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9/03/07
Note: Event Calendar has been moved to bottom of page
I. General Market Overview
The stock market was able to recover from an early week steep decline to close relatively unchanged from the prior week. The yield on the ten-year Treasury note declined to 4.54%, continuing to reflect investor flight to safety regardless of the two-week recovery in equities from their mid August plunge. For the time being the Federal Reserve has achieved the objective of stabilizing a stock market that was in a tailspin. While making it clear that they are not in the business of bailing out investors and companies who made imprudent decisions, President Bush and Federal Reserve Chairman Bernanke did make it perfectly obvious that they stand ready to provide liquidity when and if needed. This will be another tight wire act for the Fed chairman. Bernanke must try to gently re-liquefy without reigniting the leverage boom left by his predecessor. This will be a simple task. We remain of the opinion that the name of the game is now de-leveraging. This process will take time to be worked through. Losses must be realized, over leveraged hedge funds must fail, all as part of the cleansing process. This writer will continue to raise cash upon significant market advances until the de-leveraging tide reverses.
Readers should take note that several major brokerage firms are due to report quarterly earnings the week of September 13. The market reaction to these earnings will speak volumes as to the state of the market.
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). The Oil Service Index (OIH-178.61) has been added to the list this week. (See Energy comments below)
The IEF-84.14 (I-share 7-10 year Treasury bond) strength continues to reflect investor flight to safety. It is interesting to note that the IEF has not declined coincident with the stock market rebound of the past two weeks. The lack of price decline in the IEF reflects our hesitancy to endorse the recent market rebound.
Managed Healthcare provider United Healthcare (UNH-50.01) remains on our wish list for a long-side trade. 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 48.27. 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.
The sector indices under coverage that remain with negative technical implications are the Regional banks (RKH), Builders (XHB), Brokerage (XBD), Retailers (RTH), Internet Index (HHH), IYT (transportation index), and the SMH (Semiconductor Index). There are two components of the Semiconductor Index which we deem buyable at this time. Intel (INTC-25.75) and Texas Instruments (TXN-34.24) both appear safe to buy upon price dips. We would use any significant price rallies in these negative sectors as a source of funds or to initiate short positions.
Take note that the VIX-23.38 (CBOE Volatility Index) increased from a reading of 20.72 the previous week. The fear gauge reached a panic high of 37.50 on Thursday, August 16. We continue to view the 18.00-22.00 level as support for the VIX. After retreating from panic high levels the VIX appears to be marking time before the next surge higher.
II. GOLD
GLD (streetTracks gold index) – The GLD-(66.52) advanced $0.41 or 0.62% for the week. The GLD index is up 5.0% year to date. The recent shift by the U.S. Federal Reserve from concern over inflation to concern over growth should be fundamentally positive for gold. We shall remain on the sidelines in the GLD until a more definitive trend develops. 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. The strongest sub-sector of the complex continues to be the Large-Cap integrated oil companies. Exxon Mobil (XOM-85.61), Chevron Texaco (CVX-87.76), British Petroleum (BP-67.36) and Conoco Phillips (COP-81.89) have all exhibited recent relative strength. The charts of the aforementioned all currently appear to be in “buy the dip” mode.
The Oil Service Index (OIH-178.71) price action improved in the past week. Only time will tell if this renewed strength has legs. The 184.00 price level should provide significant price resistance for the OIH. The leaders in this space continue to be Schlumberger (SLB-96.50) and Transocean (RIG-105.09). This week we shall add Haliburton (HAL-34.59) to the list of favored technical patterns in the Oil Service group. We now see good technical price support for HAL shares around the 32.00-33.00 price levels. Names that should be currently avoided in the sector include BJ Services (BJS-24.81) and ENSCO International (ESV-54.22).
The Coal area, Arch Coal (ACI-29.49), Peabody Energy (BTU-42.51), and Massey Energy (20.75), remains technically attractive at this time.
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 +12, an increase from the previous week reading of +4. The Dow Jones Industrial average declined 0.16% for the week to 13357.74. The average is currently up 7.19% for all of 2007. Large Cap issues continue to outperform their small cap brethren. Small caps as measured by the IWM (IShares Russell 2000 Index Fund-78.74) are up only 0.93% year to date.
As mentioned in the prior week, the recent Federal Reserve action has temporarily relieved the intense selling pressure from mid August. The Dow Jones Industrial Diamonds (DIA-133.40 +0.24) eased 0.17% on the week, recovering from early week selling pressure. It is the opinion of this writer that the 136.00-137.50 price levels will provide significant price resistance. We shall look to initiate a short position upon any advance toward the upper end of our price resistance area.
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, HD, HPQ, IBM, INTC, JPM, KO, MCD, MMM, MO, PFE, PG, T, UTX, VZ, XOM
Dow 30 stocks with negative weekly signals:
AXP, BA, CAT, GM, HON, JNJ, MRK, MSFT, 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, September 3
Markets Closed
Economics
Earnings
Before:
After: Events
Tuesday, September 4
Economic
10:00 Construction Spending: -0.1% cons. 10:00 ISM Index: 53.0 cons. 5:00 Auto Sales: 5.0 mln cons. 5:00 Truck Sales: 7.0 mln cons.
Earnings
Before:
Events
Merrill Lynch 5th Disruptive Technology Conf. Keefe Bruyette&Woods- Insurance Conf. Mining Journal’s Zinc Day
Wednesday, September 5
Economic
10:00 Pending Home Sales: 5.0% prior 10:30 Crude Inventories: -3486 k prior 2:00 Fed’s Beige Book
Earnings
Before:
AHLL, BKRS, DSW, OSIS, SCMR
Events
Financial Times Asia Property Summit Richmond Events- : Logistics & Supply Chain Forum Gartner Portals, Content & Collaboration Summit Richmond Events, Marketing Forum Richmond Events, Retail Forum Credit Suisse Group, Maximizing Your Potential Conf. Kaufman Brothers 10th Annual Investor Conf. Roth Capital Partners 2007 New York Conf. Deutsche Bank Sec., 2007 Global Emerging Markets CIBC World Markets Income Fund Conf. Forrester Research Security Forum Credit Suisse Biotechnology Conference The Bank of New York Bank Technology Convention Capital Link, Virtual Analyst Forum Morgan Keegan Economic and Strategy Conference
Economic
8:30 Initial Claims: 320k cons. 8:30 Productivity- Rev: 2.3% 10:00 ISM Services: 54.5 cons.
Before:
CRMT, CPB, CHINA, DSGX, FLE, JTX, JOSB, KFY, METH, MOV, NOBH, PTMK, UTIW, VOL
Events
DisplaySearch China International FPD Conference Gabelli & Company 13th Annual Aircraft Supplier Conf. Cowen & Co. Clean Energy Conference Merrill Lynch Annual Mining Conference IncreMental Advantage Metals & Mining Conference FTN Midwest Bank Conference Arch Investment Conference, N.Y. Informed Investors Precious Metals & Mining Forum Credit Suisse Global Automotive Conference NewsMakers in the Biotech Industry Conference Standard & Poors Money Show NYSE Energy Investor Virtual Forum West Coast 2007 SuperCommunity Bank Investor Conf.
Friday, September 7
8:30 NonFarm Payrolls: 120k cons. 8:30 Unemployment Rate: 4.6% cons. 8:30 Hourly Earnings: 0.3% cons. 8:30 Average Workweek: 33.8 cons. 10:00 Wholesale Inventories: 0.5%
Earnings
Before:
HITK
Events
UBS Benelux Financials Conference
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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. |
