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8/20/07
Note: Event Calendar has been moved to bottom of page
I. General Market Overview
There are two predominant emotions in the world of trading and Wall Street. The emotions are fear and greed. Only five weeks ago with the Dow Jones Industrial average above the 14,000 level, greed prevailed. The emotional pendulum can turn very quickly, and it has. The fear generated by the possible failure of one of the largest mortgage lenders in the U.S. (Countrywide Financial) reached panic levels on Thursday, August 16. It was at this point that the Federal Reserve (lender of last resort) felt compelled to act. By lowering the discount rate 50 basis points, the Federal Reserve has effectively abandoned their inflation fighting resolve in order to quash the overwhelming fear of a financial sector collapse. It is the opinion of this writer that the recent Federal Reserve action is a symbolic acknowledgment of the near term financial sector distress. The Fed Action should provide some near term liquidity relief, but over the longer term will not alleviate the pain associated with the process of de-leveraging. The global liquidity boom of the past four years or so has run the course. Over-levered excesses must be corrected and this process will be lengthy and painful. There are two ways to sell assets. One can sell when they want to sell and one can sell when they have to sell. The volatility of the past few weeks is exemplary of the latter. We fully expect a relief rally in the coming week or so. It remains the opinion of this writer that investors continue to reduce stock market exposure upon this rally.
The market sector indices within our realm of coverage that continue to have positive technical weekly momentum are not present at this time. The IEF-83.03 (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, Abbott Labs (ABT-52.73) and Ely Lilly (LLY-55.81) appear poised to work higher. The shares of EBAY (EBAY-34.14) look ready to accelerate on the upside.
Managed Healthcare company United Healthcare (UNH-49.80) is indicating a potential change in trend to the upside. We may look to initiate a long position upon a retest of the 47.50-48.00 price level. The shares appear to be in a low risk potential long technical set up. The presence of legendary investor Warren Buffett in this issue can only help the cause.
Retailer Kohl’s Corp (KSS-62.88) displayed price strength after reporting quarterly earnings in the past week. The price action of the coming week in Kohl’s will determine if the ten week decline in share price has come to a conclusion.
The strength in banking issues after the Federal Reserve action warrants close attention. The price action in the coming weeks will determine if this powerful upside move was simply a short term squeeze in a heavily shorted sector, or more importantly, a change in price trend. Readers should be intently watching the price action of Citibank (C), Bank of America (BAC), Wells Fargo (WFC) and J.P. Morgan (JPM), or the sector index XLF (Financial Select Sector Fund).
The sector indices under coverage that remain with 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.
Take note that the VIX-29.99 (CBOE Volatility Index) increased from a reading of 28.30 the previous week. The fear gauge reached a panic high of 37.50 on Thursday, August 16. We feel that the VIX has reached a near term apex and anticipate an easing of this volatility gauge to around the 24.00 level. We would view a retreat to this level as a temporary pause before the resumption of more violent price behavior.
II. GOLD
GLD (streetTracks gold index) – The GLD-(65.01) declined $1.56 or 2.34% for the week. The GLD index is up 3.30% year to date. The GLD index price performance remains perplexing considering the current turmoil in the U.S. credit markets. It is becoming apparent that this precious metal is yet another asset that has been propped up by the global liquidity machine. If we are correct with this assessment, we expect more air to leave this balloon. 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 nine weeks, is beginning to show signs of life. While down for the week, we continue to like the price action in the shares of Arch Coal (ACI-30.74) and Peabody Energy (BTU-41.48).
IV. Dow 30 Analysis
Our Weekly Trend Indicator (WTI) measures in at -20, a slight improvement from the previous week reading of -24. The Dow Jones Industrial average declined 1.25% for the week to 13073.00 -165.77. The average is currently up 5.86% for all of 2007.
The DIA (130.55) reached our short term downside target area of 128.00-129.00 on the market opening of August 16, 2007. We exited our short position (8/08/07- entry point-136.30) upon that opening at 127.81, a gain of 6.22%. While a little more patience that morning might have increased our return, we are quite comfortable with our discipline to execute our game plan when a price target is attained.
Where do we go from here? We anticipate that the Federal Reserve intervention will provide temporary relief from the near term oversold market condition. It is our opinion that any relief rally to the 134.00-136.00 price area should be met by firm price resistance. Our game plan shall be to re-enter a short position upon a rally to said price zone.
The only weekly buy signals generated this past week were that of Citibank (C-48.81) and J.P. Morgan (JPM-47.01). It is critical that these two financial stocks maintain positive price momentum in the coming week. A price reversal back to the near term lows will have serious negative implications.
There are only three other Dow components with current positive weekly signals; DuPont (DD-47.31), Coca Cola (KO-54.45) and Proctor Gamble (PG-65.35).
Readers should take note that there are no Dow Jones Industrial components scheduled to report quarterly earnings this week.
Dow 30 stocks with positive weekly signals:
C, DD, JPM, KO, PG,
Dow 30 stocks with negative weekly signals:
AA, AIG, AXP, BA, CAT, DIS, GE, GM, HD, HON, HPQ, IBM, INTC, JNJ, 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% XHB- 8/06/07 Long@24.40 / exit 8/08/07@ 27.80 Gain of 13.90% DIA- 8/08/07 Short@ 136.30 / exit 8/16/07@ 127.81 Gain of 6.22%
2007 NET RESULTS ON CLOSED TRADES ASSUMING EQUAL DOLLAR AMOUNT INVESTED IN EACH TRADE: 13 trades, net return of + 24.87%
VII. KEY EVENTS IN THE WEEK AHEAD:
Monday, August 20
Economics
10:00 Leading Indicators: 0.3% cons.
Earnings
Before: ITRN, KNSY, LOW, SOLF
After: KONG, LTON, OPLK, PERY
Events
Noble Financial Small Cap Conference / Micro Cap Symposium Annual ILTA Educational Conf. American Bankers Assoc. Forum for Fiduciaries
Tuesday, August 21
Economic
Earnings Before: ARXT, AEO, BJ, DKS, MYGN, RTLX, SKS, SPLS, TGT
Events
Swift Business Forums- Asia Pacific Gartner Future of IT Conf. The Bank of N.Y. GSA SmartPay Conf.
Wednesday, August 22
Economic
10:30 Crude Inventories
Earnings
Before:
AMWD, CHRS, EV, GMTN, MAG, RGS, ROST, SHMR, TLB, TECD, TOL, TWB, WCI
Events
UBS Small and Mid Cap Conf. 2007
Economic
8:30 Initial Claims
Before:
BKS, BONT, CMRG, CTR, CCBL, DEBS, DDS, DHT, GME, GRB, HRL, LB, LYTS, NWY, OPSW,
PDCO, PRGO, SCVL, SFD, SSI, SMRT, BKE, TTC, TSL, WTSLA
Events
CMP Media Inc. Embedded Systems Conf. Taiwan Group RCI Leisure Real Estate Symposium Hodges Capital Management Summer Investment Forum The Big Sky Venture Capital Conf.
Friday, August 24
8:30 Durable Orders 10:00 New Home Sales
Earnings
Before:
ANN, BKC, HPOL, HNZ, SKIL
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. |
