Archived Letters

 6/25/07

     Note:  Event Calendar has been moved to bottom of page

I.                  General Market Overview

The major market indices experienced tough sledding last week.  The indices declined approximately 2.0% on renewed concerns regarding sub-prime lending default issues.  It appears that that a hedge fund that clears trades through Bear Stearns is in need of some forced liquidation.  As various Federal Reserve officials continue to verbally support a deteriorating real estate market, one only need view the technical charts of the Home Builder Sector (XHB) to conclude that the decline shows little signs of abating at this time.

As they say in this business, they don’t ring a bell at the top.

But sometimes there are events which occur that can be described as defining moments.  The public floating of the shares of private equity firm Blackstone Partners could quite possibly be such a moment.  Other than to cash out, why on earth would such a successful, secretive firm want anything to do with the restraints of being a public entity?

The market sectors that we follow that continue to have positive technical weekly momentum are energy (XOI, OIH, XNG), steel (SLX), brokers (XBD), internet (HHH), retailers (RTH) and semiconductors (SMH).  We would continue to use price weakness in these sectors as an opportunity to enter long positions accompanied by a strict protective sell stop discipline.

The sectors that currently have negative technical implications are the Large-Cap Pharmaceutical (PPH), regional banks (RKH), builders (XHB), transportation (IYT) and Telecom (TTH).  Readers should take note that the Telecom (TTH) is a new signal of coming weakness.  Two key TTH components that are indicating impending weakness are Verizon (VZ-41.60) and AT&T (T-38.89).   We would use any price strength in these sectors to reduce long exposure.

We continue to have an open long position in Walgreen’s (WAG-44.31).  We purchased the shares of WAG on 05/24/07 at a price of 44.60. Take note that Walgreen’s is due to report quarterly earnings this week.  Our protective sell stop shall remain at 43.19.  The upside price objective is in the 50.00 to 51.00 area.

As noted in the Dow 30 analysis below, we have instituted a short position in the DIA (Dow Industrial Diamonds ETF) at a price of 136.50.  (See below for target and protective stop information)

Take note that the VIX-15.75 (CBOE Volatility Index) increased from a reading of 13.94 the previous week.  Any near term spike to the 18.00-20.00 area may signal an end to the present market weakness.

II.               GOLD

GLD (streetTracks gold index) – The GLD-(64.78) declined $0.10 or 0.001% for the week.   The GLD index is up 2.64% year to date.  Any failure by the GLD to hold the 62.50 weekly price support level, will set up at test of the critical 58.00 price support level.  For the time being we shall maintain our neutral stance on the GLD.

III.           Energy

The energy complex (Oil, Oil Service, Natural Gas and    Coal) while down for the week, continues to maintain upward weekly momentum.  While the trade remains to buy high and sell higher in energy, we are concerned that any further broad market weakness may cause investors to begin to liquidate some of their winning positions.  Any failure to hold the low price levels of last week in the energy indices (XOI, OIH, XNG) will cause us great concern.

IV.            Dow 30 Analysis

Our Weekly Trend Indicator (WTI) measures in at -8, a decline from the previous week reading of +4.  The Dow Jones Industrial average declined 1.96% for the week to 13373.00 -267.00.  The average is currently up 7.50% for all of 2007.

Last week we stated our concern regarding the sustainability of the current rally in the DIA-133.97 (Dow Industrial Diamonds ETF).  We mentioned our desire to enter a short position on a retest of the 136.84 price level.  On 6/20/07 we executed a short trade in the DIA at 136.50.  Our downside price objective is the 128.00-129.00 area.  The last thing we would like to see in this trade is a rally to a new high price level, therefore our protective buy stop shall be placed at 137.00.

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, CAT, DD, GE, GM, HD, HPQ, INTC, UTX, XOM

Dow 30 stocks with negative weekly signals:  

AXP, BA, C, DIS, HON, IBM, JNJ, JPM, KO, MCD, MMM, MO, MRK, MSFT, PFE, PG, T, VZ, WMT

·        Underline names have changed from previous week*

V.               OPEN POSITIONS

            DIA- 6/20/07  Short@136.50 / buy stop 137.00

           WAG- 5/24/07 Long@ 44.60 / sell stop 43.19

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 25

Economics

10:00     Existing Home Sales: 6.00 mln cons

           Earnings

           Before: WAG

       After: SNX

Events

Intertech Clean Fuels 2007 Conference
Intertech Nanomaterials Symposium
GreenVest 2007

Tuesday, June 26

Economic

10:00     Consumer Confidence: 106.0 cons
10:00     New Home Sales: 925k cons

Earnings

Before: APOL, KR, LEN, SCS, SRR

After: AVAV, APOG, EXFO, FUL, NKE, ORCL

Events

       Windhover 14th Annual Euro-Biotech Forum
WBR Field Service Europe 2007
Merrill Lynch UK Mid Cap Chemicals Conference 2007
Omega Capital-Raising for Mid-Cap Mining Companies
The Euromoney Forum 2007
Jefferies Healthcare Conference
Red Herring East Conference
Merriman Curhan Ford 2nd Annual Consumer Round Robin
Diversa Corporation Conference

Wednesday, June 27

Economic

7:00     MBA Purchase Applications: 450.9 prev.
8:30     Durable Goods: -1.0% cons
10:30     Crude Inventories: 6902K prev.

Earnings

       Before: CKR, CAG, MKC, SMSC, UNF

After: ATML, BBBY, MLHR, DISK, INTV, MU, PAYX, RHT, SMOD, XRTX

Events

       Rabo Securities Made in Benelux Investor Conference
Plastics News & Plastics Encounter Conference
Kazakhstan Growth Forum
RBC Capital Markets Energy Infrastructure and Trust Conference
Southeastern Electric Exchange Annual Conference & Trade Show
The Wall Street Journal Deal & Dealmakers Conference
Jupitermedia Web Summit 2007

Thursday, June 28

 

Economic

8:30     GDP – Final: 0.8% cons
8:30     Chain Deflator- Final: 4.0% cons
8:30     Initial Claims: 315k cons
10:00     Help-wanted Index: 29 cons
2:15     FOMC Policy Statement

Earnings

Before: CRMT, STZ, FDO, GIS, GRB, KBH, MON, MSM, PKE, RAD, WOR, TONS

After: COMS, ACN, ARRO, BBOX, CBK, CREL, EGLS, FINL, HMX, MERX, NINE, PALM, RIMM, RBN, SLR, TIBX

Events

Global Pacific & Partners World Oil Future Briefing: Beijing
ResMed at Jefferies Healthcare Conference
IMN Casino Real Estate Conference
Canadian Dermatology Association's 82nd Annual Conference

Friday, June 29

Economic

8:30     Personal Income: 0.6% cons
8:30     Personal Spending: 0.7% cons
8:30     Core PCE Inflation: 0.2% cons
9: 00     Construction Spending: 0.2% cons
10:00     Mich. Sentiment-Rev: 84.0 cons

Earnings

Before: AZZ

During: SHLM

       Events

 * 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.