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8/06/07 I. General Market Overview
The state of the U.S. credit market reminds us of an automobile whose owner has driven hard (easy credit standards) but neglected to perform general preventive maintenance. The owner of the auto never took the time to check the oil (diligent credit analysis), let alone consider changing it every three thousand miles or so. Over time, this neglect led to an engine that was clogged with sludge (Debt Defaults). The owner continued to drive the automobile hard (leveraged hedge funds) until the engine reached a point where it could take no more, seized up, and refused to operate at all. At this point in time, the U.S. credit markets have seized up due to the neglect of overzealous lending standards. The engine must be rebuilt, at a considerable expense of course. Bad debt must be recognized and cleansed from lenders balance sheets, over leveraged hedge funds must fail and be liquidated. The re-built engine will run again one day, but it must spend considerable time in the mechanic’s shop before reentering life on the highway. The corporate credit markets must find an appropriate interest rate equilibrium before the system can function properly again. Esteemed former Federal Reserve Chairman Greenspan, I hope your replacement (Bernanke) is proficient with his tools, for you have left him with a major engine overhaul.
The market sector indices that we cover that continue to have positive technical weekly momentum are not present at this time. The IEF-82.64 (I-share 7-10 year Treasury bond) strength continues to reflect investor flight to safety. We will be looking for any sustained weakness in the IEF as an indication that current market fear has subsided. As of this writing, the weekly chart is telling us that fear remains the dominant market emotion.
The sector indices under coverage that currently have negative technical implications are the Regional banks (RKH), builders (XHB), Telecom (TTH), Brokerage (XBD), Large-Cap Pharmaceutical, Retailers (RTH), XOI (Amex Oil Index), IYT (transportation index), SMH (Semiconductor Index), and the SLX (Steel Index). Fresh weekly sell signals have arisen in the Oil Service Index (OIH-166.75) and Internet Index (HHH-57.60) indices. We would use any significant price rallies in these sectors as a source of funds or to initiate short positions.
Intriguingly enough, the share volume in the homebuilders of this past week (XHB-25.50) could be indicative of a short term bottom. We may initiate a trade on the long side upon any retest of recent lows.
Take note that the VIX-25.16 (CBOE Volatility Index) increased from a reading of 24.17 the previous week. This column has consistently warned of heightened market volatility and last week was another prime example. At 25.16, the VIX is fearfully high. Any blow off spike to the low 30’s area may be a short term indication of the apex of fear.
II. GOLD
GLD (streetTracks gold index) – The GLD-(66.69) advanced $1.28 or 1.95% for the week. The GLD index is up 5.64% year to date. The index bounce of last week was not impressive considering the current turmoil in the U.S. credit markets. We remain unimpressed by the price action considering the “supposed” defensive nature of the yellow metal. The GLD remains contained within the 2007 trading range (62.62-68.73). We would look to continue to trade this range but advise extreme discipline upon any violation of said parameters.
III. Energy
The energy complex (Oil, Oil Service, Natural Gas and Coal), a pillar of strength in the four year bull-run of the stock market has finally succumbed to gravity. It is apparent that fund managers are now beginning to sell some of their winning positions. Last week we stated that the Oil Service group (OIH-166.75), was the lone survivor in respect to the recent market carnage. The weekly chart of the OIH is now in sell mode. Stalwart performing Oil Service companies Schlumberger (SLB-87.74), Transocean (RIG-100.06) and ENSCO (ESV-56.45) are all entering price correction phases. We would advise holders of these issues to use any price rallies to reduce long exposure at this time. Large Cap Integrated Oil (XOI-1295.46), Natural Gas (XNG-486.95) and Coal continue to look like sources of funds upon any price appreciation.
IV. Dow 30 Analysis
Our Weekly Trend Indicator (WTI) measures in at -24, a slight deterioration from the previous week reading of -22. The Dow Jones Industrial average declined 0.65% for the week to 13179.63 -86.74. The average is currently up 6.92% for all of 2007. The DIA is currently in a downside corrective mode. Our feeling is that due to the current short term oversold condition, we could quite possibly get a mid week bounce in this index. We remain of the opinion that any rebound in the DIA-132.19 (Dow Industrial Diamonds) to the 136.00-137.00 price area is an opportunity to raise cash positions or initiate short positions. The first price support level in the DIA is around the 128.00 price level.
The shares of Boeing (BA-104.24) and Procter Gamble (PG-62.88) are the lone bright spots in an otherwise dismal picture.
It is interesting to note that despite current market weakness, Dow component Verizon (VZ-42.75) has flashed a weekly buy signal.
Readers should take note that Dow Jones Industrial component AIG is scheduled to report quarterly earnings this week.
Dow 30 stocks with positive weekly signals:
BA, PG, VZ Dow 30 stocks with negative weekly signals:
AA, AIG, AXP, C, CAT, DD, DIS, GE, GM, HD, HON, HPQ, IBM, INTC, JNJ, JPM, KO, MCD, MMM, MO, MRK, MSFT, PFE, T, UTX, VZ, WMT, XOM
· Underline names have changed from previous week*
V. OPEN POSITIONS
NONE
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% EBAY-7/11/07 Long@ 32.70 / exit 7/27/07@ 32.70 scratch trade WAG- 5/24/07 Long@ 44.60 / exit 7/28/07@ 45.70 Gain of 2.46%
2007 NET RESULTS ON CLOSED TRADES ASSUMING EQUAL DOLLAR AMOUNT INVESTED IN EACH TRADE: 11 trades, net return of + 3.90%
VII. KEY EVENTS IN THE WEEK AHEAD:
Monday, August 6
Economics
Earnings
Before:
LNT, WTR, CTB, DRAD, ENCY, LCRY, MCY, NRP, NWN, ORBK, RAE, SNTS, ELOS, TDG
Events
Credit
Suisse Group Indonesia Banks Day
Tuesday, August 7
Economic
8:30
Productivity – Prel: 2.0% cons
Earnings
Before:
ACW, AES, ANR, BBG, BLTI, BXC, CTIC, CHD, CINF, CCOI, CYNO, DF, DK, DTPI, DTG,
DHT, DUK, EP, ESLT, EMCI, EMS, EMR, ENG, EXPD, FE, GVHR, WOLF, HET, HSIC, HEW,
HURN, ICON, IIVI, IDEV, IART, IPG, IFF, ISE, IPGP, KG, LINC, MMC, MLM, MVL, MMS,
MCCC, MDH, MEND, MSA, MINI, TAP, MNTA, NNDS, NGPC, NOVN, OPTN, OFIX, VITA, GLT,
PFGC, PQ, PCG, PNK, PNCL, PXD, PXP, PLA, PBH, SBSA, SPC, SHOO, SURW, TICC, THC,
TSO, TRMP, TYC, UCO, USM, VICL, VTAL, WTI, WRNC, WMG, WCI, WXS, SAM, SNHY
Events
Canaccord
Adams 27th Annual Global Growth Conference
Wednesday, August 8
Economic
10:00
Wholesale inventories: 0.4% cons.
Earnings
Before:
FLWS, AGU, ALD, ALY, ALLT, AHII, ABTL, AVT, BRL, BECN, BVF, CVC, CSK, CHLB, CDE,
EMAG, EPL, XJT, FWLT, FTO, GEO, GNA, GPX, HANS, HSOA, HSP, IDA, NRGY, ISPH, TEG,
IDCC, IHR, VTIV, IWA, JBX, JRCC, KTO, LAMR, LXP, TMR, MEK, NOOF, RL, PGN, KWK,
REV, SKYW, S, STN, SWSI, TECH, WR, WIN, BID
Events
Credit Suisse Group
Electrical Equipment & Multi-Industry Conference
Economic
8:30 Initial Claims: 307k previous
Earnings
Before:
KDE, NDN, ABBI, AIXD, AHCI, AMSC, AHM, AIT, AQNT, ASN, ARCC, STST, ATPG, BCRX,
BGG, EAT, CALP, CAH, CRZO, CYCL, CNTY, CDL, CNSL, CEI, XTEX, XTXI, CMLS, CYPB,
DBD, DTV, DRS, DYN, EIX, EFC, FRP, FOE, FTD, GILT, GCA, GLBC, GSOL, GG, GBBK,
HEES, HLS, HB, HOC, HDIX, IAR, IFOX, KBW, KSE, KOP, TVL, MIC, MGA, MPW, MEMY,
MOVI, MGAM, NAT, NRF, CHUX, OVRL, PTIE, PRFT, PRGO, POP, ROLL, RCNI, RTK, SONE,
SIRO, SUG, TRK, STXS, STRL, SPH, STP, SUP, SYN,, TLCV, TRGL, TRGL, TRXI, TWTR,
RMIX, UIC, URBN, VIAC, VG, WNR, WON, ARD, EPEX, VLCCF
Events
2nd Annual
Needham & Company, LLC Internet & Digital Media Conference
Friday, August 10
8:30
Export Prices ex-ag: 0.1% prior
Earnings
Before:
AYR, CRYP, DISH, WCRX
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. |
