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7/09/07
Note: Event Calendar has been moved to bottom of page
I. General Market Overview
The major U.S. stock market indices rose 1.50% to 2.00% on the week. The announced purchase of Hilton Hotels by private equity firm Blackstone Group seemed to reinforce merger momentum, enabling the markets to rise despite a higher yield on the ten year bond (5.19%). Technology, as evidenced by the recent strong performance of the NDX (Nasdaq 100), QQQQ (Powershares Trust), and SMH (Semiconductors), is attempting to emerge as new leadership for the market.
This week shall kick off the beginning of second quarter earnings season. The expectations going into this reporting period appear to be more ebullient than the prior period. Technology in particular needs to satisfy investors in order to maintain the recent strong momentum. Will the latest surge in energy costs finally curb the appetite of the insatiable U.S. consumer? As global interest rates creep higher can earnings propel this market higher?
The market sectors that we follow that continue to have positive technical weekly momentum are energy sectors (XOI, OIH), 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). The Retailers (RTH) and Brokerage (XBD) should be watched closely this week as a strong performance this coming week would reverse our negative stance. We would use rallies in these sectors to reduce long exposure and possibly initiate short positions.
We continue to have an open long position in Walgreen’s (WAG-44.41). We purchased the shares of WAG on 05/24/07 at a price of 44.60. While we are certainly not enamored 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.
We like the technical set up in EBAY (EBAY-33.55). We shall look to purchase shares this week upon a dip to the 32.00-32.50 price area.
Take note that the VIX-14.72 (CBOE Volatility Index) decreased from a reading of 16.23 the previous week. We continue to view any spike in the VIX to the 18.00-20.00 area as a signal to buy. Conversely, a drop to the 10.00-11.00 area would signal near term complacency and indicate to lighten up existing long positions.
II. GOLD
GLD (streetTracks gold index) – The GLD-(64.96) advanced $0.69 or 1.00% for the week. The GLD index is up 2.86% year to date. The song remains the same here as the precious metal continues to act sluggish. We continue to view the 65.00 price level as solid weekly resistance. 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 area. 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 0, an increase from the previous week reading of -14. The Dow Jones Industrial average advanced 1.53% for the week to 13612.82 +204.85. The average is currently up 9.29% for all of 2007. Three weeks ago we stated our concern regarding the sustainability of the current rally in the DIA-136.13 (Dow Industrial Diamonds ETF). We initiated a short position in the DIA on 6/20/07 at a price of 136.50. Last week we lowered our protective buy stop to 135.20 to insure that a profitable trade remained so. Our buy stop was triggered on 7/02/07 at 135.20. Therefore, we exited the trade with a small, approximate 1.0% profit. The surprising 2.0% bounce in the DIA last week has brought us in the vicinity of the critical 136.81 weekly price resistance area once again. We shall look to initiate a short position again at our resistance zone. A weekly close above 136.81 will cause us to exit this trade promptly.
Readers should take note that Dow Jones Industrial components AA and GE are scheduled to report quarterly earnings this week.
Dow 30 stocks with positive weekly signals:
AA, BA, DD, GE, GM, HD, HON, HPQ, IBM, INTC, MO, PFE, T, UTX, XOM
Dow 30 stocks with negative weekly signals:
AIG, AXP, C, CAT, DIS, JNJ, JPM, KO, MCD, MMM, MRK, MSFT, PG, VZ, WMT
· Underline names have changed from previous week*
V. OPEN POSITIONS
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% DIA-6/20/07 Short@136.50/ exit 7/02/07@135.20 Gain of 1.00%
2007 NET RESULTS ON CLOSED TRADES ASSUMING EQUAL DOLLAR AMOUNT INVESTED IN EACH TRADE: 9 trades, net return of + 1.44%
VII. KEY EVENTS IN THE WEEK AHEAD:
Monday, July 9
Economics
3:00 Consumer Credit: $6.0 bln cons
Earnings
Before:
NUHC, SCHN
Events
Financial
Research Associates 2nd Annual Emerging Investment Strategies
Tuesday, July 10
Economic
10:00 Wholesale Inventories: 0.4% cons
Earnings
Before:
AYI, CHTT, EMMS, ETP, GBX, HELE, ISCA, PBG, RAME
Events
CIBC World
Markets 7th Annual Consumer Growth Conference
Wednesday, July 11
Economic
10:30 Crude Inventories
Earnings
Before:
AIR, ACGY, HITK, IGTE, WWW
Events
IPAA OGIS London 2007
Economic
8:30
Initial Claims: prior 318k
Earnings
Before:
FAST, FLE, MTB, MAR, METH, PGR, TXI, CBSH
Events
Credit
Suisse Group Media Conference
Friday, July 13
8:30
Export Prices ex-ag: prior 0.2%
Earnings
Before:
GE
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. |
