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6/04/07
Note: Event Calendar has been moved to bottom of page
I. General Market Overview
The holiday shortened four day trading week brought a resumption of the bullish momentum. The continuation of the frenetic pace of merger activity and the announcement of a major buyback of shares from Dow Jones Industrial component WalMart, helped to contribute to the major U.S. stock indices advancing 1.20% to 1.50%.
The Small-cap Russell 2000 index played catch up and outperformed the Large-cap indices, gaining 2.80% for the week. Year to date the S&P 500 is up 8.70%, the Dow Jones Industrial average is up 9.80% and the Russell 2000 index is up 8.50%.
The stock market remains in a “good news” mood. The slowest rate of U.S. GDP growth in five years and the increase in Chinese trading fees (they call them stamps) were shrugged off like a gnat on the great bull’s posterior. With the summer trading months upon us and the indices sitting on healthy gains year to date, the yield on the Ten-year Treasury of 4.95% must seem quite tempting to fund managers. Of course, this assumes that said fund managers are at the very least tracking their perspective benchmarks. If the majority of fund managers are currently trailing their benchmarks, the greater fool theory of performance chasing performance will carry on.
At the risk of sounding like a broken old record, 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 be derailed 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, railroads, brokers, banks, telecom, builders, internet, retailers and transportation.
The sectors that currently have negative technical implications are the semiconductor group (SMH-36.98) and Large-Cap Pharmaceutical (PPH-85.10).
Last week we mentioned our focus on the brokerage index (XBD-267.69). The announced deal of Wachovia Bank buying brokerage firm A.G.Edwards helped propel the XBD to new all time highs. The strong upside momentum of the brokers could possibly provide the impetus for the financial sector in general to move higher. If this new leadership emerges, the major indices should continue to move much higher.
Our weekly technical analysis is flashing warning signs for the Large-Cap Pharmaceutical space. Merck (MRK-52.14) has now joined Johnson&Johnson (JNJ-63.41) and Abbott Labs (ABT-56.30) in having troublesome weekly price charts. The charts of Pfizer (PFE-27.68), Wyeth (WYE-57.71) and Eli Lilly (LLY-58.94) remain the most attractive in the group.
Our only open position is long Walgreen’s (WAG-45.13). We purchased the shares of WAG on 05/24/07 at a price of 44.60. Our protective sell stop shall remain at 43.19. The upside price objective is in the 50.00 to 51.00 area.
Take note that the VIX-12.78 (CBOE Volatility Index) decreased from a reading of 13.34 the previous week. The VIX has stubbornly continued to reflect investor pessimism in regard to the current market advance. (Pessimism = bullish) The consistent strength of the VIX to date is not reflective 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-(66.44) advanced $1.50 or 1.19% for the week. After declining for three consecutive weeks the GLD had a relief rally to the mid point of its fifteen week trading range of 63.00 to 68.00. The GLD index is up 5.1% year to date. In the past two letters we have been advocating the shorting of rallies in the GLD. At this time we shall move to a neutral stance. If the strength of last week is continued, the GLD could test the upper end of the trading range around the 68.00 price level. Any failure to hold the three week price support of 64.50 will indicate a test of the 60.00 price support area. We are currently on the sidelines in the GLD.
III. Energy
The energy complex (Oil, Oil Service, Natural Gas and Coal) advanced for the week, maintaining strong upside technical momentum. This train just keeps on chugging. 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-40.42) and Peabody Energy (BTU-54.70) 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, unchanged from the previous week reading of +16. The Dow Jones Industrial average advanced 1.19% for the week to 13667.95 +160.67. The average is currently up 9.80% for all of 2007. The Dow Jones Industrial average regained upside momentum after a one week pause. Our weekly technical work is indicating that Dow components DIS and MRK are indicating signs of near term price weakness. On the bullish side, WMT and HON appear poised to move higher. For now we shall remain in the cautiously 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 no Dow Jones Industrial components are scheduled to report quarterly earnings this week.
Dow 30 stocks with positive weekly signals:
AA, AIG, AXP, BA, C, CAT, DD, GE, GM, HON, HPQ, IBM, INTC, MCD, MMM, MO, PFE, PG, T, UTX, VZ, WMT, XOM
Dow 30 stocks with negative weekly signals:
DIS, HD, JNJ, JPM, KO, MRK, MSFT,
· 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, June 4
Economics
10:00
Factory Orders (Apr): 0.6% cons
Earnings
Before:
KKD
Events
Fed's Tracy speaks at 4:45 on Monetary Policy in
Argentina
Tuesday, June 5
Economic
7:45
ICSC-UBS Store Sales
Earnings
Before:
AMWD, NOOF, SCHS
Events
Fed's Bernanke, Fukui and Trichet speak at 8:15
at a conference in South Africa
Wednesday, June 6
Economic
7:00
MBA Mortgage Applications (6/1): -7.3% prior
Earnings
Before: JOSB, KFY
Events
Fed's Pianalto speaks at 3:45 at Bundesbank Conference on Policy
Fed's Lacker speaks at 9:50 on Economy in
Frederick, MD
8:30 Initial Jobless
Claims (6/2): 311k cons
Earnings
Before: ALOG,
CRAI, NOBH, SFD, UTIW, VOL
Keybanc Capital Markets
Industrial and Automotive Conference
Friday, June 8
8:30
Trade Balance (Apr): -$63.5 bln cons
Earnings
Before: KWD, MTN
Events
Citigroup Power, Gas & Utilities
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. |
