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5/28/07 I. General Market Overview
The large capitalization U.S. indices took a pause last week, ending a seven week run of advances. All was not lost as the small-cap Russell 2000 index benefited from some rotation and gained 0.76% for the week. Strong economic reports from new home sales and durable goods orders pushed the yield on the ten-year bond to 4.86%, testing the high yield for all of 2007. Could it be that bond traders are taking a cue from the Chinese government? Last week the Chinese government announced plans to invest three billion in U.S. private equity firm Blackstone Partners. That is three billion less that will not be invested in U.S. treasuries. It seems the Chinese are beginning to diversify away from the “full faith and credit” of the United States treasury to the faith of the brain trust of Blackstone Partners. Former Federal Reserve Chairman Alan Greenspan chimed in that the Chinese stock market was due for a “drastic correction”. Readers should recall that Mr. Greenspan uttered the words “irrational exuberance” well in advance of a market top in the days of the Internet stock market bubble. Mr. Greenspan has proven much more adept at creating market bubbles than calling the timing of their imminent demise.
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, builders, internet, retailers and transportation.
We continue to watch the price action of the brokerage index (XBD-253.76). Last week we mentioned that the 260.00 level was a formidable hurdle of price resistance. A close above this critical level could possibly bring the financial sector as a whole to the forefront of market leadership and propel the major indices much higher. For now it appears that the sector is not firing on all cylinders. The strong performers remain Goldman Sachs (GS-225.53), Morgan Stanley (MS-84.26) and Merrill Lynch (91.85). Until current weakness in the shares of Bear Stearns (BSC-146.86) and Lehman Bros. (LEH-72.76) subsides, the XBD (brokerage index) will fail on its assault of the 260.00 price level.
The semiconductor sector (SMH-36.36) is beginning to show signs of weakness. It seems that the sector has yet to deal with the problem of overcapacity. A disappointing earnings report last week from SMH component Analog Devices (ADI-35.67) was the main contributor to the 11% weekly decline in the SMH index. We would use any price strength to reduce long exposure in this group at this time.
Our next trade is Walgreens (WAG-45.09). We purchased the shares of WAG on 05/24/07 at a price of 44.60. Our protective sell stop shall be place at 43.19. The upside price objective is in the 50.00 to 51.00 area.
Take note that the VIX-13.34 (CBOE Volatility Index) increased from a reading of 12.95 the previous week. We remain of the opinion that the VIX continues to reflect investor pessimism in regards to the sustainability of the market advance. The consistent strength in the VIX up to date is not indicative of a market top. We shall continue to look for a drop in the VIX to the 10.00 area for an indication that current investor sentiment has shifted to excessive optimism.
II. GOLD
GLD (streetTracks gold index) – The GLD-(64.94) declined $0.58 or 0.9% for the week. It appears that the recent strength in the U.S. dollar has brought out some sellers in gold. We shall continue to look to sell rallies in the GLD until the price reaches our support zone in the 62.00-63.00 area. Our current weekly price resistance resides at 65.89.
III. Energy
The energy complex (Oil, Oil Service, Natural Gas and Coal) declined for the week but maintained upside technical momentum. We continue to prefer the names in the coal space as they have lagged performance relative to the other sub sectors of the energy complex. Arch Coal (ACI-41.48) and Peabody Energy (BTU-53.96) are the preferred names here. The trade in energy remains buy high and sell higher.
IV. Dow 30 Analysis
Our Weekly Trend Indicator (WTI) measures in at +16, a decline from the previous week reading of +26. The Dow Jones Industrial average declined 0.36% for the week to 13507.28 -49.25. The average is currently up 8.26% for all of 2007. The Dow Jones Industrial average posted its first week over week decline in seven weeks. Our weekly technical work is indicating that Dow components HD, HON, JPM, KO, and MSFT are beginning to see a stall in their upside momentum. While it is quite obvious that one week does not make a trend, we shall monitor these names closely to see if further weakness develops. For now we shall remain in the reluctant bullish camp. While we feel that the Dow Jones is in a short term over bought stage, the dominant trend remains to the upside. Traders should continue to enter long positions upon bouts of market weakness but must maintain a strict sell stop discipline to protect them against any swift decline.
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, HPQ, IBM, INTC, MCD, MMM, MO, MRK, PFE, PG, T, UTX, VZ, XOM
Dow 30 stocks with negative weekly signals:
HD, HON, JNJ, JPM, KO, MSFT, WMT
· Underline names have changed from previous week*
V. OPEN POSITIONS
WAG- 5/24/o07 Long@ 44.60 / sell stop43.19
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 28
Economics
Earnings
Events
Tuesday, May 29
Economic
9:00 Bank of Canada
Announcement
Earnings
Before:
CMCO, HNZ, ITRN, SHMR, STP
Events
WBR AutoRussia 2007
Wednesday, May 30
Economic
7:00
MBA Mortgage Applications (5/25): 1.6% prior
Earnings
Before: DAKT, DLTR, DBRN, JOYG, OPSW, RL, SOLF, WSM
Events
Cowen and Company 35th Annual
Technology Conference 2007 Focus on SMidCap
6:00 Monster Employment
Index Earnings
Before: BIG,
BTH, CIEN, CONN, COST, FRED, GCO, JTX, LAYN, MOV, PTMK, TIF
Cowen and Company 35th Annual
Technology Conference 2007 Focus on SMidCap
Friday, June 1
8:30 Personal Income
(Apr): 0.3% cons
Earnings
Events
Fed's Kroszner speaks at 4:30 on US Economic
Outlook in Greece
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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. |
