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8/13/07
Note: Event Calendar has been moved to bottom of page
I. General Market Overview
Central banks around the globe have circled the wagons in a concerted effort to provide liquidity to credit markets in distress. It seems that globalization has enabled the export of U.S. credit default problems to overseas banks. Each new day brings disclosure of hedge fund losses and mortgage originator problems. Why did all of these problems appear so suddenly? It is called “marking to market”. Most securities that are bought and sold by open out cry or computer bid/offer have a closing price for each day of trading. These said securities are easy to monitor due to their appropriate transparency. The world of derivatives is completely different. Collateralized Debt Obligations (CDO’s) are not traded in an open market fashion. The only way to price these derivatives is when they are actually traded. The shady backroom nature of derivative trading provides zero transparency to the average investor. Bond and Hedge funds that have been marking these derivatives at cost suddenly find themselves with massive losses due to the fact that the market for these securities has completely seized up. I applaud Federal Reserve Chairman Bernanke for his decision not to lower interest rates and bail out the shady world of credit derivatives. Caveat Emptor, buyers beware. The market will punish those firms that have misbehaved in this arena. The important question is how many more skeletons reside in the closet? Is this the beginning of a dizzying unraveling death spiral? It is our belief that these issues will be resolved over time and price. At this time we are uncertain of how much time and how low a price.
The market sector indices that we cover that continue to have positive technical weekly momentum are not present at this time. The IEF-82.07 (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.
There are a few select issues under our coverage that are holding up well in this nasty market atmosphere. In the drug arena, Abbot Labs (ABT-55.22) and Ely Lilly (LLY-57.16) appear poised to work higher. The shares of EBAY (EBAY-36.00) look ready to accelerate on the upside.
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 (PPH), Retailers (RTH), XOI (Amex Oil Index), OIH (Oil Service Index, Internet Index (HHH), IYT (transportation index), SMH (Semiconductor Index), and the SLX (Steel Index). We would use any significant price rallies in these sectors as a source of funds or to initiate short positions.
Last week we mentioned that the volume pattern in the homebuilding index (XHB- 27.06) was indicative of a short term price bottom. We stated that we were looking to initiate a long position in the XHB upon a retest of the recent lows. On 8/06/07 we went long upon that very retest at an entry price of 24.40. We did not expect the instant gratification that was afforded by this purchase and decided to exit the position two days later (8/08/07) at a price of 27.80, a 13.90% gain. It is quite certain that the problems in the homebuilding sector are far from over. What is uncertain is whether the market has discounted these problems appropriately at this point in time.
Take note that the VIX-28.30 (CBOE Volatility Index) increased from a reading of 25.16 the previous week. At 28.30 it is our belief that VIX is approaching a short term peak in regards to investor fear. The heightened reading is also reflective of margin call forced liquidation. The market can be very unforgiving when it senses margin call liquidation. The price action of last week offers a prime example of what occurs when this situation is present.
II. GOLD
GLD (streetTracks gold index) – The GLD-(66.57) declined $0.12 or 0.001% for the week. The GLD index is up 5.64% year to date. The GLD index price performance remains perplexing considering the current turmoil in the U.S. credit markets. 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), remains in a near term corrective phase. At this time we would continue to use price strength as an opportunity to reduce long exposure in Large Cap Oil, Oil Service and Natural Gas.
The Coal sector, which we have been negative on for the past eight weeks, is beginning to show signs of life. We will be monitoring the price action in the shares of Arch Coal (ACI-32.99) and Peabody Energy (BTU-45.34) closely this week for confirmation of a change in trend.
IV. Dow 30 Analysis
Our Weekly Trend Indicator (WTI) measures in at -24, an unchanged reading from the previous week reading of -24. The Dow Jones Industrial average advanced 0.45% for the week to 13238.73 +59.10. The average is currently up 6.91% for all of 2007. The DIA (131.94) remains in a downside corrective mode. Last week we stated in this column that we were looking for a mid week bounce in the DIA. We stated that this price bounce (136.00-137.00) would be an ideal opportunity to raise cash or initiate a short position. On 8/08/07 we initiated a short trade in the DIA at a price of 136.30. The short term price objective for this trade is 128.00-129.00 price level. In order to protect the profitability of this trade our protective buy-stop shall be placed at 135.10.
Proctor Gamble (PG-65.39), DuPont (DD-48.59) and Coca Cola (KO-54.98) are the only current weekly buy signals in an otherwise dismal technical picture.
Readers should take note that stalwart performer Boeing (BA-98.44) is indicating near term weakness. Existing long positions should use any price strength to take profits in this issue.
The weekly buy signal in Verizon (VZ-41.33) reported in this column last week, has been aborted.
Readers should take note that Dow Jones Industrial components HD, HPQ, and WMT are scheduled to report quarterly earnings this week.
Dow 30 stocks with positive weekly signals:
DD, KO, PG,
Dow 30 stocks with negative weekly signals:
AA, AIG, AXP, BA, C, CAT, DIS, GE, GM, HD, HON, HPQ, IBM, INTC, JNJ, JPM, MCD, MMM, MO, MRK, MSFT, PFE, T, UTX, VZ, WMT, XOM
· Underline names have changed from previous week*
V. OPEN POSITIONS
DIA- 8/08/07 Short@ 136.30 / Buy Stop 135.10
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% XHB- 8/06/07 Long@24.40 / exit 8/08/07@ 27.80 Gain of 13.90%
2007 NET RESULTS ON CLOSED TRADES ASSUMING EQUAL DOLLAR AMOUNT INVESTED IN EACH TRADE: 11 trades, net return of + 18.65%
VII. KEY EVENTS IN THE WEEK AHEAD:
Monday, August 13
Economics
8:30
Retail Sales: 0.2%
Earnings
Before: GTLS, GRRF, LCRY, SYY,
VAL, VYYO, XFML
Events
Howe Barnes
Hoefer & Arnett Annual Bank Conference
Tuesday, August 14
Economic
8:30
PPI: 0.1% cons
Earnings
Before:
CSIQ, DDS, ESLT, FOSL, GKSR, GIGM, HD, IGLD, MTRX, SCHS, TJX, WMT
Events
Wall Street
Analyst Forum Institutional Investor Conferences
Wednesday, August 15
Economic
8:30
CPI: 0.2% cons
Earnings
Before:
CTR, CPA, DAKT,
DE
, IAG, ORCT, SLE
Events
Standard & Poors 2007 NIRI Southwest Regional Conference
Economic
8:30
Housing Starts: 1410 k cons
Earnings
Before:
BKS, BIG, DKS, DHT, EL, FLO, FTD, GMTN, HAR, JCP, LANC, MGPI, SHMR, TWB, WW, WCI,
THO
Events
RedChip
New
York
Conference
Friday, August 17
8:30 Michigan Sentiment – Prel: 88.5 cons
Earnings
Before:
CCUR, SJM
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. |
