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9/17/07
Note: Event Calendar has been moved to bottom of page
I. General Market Overview
The U.S. stock market spent the week gradually recovering from the sell-off induced by the surprisingly poor August employment figures reported in the prior week. The S&P 500 advanced 1.94% coupled with a 2.51% increase in the Dow Jones Industrial average. The coming week will prove to be quite eventful with several quarterly earnings reports due from the Brokerage space (LEH, MS, GS, BSC), inflation data due via PPI and CPI, and of course, the much awaited interest rate announcement due from the FOMC policy meeting. The markets seem to be anticipating a 50 basis point reduction in the Fed Funds rate. We would not be surprised if the Federal Reserve failed to appease the market expectations and left rates unchanged at the upcoming meeting. At best we anticipate a 25 basis point rate cut which might disappoint a stock market eagerly anticipating a stronger remedy. Whatever the Fed action may be, we would continue to view any sharp advance as an opportunity to reduce long exposure. We remain of the opinion that de-leveraging is the dominant investment theme which must be respected. The Federal Reserve would like to see the markets act as a discounting mechanism and filter out the excesses created by the abnormally low interest rates characterized by the end of the Greenspan era. This writer is quite certain that the last thing that Fed Chairman Bernanke and company desire is to re-inflate the easy money atmosphere of the past three and a half years. Price stability (inflation fighting) should trump market bailouts as the Federal Reserve’s primary objective.
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), Internet Index (HHH) and the Natural Gas Index (XNG).
Added to the preferred Large Cap Pharmaceutical longs of Abbott Labs. (ABT-52.10) and Eli Lilly (LLY-56.82), are the shares of Johnson & Johnson (JNJ-63.20). After nine weeks of negative price action, we feel that JNJ is poised for an upside turn. We shall now look to buy price dips in JNJ.
The Natural Gas Index (XNG-502.72) is a new weekly signal. The stock play for Natural Gas appears to be the shares of Chesapeake Energy (CHK-34.95). We will be looking to initiate a long position in CHK around the price level of 33.00-34.00.
The IEF-84.30 (I-share 7-10 year Treasury bond) declined on the week as the yield on the ten-year treasury increased from 4.37% to 4.46%. Although declining on the week, the price trend remains to the upside in the IEF. A weekly close below the 84.10 level would cause us to rethink our posture here.
Managed Healthcare provider United Healthcare (UNH-49.91) 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.
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), SMH (Semiconductor Index) and the Telecom Index (TTH-39.68).
In the Semiconductor space we shall remove our previously bullish stance on the shares of Intel (INTC-24.93) as the upside momentum appears to be stalling. We shall remain bullish on the shares of Texas Instruments (TXN-34.68) until a weekly close below the 34.34 price support level.
This week brings several earning reports from the brokerage community. The brokerage group has recovered nicely from the mid-August panic low price levels. Lehman (LEH), Morgan Stanley (MS), Goldman Sachs (GS) and Bear Stearns (BSC) will all be scrutinized to determine the future direction of the financial sector in general. Can the trading acumen of these financial behemoths make up for the reduced revenues from merger financing and mortgage activity? Watch closely!!!
The Retail sector will be influenced by the quarterly earnings report due this week from electronics retailer BestBuy (BBY-44.08). The shares of BBY have been in a slow steady decline from a September 2006 price peak of 58.49. The expectations for BBY appear quite low in advance of this report. Barring a disastrous earnings report in BBY, the shares could be setting up for a price appreciation short squeeze to the 50.00 price area.
We remain of the opinion that the shares of Walgreen (WAG-45.28) are the lowest risk long trade in the retail sector. Retail issues to avoid include WalMart (WMT-43.32), Home Depot (HD-35.68), and Sears Holdings (SHLD-134.93).
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-24.92 (CBOE Volatility Index) decreased from a reading of 26.23 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-(69.99) advanced $0.60 or 0.86% for the week. The GLD index is up 10.72% year to date. The GLD, along with the price of crude oil remain prime beneficiaries of the weakening U.S. dollar. The GLD has eclipsed the upper end of an eight month trading range on strong volume. The next upside price hurdle for the GLD is the 2006 weekly high close of 71.12. A weekly closing price above 71.12 will confirm the positive upside trend and indicate a significantly higher price for the GLD. The GLD now has major price support around the 66.60- 68.00 price area. We shall be looking for any significant price pullbacks to our support area 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-88.67), Chevron Texaco (CVX-90.65), British Petroleum (BP-68.80) and Conoco Phillips (COP-85.27) continue to exhibit relative strength. The charts of the aforementioned all currently remain to be in “buy the dip” mode.
The Oil Service Index (OIH-184.80) price action continued strong in the past week. The 184.00 price level should provide significant price resistance for the OIH. This week shall prove critical if the OIH can power through our 184.00 price resistance level. The leaders in this space continue to be Schlumberger (SLB-100.37) and Transocean (RIG-106.16) and Haliburton (HAL-37.11). We 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-26.50) and ENSCO International (ESV-53.29).
The Coal area, Arch Coal (ACI-32.86), Peabody Energy (BTU-47.42), and Massey Energy (22.84), remains technically attractive at this time.
The Natural gas sector is indicating signs that the seven week price correction has run its course. As mentioned above, the shares of Chesapeake Energy (CHK-34.95) appear attractive at these price levels.
IV. Dow 30 Analysis
Our Weekly Trend Indicator (WTI) measures in at 0, unchanged from the previous week reading of 0. The Dow Jones Industrial average advanced 2.51% for the week to 13444.07. The average is currently up 7.88% 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-78.09), is roughly unchanged at +0.11% year to date.
We have been looking for a price rally in the DIA (Dow Industrial Diamonds-134.46) 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. In the previous letter we lowered our short trade initiation level to the 134.00 price area. Last week provided us with our opportunity, on 09-13-07; we initiated a short position in the DIA on the close of trading at 134.30. Our protective buy stop will be placed at 137.31. This is an attractive risk/reward, risking $3.01 to make $12.00. Our downside objective is the 120.00-122.00 area. The risk in this trade is that we have underestimated the market response to a rate cut by the Federal Reserve at this week’s FOMC meeting.
Positive highlights from our weekly technical work include the shares of General Motors (GM-34.22), Johnson & Johnson (JNJ-63.20) and Microsoft (MSFT-29.04). All are indicating possible change of trend from sell strength to buy weakness.
Negative highlights of our weekly chart analysis include Hewlett Packard (HPQ-48.38), International Business Machines (IBM-115.13) and Intel Corporation (INTC-24.93). All three of these issues are indicating the possible exhaustion of upside momentum.
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, GM, JNJ, JPM, KO, MCD, MMM, MSFT, PFE, PG, T, UTX, XOM
Dow 30 stocks with negative weekly signals:
AA, AIG, AXP, BA, C, CAT, HD, HON, HPQ, IBM, INTC, MO, MRK, VZ, WMT
· Underline names have changed from previous week*
V. OPEN POSITIONS
DIA-9/13/07 Short@ 134.30 / buy stop 137.31
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 17
Economics
8:30 N.Y. Empire State Index: 18.0 cons.
Earnings
Before:
After: ADBE
Events
J.P.Morgan Asian Gaming Conference Pacific Conferences Strategic Public Relations Conference Omega International Business Hong Kong Mining Roadshow SID Eurodisplay 2007 Information Management Network (IMN) The Global ABCP & SIVs Summit International SAP Real Estate Management Conference 2007 CF&B Communication Conference UBS Transport Conference The Canada Europe Roundtable on Energy AACR Conference on Molecular Diagnostics in Cancer Therapeutic Development Fox-Pitt, Kelton Inc. 3rd Annual Bermuda in Boston Insurance Conference Information Management Network (IMN) Middle Atlantic Public Employee Retirement…
Gartner Customer Relationship Management Summit Worldwide Business Research Defense Finance 2007 Conference Strategic Research Institute 3rd Global C02 Cap & Trade Forum Credit Suisse Group 2007 Homebuilders Conference IncreMental Advantage Conference Valuation of Early-Stage Technologies Financial Research Associates Target Date/Lifecycle Funds Summit Financial Research Associates 7th Annual Sub Advised Funds Forum Financial Research Associates Biofuels Marketing & Distribution Conference Jupiter Research Digital Rights Strategies 2007 IBC’s 2007 Discovery2Diagnostics Conference Strategic Research Institute 5th Annual Art of Indexing Conference Raymond James Paper and Forest Products Conference Strategic Research Institute 2nd Annual Biofuels Investor Summit SourceMedia Conferences 2nd Annual Employee Benefit Adviser Summit Government Technology Illinois Digital Government Summit BMO Capital Markets 2007 Canadian Energy Investor Tour Bank of America Securities 37th Annual Investor Conference G5: ThinkEquity Partners 5th Annual Growth Conference Merriman Curhan Ford & Co. Investor Summit 2007 CCMI Telecom Negotiation Conference
Tuesday, September 18
Economic
8:30 PPI: -0.1% cons 8:30 Core PPI: 0.1% cons 9:00 Net Foreign Purchases 2:15 FOMC Policy Statement Earnings
Before: AHII,
AZO, BKRS, BBY, CBRL, KR, LEH
Events
EuroFinance International Cash & Treasury Management Conference EuroFinance Cash, Treasury & Risk Management in Central Europe Conference Financial Times Delivering More value from the Finance Function Conference Connect Scotland Enterprise Workshop Euromoney Total Derivatives Fixed Income Forum Kavi Corporation Storage World Conference Fall CMP Media Inc. Embedded Systems Conference Boston Keybanc Capital Markets Basic Materials & Packaging Conference A.G. Edwards Emerging Growth Conference RBC Capital Markets Consumer Conference CL King and Associates Best Ideas Conference Securities Industry Association Due Diligence Conference Stanford Group Company International Water Conference IncreMental Advantage Intellectual Property Finance & Valuation Seminar Piper Jaffray Financial Services Private Equity Conference Shorecliff Communications, Inc. RFID World Boston 2007 Keefe, Bruyette & Woods, Inc. European Financials Conference Credit Suisse Group Column Housing Conference Securities Industry Association AMG Buy Side Conference UBS Global Paper & Forest Products Conference CanaccordAdams Future of Communications Conference Scotia Capital Annual Back to School Conference TotalConnection 2007 Pritchard Capital Partners Dallas One on One Conference Government Technology Colorado Digital Government Summit Strategic Research Institute Defense & Aerospace Investor & Corporate Development… American Electronics Association Global Trade Compliance: Best Practices Conference Burrill & Company 3rd Annual Japan Biotech Meeting
Wednesday, September 19
Economic
8:30 CPI: 0.0% cons 8:30 Core CPI: 0.2% cons 8:30 Housing Starts: 1360 k cons 8:30 Building Permits: 1350 k cons 10:30 Crude Inventories – 7011 k
Earnings
Before: AIR, KMX, DBRN, GIS, MS, POSS, SMTS
Events
Deutsche Bank Securities Inc. Emerging Europe Conference Forbes Inc. Executive Women’s Forum Friedland Capital, Inc. Alternative Energy Conference Dow Jones Newswires Private Equity Analyst Conference The IMN Summit On Real Estate M&A, Private Equity & REIT Privatization IncreMental Advantage Open Source Software Finance & Valuation Issues Conference American Gas Association Understand the Energy Industry Conference Information Management Network (IMN) Subprime ABS Conference Calyon Securities (USA) Inc. Pacific Prospects: Korean Structured Products Forum
Thursday,
September 20 Economic
8:30 Initial Claims: 319 k prior 10:00 Leading Indicators: 0.0% cons 12:00 Philadelphia Fed: 2.0 cons
Before:
AM, BSC, CCL, CC, CAG, FDX, GS, NSSC, PIR, PRGS, SCHL, SCS, AGE
Events
Calyon Securities (USA) Inc. Euromoney Covered Bonds Congress UBS London CDO Conference UBS Best of Americas Conference Bear, Stearns & Co. Inc. Rates Conference America’s Growth Capital Emerging Growth Conference NASD Advertising Regulation Conference Wall Street Analyst Forum Standard & Poors Auto, Auto Supplier, Auto Asset-Backed Industry Hot Topics Conference Maxim Group Growth Conference Credit Suisse Group September Hedge Fund Roundtable SourceMedia Conferences 2nd Annual TradersLIVE Block Trading Conference RBC Capital Markets Transportation Conference D.A. Davidson & Co. Engineering & Construction Conference Arch Investment Conferences, Inc. San Francisco Conference DisplaySearch FPD Components and Materials Seminar
Friday, September 21
Earnings
Before:
TONS
Events
Deutsche Bank Macau Gaming & Property Conference CFO Rising India 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. |
