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5/14/07 Note: Event Calendar has been moved to bottom of page
I. General Market Overview
Aided by continued merger and acquisition activity, the major U.S. stock indices advanced, ever so slightly, for the sixth consecutive week. This is the longest streak of week over week advances since 2004. Year to date, there have been 936 billion dollars in announced takeovers involving U.S. companies. This frenetic pace of deals has contributed to a market atmosphere ripe with buyout rumors on a daily basis.
It is our belief that the “private equity” factor has fostered somewhat of a “safety net” support mechanism in the U.S. stock market. This merger mania environment is the only way to explain a market that consistently has displayed an ability to disregard negative news events. For example, last week the market rallied after a poor retail sales report that missed drastically reduced expectations. Some chose to blame the retail sales weakness on poor weather. Gasoline at $3.25 per gallon can cause quite a chill, but it certainly will not send you rushing out to the mall to buy a sweater. Bottom line, the U.S. consumer is over indebted and very tired.
Last week, to no great surprise, the Federal Reserve left the discount rate unchanged at 5.25%. It appears that auto-pilot is the only option for a Federal Reserve that continues to gawk at “stagflation” on the horizon. We feel there is little the Fed can do at this point in time. If they lower rates they risk igniting already heightened inflation, if they decide to raise rates they will send a wobbly housing market in to a death spiral. I truly believe that they convene at their monthly meeting and collectively “hope” that inflation cools on its own.
At this time we shall maintain our overall market opinion as very “cautiously” bullish. While we continue to believe that the major indices are currently over bought and extended, the overall momentum sides with the bulls. The trend is up until proven otherwise. Traders should continue to buy weakness and protect themselves with a strict sell-stop discipline.
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.
It seems that our concern about the chart of U.S. Steel (X-111.08) was completely wide of the mark. After the Merger Monday announcement of Alcoa’s bid for Alcan Aluminum the shares of U.S. Steel enjoyed a 6.4% advance for the week on heightened speculation that it too is in play.
Also, while we are confessing our misdeeds, the shares of managed care company WellCare Group (WCG-90.02) advanced 9.6% for the week after raising earnings guidance for 2007.
Last week we mentioned our affinity for the weekly chart of Novellus Systems (NVLS-32.17). We went long the shares on 05/10/07 at a price of 32.40. Our protective sell stop shall be placed at 30.59. Our upside price target is the 40.00-42.00 area.
Take note that the VIX-12.95 (CBOE Volatility Index) was virtually unchanged from a reading of 12.91 the previous week. 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-(66.45) declined $1.74 or 2.5% for the week. We are currently long the GLD from 04/26/07 at a price of 67.01. The price action of last week was less than encouraging; therefore we shall use any strength in the coming week to exit this trade. Our protective sell-stop shall remain at 64.90.
III. Energy
While relatively unchanged for the week, the energy complex (Oil, Oil Service, Natural Gas, and Coal) continues to maintain positive weekly momentum. Our opinion remains unchanged, buy high and sell higher, but maintain a strict sell-stop discipline. One can never anticipate the next hedge fund calamity that will result in the forced liquidation of said fund’s holdings.
IV. Dow 30 Analysis
Our Weekly Trend Indicator (WTI) measures in at +16, a decrease from the previous week reading of +26. The Dow Jones Industrial average advanced 0.52% for the week to 13272.11 +69.16. The average is currently up 6.9% 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 three Dow components are due to report quarterly earnings this week. The list includes: HD, HPQ, and DIS.
Dow 30 stocks with positive weekly signals:
AA, AIG, AXP, BA, CAT, DD, DIS, GE, HD, HON, HPQ, IBM, INTC, JPM, KO, MCD, MMM, MRK, MSFT, PFE, UTX, VZ, XOM
Dow 30 stocks with negative weekly signals:
C, GM, JNJ, MO, PG, T, WMT
· Underline names have changed from previous week*
V. OPEN POSITIONS
NVLS- 05/10/07 Long@ 32.40/ sell stop 30.59
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 14
Economics
11:00 4-Week
T-bill Announcement
Earnings
Before:
ACPW, CSIQ, GRRF, GILT, NAT, PETS, ELOS, VAL, VYYO
Events
Fed's Fisher speaks at 16:00 in Washington on
Service Sector
Tuesday, May 15
Economic
7:45 ICSC-UBS Store
Sales
Earnings
Before:
AER, ACAT, DCX, ESLT, FOSL, HD, IAG, JASO, TJX, WMT, WNS
Events
Fed's Bernanke speaks at 8:10 at Atlanta Fed Financial Markets Conference
Fed's Kroszner speaks at 18:00 on Capital
Flows at Argentina Conference
Wednesday, May 16
Economic
7:00
MBA Mortgage Applications (5/11): 3.6% prior
Earnings
Before: CPA, DE, FD, JBX, MT, CHUX, REDF
Events
CLSA 12th China Forum 2007
8:30 Initial
Jobless Claims (5/12): 310k cons
Earnings
Before: AAP,
BRC, JCP, PDC
BMO Capital Markets Agriculture and
Protein Conference
Friday, May 18
10:00 University of Michigan Confidence (May P): 86.7
Earnings
NONE
Events
BMO Capital Markets 2007 North American REIT 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. |
