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8/27/07
Note: Event
Calendar has been moved to bottom of page I. General Market Overview
The past week brought the much anticipated relief rally from a short term deeply oversold condition. It appears that the discount rate cut by the Federal Reserve provided investors with the assurance that the “Fed” has their eye on the ball. It is the opinion of this writer that the sole purpose of the recent “Fed” action was to avert panic in the markets. The “Fed” saw a need for a liquidity injection. It is certain that the motive behind this action is not to recreate the excessive liquidity left behind by former Federal Reserve chairman Greenspan. For the time being the calming objective has been achieved, the short term panic has subsided. This does not change the fact that the trend of increasing global liquidity that has fueled stock markets over the past three and a half years has been reversed. The game has changed to de-leveraging. The tightening of credit standards and the unwinding of the Japanese Yen carry trade are prime contributors to this change of trend. As much as we would like to sound the all clear horn after the market rally this past week, we remain of the opinion that in the grand scheme, liquidity removal does not bode well for the U.S. stock market let alone the other bourses of the world. Investors should continue to preserve capital by raising cash positions upon sharp market advances. This correction has yet to run its course.
The market sector indices within our realm of coverage that have positive technical weekly momentum are the Steels (SLX), large integrated oils (XOI), Large Cap Pharmaceuticals (PPH) and the Telecom Index (TTH). These signals were all generated this past week. The steel stocks rebounded with a vengeance. The SLX index rose roughly 25% in six trading days. We would not chase the steels at these levels as the major driver in the sector has been consolidation. The lack of available financing should slow this consolidation trend. In the oil patch, Exxon Mobil (XOM), Chevron Texaco (CVX), British Petroleum (BP) and Conoco Phillips (COP) are all showing signs of near term price bottoms. In the Large Cap Pharmaceutical space, Abbott Labs (ABT), Eli Lilly (LLY) and Pfizer (PFE) now look attractive. We would continue to avoid Merck (MRK), Johnson&Johnson (JNJ) and Wyeth (WYE). The companies that look attractive in the Telecom sector are A T&T (T) and Verizon (VZ). In regards to all the stocks mentioned above, we would not rush in to buy at these levels. Investors should look for price pullbacks for optimal entry points. The IEF-83.36 (I-share 7-10 year Treasury bond) strength continues to reflect investor flight to safety. It is interesting to note that the IEF did not decline coincident with the stock market rebound of the past week. The lack of price decline in the IEF reflects our hesitancy to endorse the recent market rebound.
Managed Healthcare company United Healthcare (UNH-49.61) is indicating a potential change in trend to the upside. We did not initiate our desired long position in UNH because the shares did not quite reach our favored price level of 47.50-48.00. The low price last week for UNH was 48.10. We will continue to look to purchase in the 47.50-48.00 price range. 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.
Traders should continue to monitor banking and brokerage issues closely. 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.
A very interesting earnings report is due this week. Sears Holdings (SHLD), run by the legendary derivative master Edward Lampert, will report quarterly earnings this week. Will there be collateral (CDO-collateralized debt obligation) damage here? Watch closely, as this is certainly not a retailing story.
The sector indices under coverage that remain with negative technical implications are the Regional banks (RKH), Builders (XHB), Brokerage (XBD), Retailers (RTH), Oil Service Index (OIH), Internet Index (HHH), IYT (transportation index), and the SMH (Semiconductor 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-20.72 (CBOE Volatility Index) decreased from a reading of 29.99 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 18.00-22.00 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-(66.11) advanced $1.10 or 1.70% for the week. The GLD index is up 5.0% year to date. The GLD index price performance has provided little protection amid the turmoil in the U.S. credit markets. It is becoming more 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, it is only a matter of time before the air begins 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), is showing sign of divergence. As mentioned above the Large integrated companies (XOM, CVX, BP, COP) are indicating possible price bottoms. The coal issues, in particular Arch Coal (ACI-30.46) and Peabody Energy (BTU-42.60) appear to be low risk long trades at these levels.
The Oil Service Index (OIH-175.60) price action of this past week was unimpressive. The names in this space that do look attractive are Schlumberger (SLB-94.23) and Transocean (RIG-103.94). Oil Service names that should be avoided include Halliburton (HAL-33.73) and BJ Services (BJS-24.84)
The Natural gas sector is the weakest area of the energy complex. We would continue to avoid the group at this time.
IV. Dow 30 Analysis
Our Weekly Trend Indicator (WTI) measures in at +4, an increase from the previous week reading of -20. The Dow Jones Industrial average advanced 2.34% for the week to 13378.79. The average is currently up 7.35% for all of 2007.
As anticipated, the recent Federal Reserve action relieved the panic selling pressure and the Dow Jones Industrial Diamonds (DIA-133.64 +3.09) gained 2.36% on the week, bouncing from an oversold condition. Readers should take note that this advance occurred on very low volume. Last week we stated that we anticipated price resistance for the DIA in the 134.00-136.00 area. We shall look to initiate a short position upon any advance toward the upper end of our price resistance area.
As listed below there were twelve individual Dow component weekly buy signals generated in the past week. The low share volume that accompanied this rebound makes us suspect of this advance. Our concern being stated, we shall be watching these issues closely for a confirmation of change in trend.
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:
AA, AIG, C, DD, DIS, GE, INTC, JPM, KO, MCD, MMM, MO, PFE, PG, T, VZ, XOM
Dow 30 stocks with negative weekly signals:
AXP, BA, CAT, GM, HD, HON, HPQ, IBM, JNJ, MRK, MSFT, UTX, WMT
· 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 27
Economics
10:00 Existing Home Sales: 5.70m cons.
Earnings
Before:
After: CSC, SNDA
Events
IMID 2007 Pacific Conferences Retaining & Attracting Talent Gartner Financial Services Technology Summit
Tuesday, August 28
Economic
10:00 Consumer Confidence: 106.5 cons. 2:00 FOMC Minutes
Earnings Before: CHINA, CMED, COCO, SAFM, TUES, NX
Events
Wednesday, August 29
Economic
10:30 Crude Inventories
Earnings
Before:
BIG, BWS, CYBX, DAI, DLTR, ENER, FRED, JOYG, LAYN, WSM
Events
Red Herring 100 Asia Conference
Economic
8:30 GDP-Prel: 4.1% cons. 8:30 Chain Deflator-Prel: 2.7% 8:30 Initial Claims: 322k prev.
Before:
BTH, BF.B, CIEN, CONN, DLM, DDS, DHT, FRE, GCO, GRB, HRB, KIRK, OPSW, OSIS,
SHLD, SKIL, TIF, UNFI, VIP, ZLC
Events
Pacific Conferences Retaining & Attracting Talent SourceMedia Conferences Strategic Customer Interaction Summit
Friday, August 31
8:30 Personal Income: 0.3% cons. 8:30 Personal Spending: 0.4$ cons. 8:30: Core PCE Inflation: 0.2% 9:45 Chicago PMI: 53.0 10:00 Factory Orders: 0.9% 10:00 Mich. Sentiment-Rev: 84.0
Earnings
Before:
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. |
