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7/23/07
I. General Market Overview
It was a violent week in the U.S. stock market last week. After eclipsing the 14000 level the Dow Jones Industrial average succumbed to profit taking on Friday and closed down 0.40% for the week to 13849.05. For individual stock issues it was the thrill of victory (IBM+ 5.70%) and the agony of defeat (GOOG -5.80% and CAT -3.20%).
It appears that Federal Reserve Chairman Ben Bernanke has changed his tune in regards to the sup-prime default mess. In testimony on Capital Hill, Bernanke finally admitted that the sub-prime debacle will cause some investors “significant losses” and that these problems are likely to deteriorate further in the near future. It was only weeks ago when Bernanke stated that the sub-prime fall-out appeared to be “well contained”. Will “Gentle Ben” soon have to admit that the housing correction and sub-prime fallout might actually negatively affect the U.S. economy? Confessions are never fun nor are they easy to make. Poor Ben, Mr.Greenspan certainly left you with many an issue to deal with.
Readers should continue to monitor the price action in the money center banks and brokerage firms. Financial issues, which comprise roughly thirty percent of the S&P 500, should remain a good barometer as to the status of credit default issues. At this time, the situation does not look good. Strangely enough, the uptrend in the S&P 500 remains intact. Is this a function of the “wall of worry” or could it be a “wall of complacency”? The exit door in this electronic age of trading is a very small one.
The market sectors that we follow that continue to have positive technical weekly momentum are energy sectors (XOI, OIH, XNG), steel (SLX), internet (HHH), transportation (IYT), and semiconductors (SMH). Weekly Buy signals that were generated in large-cap Pharma (PPH) and Regional Banks (RKH) last week have been rejected. Strength in technology, notably IBM, MSFT, and most semiconductor names must be maintained. If these issues begin to falter, the energy complex is left to carry the weight of this great bull market. We would continue to use price weakness in these positive 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 Regional banks (RKH), builders (XHB), Telecom (TTH), Brokerage (XBD), Large-Cap Pharmaceutical, and Retailers (RTH). We would use any rallies in these sectors as a source of funds or to initiate short positions.
We continue to have an open long position in Walgreen’s (WAG-45.49). We purchased the shares of WAG on 05/24/07 at a price of 44.60. The sluggish price action of this defensive issue remains somewhat disappointing. Our protective sell stop shall remain at 43.19. The upside price objective is the 50.00 to 51.00 area.
We mentioned our affinity for EBAY (EBAY-33.50) two weeks ago. We initiated a long position on 7-11-07 at a price of 32.70. The earnings report from EBAY last week was in line with expectations but also featured positive guidance going forward. It remains to be seen whether the revenue miss from Google will weigh negatively on the sector as a whole. This week the earnings report from Amazon (AMZN-71.63) should have a dramatic affect on the sector. Our protective sell stop on our EBAY long position shall be raised to breakeven at 32.70. Our upside price objective is 42.00.
Take note that the VIX-16.95 (CBOE Volatility Index) increased from a reading of 15.15 the previous week. As we have stated numerous times, it is our opinion that the extended period of low market volatility has come to an end. Readers should expect the rollercoaster ride in the stock market to remain quite turbulent. 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-(67.58) advanced $1.55 or 2.34% for the week. The GLD index is up 6.85% year to date. Last week we stated that the GLD was beginning to show some signs of life. We were looking to initiate a long position upon a retest of the 65.00 price level. This retest did not occur as the GLD momentum accelerated to the upside. Therefore we missed the initiation of our desired long trade. The GLD is now approaching the upper end of the 2007 trading range (62.62-68.73). A weekly close above the 68.73 price level will indicate a price objective in the low seventies.
III. Energy
The energy complex (Oil, Oil Service, Natural Gas and Coal), remain to be the cornerstone of strength in the U.S. stock market. Recent fearful weather forecasts seem to have excited the Natural Gas stocks. The price action of Natural Gas companies in the past week has caused us to upgrade them from “avoid” to “neutral”. At this time we remain negative on the “coal” issues as the technical patterns remain negative. The strong issues remain integrated oil (XOM, CVX, BP, COP), and Oil Service (SLB, RIG, ESV). Issue that we would avoid at this time include: Tesoro (TSO), Valero (VLO), Baker Hughes (BHI), and B.J. Services (BJS).
IV. Dow 30 Analysis
Our Weekly Trend Indicator (WTI) measures in at +6, a decrease from the previous week reading of +16. The Dow Jones Industrial average declined 0.40% for the week to 13849.05 -55.44. The average is currently up 11.03% for all of 2007. Our current view of the DIA is that the weekly upside technical momentum remains intact at this time. A weekly close below the 137.88 price support area will raise our concern. Last week we said that Johnson&Johnson (JNJ-61.79) was flashing a buy signal. The earnings report was not well received by Wall Street. The buy signal has been aborted; therefore we would continue to avoid the shares at this time.
The earnings expectations of Boeing (BA-103.86) seem quite ebullient heading into the quarterly report due this week. One only needs to look at a chart of Google and Caterpillar to see what occurs when expectations get ahead of themselves. Boeing better blow earnings expectations away or a swift price correction could be in the cards.
Readers should take note that DowJones Industrial components, AXP, BA, DD, MCD, MMM, MRK, and T, are scheduled to report quarterly earnings this week.
Dow 30 stocks with positive weekly signals:
AA, AXP, BA, CAT, DD, GE, HON, HPQ, IBM, INTC, KO, MCD, MMM, MSFT, PG, UTX, WMT, XOM
Dow 30 stocks with negative weekly signals:
AIG, C, DIS, GM, HD, JNJ, JPM, MO, MRK, PFE, T, VZ
· Underline names have changed from previous week*
V. OPEN POSITIONS
WAG- 5/24/07 Long@ 44.60 / sell stop 43.19 EBAY-7/11/07 Long@ 32.70 / sell stop 32.70
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 23
Economics
Earnings
Before:
ACI, ASTE, BOH, CRNT, CNH, DSPG, EEFT, GNTX, HAL, HAS, JRN, LEE, MRK, PETS,
PVTB, RPM, SGP, SIFY, TASR, TOMO, WFT,
Events
Intertech LEDs and OLEDs in Displays and
Lighting Conference
Tuesday, July 24
Economic
Earnings
Before:
ABY, AKS, AXE, T, AVY, BIIB, BJS, BOW, BNI, CP, CDWC, CNC, CRDN, CHKP, CME,
CMCO, CBH, CPO, CFC, CYNO, CPZ, DD, ECL, LLY, ENR, ESV, SSP, FMER, GOL, HHS,
IEX, JEC, JBLU, KELYA, KMB, LH, LM, LXK, LMT, MCD, MHP, MDU, MICC, MWRK, EDU,
NOC, OXY, OMC, BTU, PNR, PEP, PCP, DGX, RVSN, RYN, ROH, SAIA, SII, SWK, STFC,
SVU, TLAB, TSS, X, UAUA, USAP, UPS, USG, WDR, WAT, WSO, WU, WTNY, XTO, ZL, EMC,
SNV,
Events
Global Pacific & Partners World Oil Future -
Johannesburg
Wednesday, July 25
Economic
10:30 Existing Home Sales: 5.90mln cons.
Earnings
Before:
AMG, APD, ALXN, ALGN, ATI, ABK, ABI, ACAT, ABFS, ARW, ASH, ASPM, ATMI, BA, CACH,
CSL, CRA, CHIC, CPS, CBR, CSG, CL, COP, CVG, GLW, CFR, DADE, DOV, ECA, EPIC,
ETH, FNF, FLIR, FCX, GD, GLS, GENZ, HES, HMC, IHP, JAKK, KEM, KMT, KRC, LII,
LIFC, LPX, MPX, MDP, MNC, NBR, NOV, NYT, NSC, NCX, NYB, PCAR, PMTC, PAS, PFCB,
PLUG, PRAI, PX, RAI, ROK, RE, R, SEE, SEIC, SLAB, SNA, SNWL, SPNC, STN, STE, SY,
TIN, MDCO, TRAD, TRB, XPRSA, WLP, XEL, XRX, ZBRA, BUD
Events
Merrill Lynch Thai Investor Forum
Economic
8:30 Durable Orders: 2.0% cons.
Earnings
Before:
MMM, ACPW, AET, AAI, ALK, ACV, ALEX, ALY, AHM, ABC, ANDW, APA, ASN, ARQL, ARTG,
ABG, AZN, AGIX, AUO, ALV, AN, AVX, BLL, BLDP, BKUNA, BZH, BDX, BDC, BHE, BBI,
BWA, BMY, BC, BBW, BG, CCMP, CRR, CRS, POS, CDI, CELG, CEN, CKP, CTEC, CCE,
CMCSA, CNMD, CNX, CMI, DLX, DO, DTG, DDE, DOW, DHI, DEP, ELNK, ELON, ELN, EME,
EPD, EQT, EVVV, EXC, FSS, FSNM, F, BEN, RAIL, GPN, GGL, GR, GHL, HAE, HSC, HCR,
HW, HTV, HSIC, HTZ, HOLX, ICLR, ICON, ICTG, IFLO, IKAN, IKN, IMCL, INCY, IFS, IR,
IDC, ICE, ESI, JNS, JNY, KTO, KSU, KEI, K, KSWS, KLIC, FSTR, LLL, LVLT, LTM,
LECO, LKQX, LYO, MGLN, HZO, MATR, MBI, MEDE, MESA, MLNM, MKSI, MNRO, MOG.A, MPS,
MYL, NCC, NCI, NWL, GAS, NIHD, JNC, ODP, ODFL, ORI, OFIX, OSTK, PMTI, PCC, PENN,
PCZ, PNW, POT, PCH, POZN, PDS, PLD, QLTI, RHD, RDWR, RJF, TRN, FRZ, REDF, RGC,
RBC, COL, RCKY, RCL, SFUN, SPAR, SPR, STRA, SU, SYNT, SYPR, TSM, TE, TDY, TEN,
TRA, PNX, TMO, TSCM, TWTI, TOC, TDW, TRV, UTEK, LCC, UST, VDSI, VIGN, WAB, WEN,
WHQ, WLSC, WRLD, WPL, XMSR, ZOLL, EGN, MEH, NFX, Events
Roth Capital Partners Global Chinese Financial
Forum (GCFF) - Shanghai Conference
Friday, July 27
8:30 GDP-Adv: 3.2% cons.
Earnings
Before:
ALE, AXL, BHL, BLC, BPO, CE, CVX, CCU, CCO, CEG, XO, FO, GMST, IDXX, IGTE, ITT,
KDN, KIM, LMS, LZ, MHS, SCG, SEPR, TROW, VECO, VVI, VVUS
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. |
