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7/02/07
Note: Event Calendar has been moved to bottom of page
I. General Market Overview
This week featured heightened intraday volatility with some severe price swings, but after all was said and done the major stock market indices closed the week little changed. Six months to date, the major stock market indices have gained approximately 6% to 8%. The Federal Reserve met this week and to no great surprise left interest rates unchanged. It appears that inaction will be the status quo for some time to come. Let’s see, Inflation vs. Residential Housing crash, which shall require appropriate action from the Fed first? For all pundits who continue to attempt to call an end to the housing correction, read the comments made this week from CEO Miller of Lennar Homebuilders. “I currently see no signs of recovery”. There is also an accountant from homebuilder Beazer Homes (BZH) who seems to have been a little aggressive with his paper shredder. A homebuilder with accounting issues, sounds lethal. If one adds to the equation stricter mortgage lending standards as a result of increased sub prime defaults, the picture continues to grow darker. If this sub prime problem begins to domino into corporate bond issuance, we may have seen the peak of leveraged buy out activity for some time to come. A key to the market will be to watch pending LBO’s and see if financing begins to dry up. Is it time for a liquidity squeeze?
The market sectors that we follow that continue to have positive technical weekly momentum are energy sectors (XOI, OIH) note Natural Gas (XNG) turned negative, steel (SLX), internet (HHH), 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), Telecom (TTH), Brokerage (XBD), Natural Gas (XNG), and Retailers (RTH). We would use rallies in these sectors to reduce long exposure and possibly initiate short positions. Readers should take note that the XBD, XNG, and RTH are new signals of coming weakness.
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. Last Monday, Walgreen’s reported e.p.s. of 56 cents per share, 3 cents better than consensus expectations on revenues that met consensus expectations. While we are certainly not thrilled by the price action in WAG, our protective sell stop shall remain at 43.19. The upside price objective is the 50.00 to 51.00 area.
As noted in the Dow 30 analysis below, we currently maintain 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-16.23 (CBOE Volatility Index) increased from a reading of 15.75 the previous week. After a mid-week spike to the 19.00 level (short term indication of panic) the fear gauge eased through the latter part of the week. The fact is that the VIX remains somewhat elevated, which is an indication of further turbulent price action in the markets.
II. GOLD
GLD (streetTracks gold index) – The GLD-(64.27) declined $0.51 or 0.78% for the week. The GLD index is up 1.86% year to date. The precious metal continues to act sluggish, with solid weekly price resistance at the 65.00 area. 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 with a slight negative bias on the GLD.
III. Energy
The energy complex (Oil, Oil Service, Natural Gas and Coal), a powerful upside performer year to date, is beginning to show signs of wear and tear. First the coal stocks began to falter; now the Natural Gas sector is indicating signs of weakness. The remaining pillars of strength in the energy complex are Large-CapOil (XOM, CVX, BP, and COP) and select Oil Service names (SLB, RIG, and ESV). We would currently avoid Oil Service components BHI, HAL, and BJS. We are concerned by new weekly sell signals in Gasoline refiners Valero (VLO) and Tesoro (TSO). Both have enjoyed extended strong share price advances on record refining margins. Could these companies be signaling the peak in prices at the pump? We advise the use disciplined sell stops on current longs and to become much more selective when initiating long positions. This engine is no longer firing on all cylinders.
IV. Dow 30 Analysis
Our Weekly Trend Indicator (WTI) measures in at -14, a decline from the previous week reading of -8. The Dow Jones Industrial average advanced 0.26% for the week to 13407.00 +34.97. The average is currently up 7.76% for all of 2007. Two weeks ago we stated our concern regarding the sustainability of the current rally in the DIA-134.20 (Dow Industrial Diamonds ETF). Our weekly technical work points to further deterioration in the price of the DIA. On 6/20/07 we entered a short position at the 136.50 price level. Our downside price objective remains the 128.00-129.00 area. In order to insure that this currently profitable trade remains profitable we are lowering our protective buy stop to 135.20.
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, DD, GE, GM, HD, INTC, T, XOM
Dow 30 stocks with negative weekly signals:
AIG, AXP, BA, C, CAT, DIS, HON, HPQ, IBM, JNJ, JPM, KO, MCD, MMM, MO, MRK, MSFT, PFE, PG, UTX, VZ, WMT
· Underline names have changed from previous week*
V. OPEN POSITIONS
DIA- 6/20/07 Short@136.50 / buy stop 135.20 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 ON CLOSED TRADES ASSUMING EQUAL DOLLAR AMOUNT INVESTED IN EACH TRADE: 8 trades, net return of + 0.44%
VII. KEY EVENTS IN THE WEEK AHEAD:
Monday, July 2
Economics
10:00 ISM Index: prior 55.0
Earnings
Before:
Events
Tuesday, July 3
Economic
10:00
Factory Orders: prior 0.3%
Earnings
Events
Wednesday, July 4
Economic
Earnings
Events
SWIFT ELUS 2007 Conference
Economic
8:30
Initial Claims: prior 313k
Earnings
Before:
Events
Merrill
Lynch China Investor Forum
Friday, July 6
8:30
Nonfarm Payrolls: 157k cons.
Earnings
Events
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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. |
