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5/21/07 I. General Market Overview
It was just another average week in stock market paradise. The Dow Jones Industrial average gained 1.72% coupled with a 1.12% rise in the S&P 500. These Large-Cap brethren continue to outperform their Small-Cap counterparts as the Russell 2000 declined 0.71% on the week. Benign inflation data, coupled with a stronger than anticipated reading for Industrial Production provided the impetus for the major stock market indices to record their seventh consecutive week over week advance. We also cannot neglect to mention the fact that merger mania also maintained momentum. Microsoft announced the acquisition of Aquantive Inc. (AQNT) which saw its shares rise a stunning 83% for the week. Warren Buffet also made his contribution to the rally by disclosing the purchase of shares in Johnson&Johnson (JNJ) and healthcare provider WellPoint (WLP). Legendary investor Eddie Lampert also jumped in to the fray by revealing that he recently acquired fifteen million shares of Citibank (C). Last but not least we cannot overlook Federal Reserve Chairman Ben Bernanke. Gentle Ben took a peak at his crystal ball and chimed in that the sub-prime delinquency problem will not spread like wildfire to other areas of the economy.
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. The momentum will not subside until the next hedge fund disaster or the implosion of some mysterious, secretive trade in the world of derivative instruments. 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. Readers should keep an eye on the brokerage Index (XBD-254.63). A weekly close above the 260.00 price level could potentially lead to much higher prices. The shares of Goldman Sachs (GS-230.34), Merrill Lynch (MER-94.17) and Morgan Stanley (MS-85.05) are the better charts in the space. Lehman (LEH-72.40) and Bear Stearns (BSC-149.57) are not as attractive. An upside breakout of the XBD could signal that the financial sector as a whole is prepared to lead the market much higher.
Last week we mentioned that we went long the shares of Novellus Systems (NVLS-30.61) at a price of 32.40. A disappointing earnings report from semiconductor Applied Materials (AMAT-18.85) caused a sell off in the group and our protective sell stop was triggered at 30.52. We unfortunately took a 5.8% loss on the trade. Yes, one can lose money being long in this market. We must respect price discipline and move on to the next trade.
Our next trade is Walgreens (WAG-45.74). We shall look to go long the shares of WAG upon any price retreat to the 44.00-45.00 area. The weekly chart is indicating that it is now time to buy weakness in WAG.
Take note that the VIX-12.76 (CBOE Volatility Index) was virtually unchanged from a reading of 12.95 the previous week. We shall continue to look for a significant drop to the 10.00 area in this sentiment gauge, which, in turn, shall indicate excessive optimism. At current levels the VIX signifies continued pessimism. This pessimism will enable the stock market to continue to climb a “wall of worry”.
II. GOLD
GLD (streetTracks gold index) – The GLD-(65.52) declined $0.93 or 1.4% for the week. Last week we said that we were discouraged by the price action in the GLD and that we would use any strength to exit the trade. We liquidated our long position on 5/15/07 at 66.60 for a loss of 0.41 or roughly a half of a percent. While the longer term chart in the GLD remains bullish, the short term chart points to a test of the 62.00-63.00 key support area. We shall remain on the sidelines for now.
III. Energy
The energy complex (Oil, Oil Service, Natural Gas and Coal) maintained current upside momentum. The stocks of coal companies (ACI-39.93, BTU- 53.51) which have underperformed relative to the other sectors within the energy complex, appear to be playing catch up at this time. Look for continued strength in the coals. The trade in energy remains 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 +16. The Dow Jones Industrial average advanced 1.72% for the week to 13556.53 +229.42. The average is currently up 8.62% for all of 2007.
The Dow Jones Industrial average continues to benefit from the ongoing investor preference for Large-Cap companies. Also aiding the advance was the announcement that two legendary investors disclosed long positions in two Dow components. Warren Buffet disclosed a stake in Johnson&Johnson (JNJ) and Eddie Lampert disclosed the purchase of fifteen million shares of Citibank (C). 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 there are no Dow components scheduled to report quarterly earnings this week.
Dow 30 stocks with positive weekly signals:
AA, AIG, AXP, BA, C, CAT, DD, DIS, GE, GM, HD, HON, HPQ, IBM, INTC, JPM, KO, MCD, MMM, MO, MRK, MSFT, PFE, PG, T, UTX, VZ, XOM
Dow 30 stocks with negative weekly signals:
JNJ, WMT
· 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% GLD-4/26/07 Long@67.01/ exit 5/15/07@ 66.60 Loss of 0.006% DIA-4/3/07 Short@125.18/ exit 4/16/07@127.20 Loss of 1.6% NVLS-4/26/07 Long@32.40/ exit 5/16/07@30.52 Loss of 5.8%
2007 NET RESULTS ASSUMING EQUAL DOLLAR AMOUNT INVESTED IN EACH TRADE: 8 trades, net return of + 0.44%
VII. KEY EVENTS IN THE WEEK AHEAD:
Monday, May 21
Economics
11:00 4-Week
T-bill Announcement
Earnings
Before:
CPB,
LOW,
RTLX,
SKS,
TSL
Events
Fed's Braunstein testifies at 10:30 on Banking
and Subprime in Cleveland
Tuesday, May 22
Economic
7:45
ICSC-UBS Store Sales
Earnings
Before:
AZO, BJ, CBRL,
PLCE,
GMTN, GIGM, MNRO,
SPLS,
TECD, TNP, UNFI, ZLC
Events
Fed's Paulson starts meeting at 9:15 with
Chinese Officials in Washington
Wednesday, May 23
Economic
7:00
MBA Mortgage Applications (5/18): -0.8% prior
Earnings
Before: DKS, EV, GME, POSS, ROST, TLB, TGT, TWB, WTSLA
Events
Citigroup Healthcare Conference
8:30 Durable Goods
Orders (Apr): 0.9% cons
Earnings
Before: AMSC,
ANN, BKS, BBA, BWS, CAMT, CMRG, CTR, CHRS, DEBS, FLO, HRL, KEYS, LTON, MM, MYL,
NWY, PDCO, SAFM, SCVL, SSI, SMRT,
TOL,
TTC
Citigroup Healthcare Conference
Friday, May 25
10:00
Existing Home Sales (Apr): 6.10 mln cons
Earnings
Before: AGYS, DG
Events
INTEROP 2007
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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. |
