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9/10/07
Note: Event Calendar has been moved to bottom of page
I. General Market Overview
The U.S. stock market took a beating last Friday after the government released the employment figures for August. The consensus estimates from economists were for an increase in non-farm payrolls of 115,000 jobs. These very economists appear to have underestimated the influence of the current credit crunch. Residential construction workers and mortgage broker layoffs contributed to a loss of 4000 jobs in the month of August. This is this first negative job growth number in over four years. The ten-year U.S. Treasury yield dropped to 4.37% as investors continued to flee equities for the safety of the full faith and credit of U.S. government bonds. Will this negative jobs development cause the Federal Reserve to act and lower interest rates? With the Dow Jones Industrial average up 5.37% year to date, the S&P 500 up 3.2%, and the small cap Russell 2000 negative by 0.44%, it is the belief of this writer that the Federal Reserve will continue to save their “silver bullet” until the major indices decline to levels that reflect a more pessimistic investor. Federal Reserve Chairman has made it clear that it is not the responsibility of the Federal Reserve to bail out imprudent investments by hedge funds or housing speculators. The market will punish those who have stayed in the leverage game too long. We remain of the opinion that any significant stock market rallies be used as an opportunity to reduce long exposure until the de-leveraging tide has subsided.
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), Oil Service (OIH), Biotech Index (BBH) and the Internet Index (HHH). The Internet Index (HHH-60.53) and the Biotech Index (BBH-170.22) have been added to the list this week. The Telecom Index (TTH) has been deleted from our buy list this week.
The Biotech Index (BBH) strength can be attributed to the strong upside move of Genentech (DNA-79.09). Genentech appreciated by 5.7% in the past week and now should warrant investor attention upon price pullbacks. We would continue to avoid biotech Amgen (AMGN-50.90) as the chart remains in negative mode.
The IEF-84.89 (I-share 7-10 year Treasury bond) strength continues to reflect investor flight to safety. It is interesting to note that the IEF does not decline coincident with stock market rallies. The lack of price decline in the IEF reflects our hesitancy to endorse the any market rebound. Investors should continue to monitor this critical indicator.
Managed Healthcare provider United Healthcare (UNH-49.19) 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 48.98. 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 major brokerage firms will be reporting quarterly earnings coming weeks and the market response to these earnings reports will speak volumes. The major indices will continue to struggle until the financial sectors of the marketplace reverse current negative implications.
The sector indices under coverage that remain with negative technical implications are the Regional banks (RKH), Builders (XHB), Brokerage (XBD), Retailers (RTH), IYT (transportation index), Natural Gas (XNG), and the SMH (Semiconductor Index). While we would continue to avoid the SMH sector exchange traded fund (ETF), there are two components of the Semiconductor Index which we will continue to deem buyable at this time. Intel (INTC-25.47) and Texas Instruments (TXN-35.30) 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-26.23 (CBOE Volatility Index) increased from a reading of 23.38 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 is once again on the upswing. It appears that the 30.00 level will be tested once again.
II. GOLD
GLD (streetTracks gold index) – The GLD-(69.39) advanced $2.87 or 4.31% for the week. The GLD index is up 9.31% year to date. The explosive upside move is reflective of the weakening U.S. dollar and the continued deterioration of the U.S. housing market. The GLD has eclipsed the upper end of an eight month trading range on strong volume. This could be the beginning of an extended upside move that should at the very least test the 2006 high of 72.26. The GLD now has major price support around the 66.60 level. We shall be looking for any significant price pullbacks to initiate a long position in the GLD.
III. Energy
The energy complex (Oil, Oil Service, Natural Gas and Coal), continues to outperform relative to the broader market. The strongest sub-sector of the complex continues to be the Large-Cap integrated oil companies. Exxon Mobil (XOM-85.75), Chevron Texaco (CVX-87.65), British Petroleum (BP-68.21) and Conoco Phillips (COP-82.81) have all exhibited recent relative strength. The charts of the aforementioned all currently remain to be in “buy the dip” mode.
The Oil Service Index (OIH-182.93) price action continued strong 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-97.47) and Transocean (RIG-108.52). Last week we added Haliburton (HAL-35.24) to the list of favored technical patterns in the Oil Service group. We now see good technical price support for HAL shares around the 33.00-34.00 price levels. Names that should be currently avoided in the sector include BJ Services (BJS-25.99) and ENSCO International (ESV-55.19).
The Coal area, Arch Coal (ACI-31.01), Peabody Energy (BTU-45.11), and Massey Energy (21.67), 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 0, a decrease from the previous week reading of +12. The Dow Jones Industrial average declined 1.82% for the week to 13114.36. The average is currently up 5.37% for all of 2007. Large Cap issues continue to outperform their small cap brethren. Small caps issues, as measured by the IWM (IShares Russell 2000 Index Fund-77.66), is negative by 0.44% year to date.
We have been looking for a price rally in the DIA (Dow Industrial Diamonds-131.52) for an opportunity to initiate a short position. It has been stated previously that the 136.00-137.00 price area was our ideal short entry price level. We shall adjust our price levels lower at this time. We will be looking to initiate a short position upon any price rally approaching the 134.00 level. If executed our protective buy stop will be placed at 137.25. This is an attractive risk/reward, risking $3.25 to make $12.00. Our downside objective is the 120.00-122.00 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:
DD, DIS, GE, HPQ, IBM, INTC, JPM, KO, MCD, MMM, PFE, PG, T, UTX, XOM
Dow 30 stocks with negative weekly signals:
AA, AIG, AXP, BA, C, CAT, GM, HD, HON, JNJ, MO, MRK, MSFT, VZ, 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 10
Economics
Consumer Credit: $9.5 bln
Earnings
Before: STEI
After: ASHW, DLLR, LULU, NMHC, SHFL, SORC, TTWO
Events
Raymond James European Investors North American Conference Credit Suisse Group Hedge Fund Roundtable Jefferies Media & Communications Conf. Bear Stearns Healthcare Conference Next Generation Telecoms Billing Forum IIC Hard Assets Conference 2007 Gartner Manufacturing & Distribution Technology Summit
Tuesday, September 11
Economic
8:30 Trade Balance: -$59.0 bln
Earnings
Before:
Events
Gartner CIO Summit Omega International Business Sugar Conf. MainFirst Bank Frankfurt Auto Show Conf. BMO Capital Markets Back to School Conf. Credit Suisse Group HOLT UFO: Under Followed Opportunities Conf. KPMG Insurance Industry Conf. BMO 2007 Media&Telecom Conf.
Wednesday, September 12
Economic
10:30 Crude Inventories: -3972k prev.
Earnings
Before:
BIVN, BRC, GRB, JOSB, SHRP
Events
IBF Shanghai International Private Equity Forum SEMICON Taiwan 2007 Credit Suisse Asian Technology Conf. Credit Suisse European Capital Goods Conf. BMO Capital Markets E&P/Oil Services Tour
Economic
8:30 Initial Claims: 330 k cons. 2:00 Treasury Budget: -$85 bln.
Before:
FLOW, NSSC, OPSW, PTMK, PIR, SHE, PNY
Events
UBS China Property Day Deutsche Bank Securities 11th Annual Technology Conference Private Equity International 5th Annual Private Equity COO’s and CFO’s Forum Informed Investors Investment Trusts Conference Intertech Biodegradable Plastics in Packaging Applications Conference
Friday, September 14
8:30 Current account: -$190 bln. 8:30 Export Prices ex-ag
Earnings
Before:
Events
CARDICA INC At The 21st EACTS Annual Meeting
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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. |
