reports are increased company share buybacks which give the impression that U.S. shares are currently a good value. The other side of the coin is that by reducing outstanding shares, corporations can soften the blow of decelerating earnings growth. For now, the markets have chosen to focus on the former. At this time we would categorize our overall market opinion as being one of a very cautious bull. In past letters we have consistently stated that we are uncomfortable with the risk/reward of entering long positions at these current elevated price levels. While this opinion remains unchanged, the trade continues to be to buy high and sell higher. This trade will not change until we begin to see signs of excessive optimism. Traders should continue to buy weakness, but must maintain a strict risk discipline.
This coming week brings three key events which traders should take note of. Retail sales (low expectations) will be a good gauge of the influence of skyrocketing gasoline prices on the consumer. The Federal Reserve meeting on Wednesday will bring more anti-inflation rhetoric from a Fed who with great certainty will leave interest rates unchanged. Finally, on Friday we have the Producer Price Report. How long can companies continue to hold the line on price increases?
The market sectors that we follow that have positive technical weekly momentum are energy, steel, large cap pharmaceutical, railroads, brokers, banks, telecom, semiconductors, builders, internet, retailers and transportation.
We would like to point out the chart of semiconductor Novellus Systems (NVLS-33.85). The weekly chart is indicating that this laggard is preparing to join the party on the upside. We shall look to enter a long position in NVLS this week. An optimal entry appears to be around the 32.50 area, but as is usually the case we may have to pay up. Our protective sell stop will be dependant upon our entry point, but looking at the chart, we can safely state that we would not like to see a breach of the 31.50 price level.
The Steel group as a whole (SLX-62.05) continues to look constructive. However the technical action in U.S. Steel (X-104.38) and Nucor Steel (NUE-65.38) are indicating potential near term weakness.
The managed Healthcare sector is currently the weakest group that we follow. Shares of WellPoint (WLP-81.43) and United Healthcare (UNH-53.57) appear vulnerable to further price weakness. Also, shares of WellCare Group (WCG-82.09) are displaying signs that the spectacular year and a half ascent has run its course.
Take note that the VIX-12.91 (CBOE Volatility Index) rose ever so slightly from a reading of 12.45 the previous week. This is the third consecutive week that the VIX has increased slightly notwithstanding the market advance. It may very well be the case that the recent stability of the VIX is a direct reflection of the current “wall of worry” that the stock market is ascending. The key indicator could come when the VIX actually falls to the 10.00 area. This will then reflect investor acceptance of the rally, which in turn should weaken the foundation of the “wall of worry”. Watch for this decline in the VIX for it should correlate well with a short term top in the market.
II. GOLD
GLD (streetTracks gold index) – The GLD-(68.19) advanced $0.63 or 1.0% for the week. We are currently long the GLD from 04/26/07 at a price of 67.01. Our protective sell stop shall remain at 64.90. The weekly technical picture points to a retest of the May 2006 highs. This would translate to a short term target of 71.00-72.00 price for the GLD.
III. Energy
Despite a 6.8% decline in the price of crude oil for the week, the strong upside momentum continued in the energy sectors (Oil, Oil Service, Coal and Natural Gas). At this time we are reluctant to pick a top in the energy complex because the technical trends continue with the bulls. We shall remain uncomfortable as to entering long trades at these elevated price levels due to what we consider as unfavorable risk/rewards. For those with high risk tolerance, the trade continues to be to buy high, and sell higher.
IV. Dow 30 Analysis
Our Weekly Trend Indicator (WTI) measures in at +26, an increase from the previous week reading of +22. The Dow Jones Industrial average advanced 1.00% for the week to 13262.85 +143.66. The average is currently up 6.4% for all of 2007. The weekly technical picture, while appearing to be in the over bought stage, continues to rest in the bullish camp. Although we do not like this risk/reward of entering long positions at these price levels, the trade remains to buy short term weakness accompanied with disciplined, protective sell stops.
Readers should take note that two Dow components are due to report quarterly earnings this week. The list includes: AIG and DIS.
Dow 30 stocks with positive weekly signals:
AA, AIG, AXP, BA, C, CAT, DD, DIS, GE, GM, HD, HON, HPQ, IBM, INTC, JNJ, JPM, KO, MCD, MMM, MO, MRK, MSFT, PFE, UTX, VZ, WMT, XOM
Dow 30 stocks with negative weekly signals: PG, T
· Underline names have changed from previous week*
V. OPEN POSITIONS
GLD- 04/26/07 Long@ 67.01/ sell stop 64.90
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% DIA-4/3/07 Short@125.18/ exit 4/16/07@127.20 Loss of 1.6%
2007 NET RESULTS ASSUMING EQUAL DOLLAR AMOUNT INVESTED IN EACH TRADE: 5 trades, net return of + 6.25%
VII. KEY EVENTS IN THE WEEK AHEAD:
Monday, May 7
Economics
11:00
4-Week T-bill Announcement
3-Year
T-note Auction
Earnings
Before:
AEE, AGII, AMT, ARD, BID, CCOI, DQE, DRAD, ENCY, ENTG, ETM, FLML, FNDT, GROW,
HANS, HOFF, IMKTA, MCY, ORBK, OSIS, PGN, RCKY, TTI, VITA
Events
Richmond Events CIO Forum Financial Services
Tuesday, May 8
Economic
7:45 ICSC-UBS
Store Sales
Earnings
Before:
ABY, AHCI, ALD, AQNT, BBG, BECN, BIVN, BLTI, BRNC, CBB, CDE, CDL, CHD, CVS, DEPO,
DTPI, DUK, DYN, EP, EXPE, HET, HEW, HOC, HSIC, IDCC, ILA, IPGP, JBSS, JRCC, KPA,
LAZ, LCAV, LIOX, MGA, MIC, MMC, MLM, MNTA, MVL, NSR, NUHC, OPTN, ORA, ORCT, PEC,
PFGC, PLA, PKD, PNCL, PNK, PRGO, PXR, REV, RTIX, SBSA, SLXP, SOMX, SRZ, STE,TAP,
THC, TMR, TVL, TYC, UAG, VSE, VTIV, VTRU, WCI, WMG, WON, WRNC, WTI, WOLF
Events
Richmond Events CIO Forum
Financial Services
Wednesday, May 9
Economic
7:00
MBA Mortgage Applications (5/4): 0.6% prior
Earnings
Before:
ALLT, ASN, ATPG, AZPN, B, BCRX, BORL, BRL, CACH, CLHB, CMLS, CRZO, CTEC, CXR,
CYPB, DTV, EBS, EFD, EIX, EMAG, FLA, FTO, FWLT, GCA, GTOP, HGSI, HLS, HSP, IART,
ID, IDA, IDEV, ISPH, KEM, LEV, LM, MGAM, MMS, MSA, NICE, NRGY, PBH, PCP, STRL,
STXS, SURW, THS, TLM, TOA, TOL, TRGL,TRK, TXU, UIC, WW, XEC, XJT
Events
Merrill Lynch 9th Global
Industries Conference
7:00 BOE
Announcement
Earnings
Before: ABBI,
ARXT, BVT, CNSL, CNTY, CPE, CRYP, DISH, DK, ED, EEEE, FBST, HB, HEES, IFOX, IHR,
IPG, KDE , KG, LAMR, LB, MDTH, MEK, MEMY, MEND, MGPI, NRF, OHB, PCG, PDE, PDX,
POP, PRFT, RTK, SLE, SPC, SPH, STE, STST, SUP, SWSI, TLCV, TWTR, RMIX, VG, VTAL,
WIN, XTEX, XTXI
Events
Fed's Moskow gives welcome remarks at 11:00 at
Payments Conference in Chicago
Friday, May 11
8:30 Producer
Price Index m/m (Apr): 0.6% cons
Earnings
Before: ALU, CHCI, DRS, EMMS, GG, HELE, NAVX
Events
Merrill Lynch 9th Global
Industries 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. |
