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9/24/07
Note: Event Calendar has been moved to bottom of page
I. General Market Overview
The U.S. stock market indices enjoyed 2-3% advances last week after the Federal Reserve surprised the markets by giving them what they wanted, a 50 basis point reduction in both the Discount rate and the Fed Funds rate. This columnist shall eat his well deserved crow as I was anticipating no action at all from the Federal Reserve. I obviously overestimated the political independence of our Federal Reserve as they have sacrificed future price stability in order to re-liquefy overzealous investment (mortgages, real estate) sectors of the economy. With a collapsing U.S. Dollar, gold zooming to a twenty-seven year high and crude oil continuing to march northward, inflation (Only if one is a believer in the validity of government statistics) sure seems to be quite well contained. I wonder if Chairman Bernanke has visited a grocery store recently, he must certainly be a frequent guest at the Fed cafeteria. Along with our esteemed congressmen and senators it is certainly a fact that he is not concerned about rising premiums on his healthcare insurance. Only time will tell if this “quick fix” move by the Federal Reserve will have dire implications. For the time being, the collapsing value of the U.S. dollar is screaming inflationary tones.
We shall see in the weeks to come if the market advance was a one week phenomena fueled by short covering. At best, it is our belief that we have defined a trading range. We do not see the markets galloping on to new highs. It is the belief of this writer that now that the Fed has succumbed to political pressure and lowered rates, the markets will soon develop an appetite for further Fed relief. It appears that this Federal Reserve Board is not unlike its predecessor and will continue to print money rather that let the markets work as the discounting mechanism they are designed to be. Is it once again time to leverage up?
The market sector indices within our realm of coverage that have positive technical weekly momentum are the Steels (SLX), large integrated oils (XOI), Oil Service (OIH), Natural Gas Index (XNG),Biotech Index (BBH), Internet Index (HHH), Large Cap Pharmaceutical (PPH), Retailers (RTH), Brokerage (XBD), Telecom (TTH) and Semiconductors (SMH).
New weekly strength signals have been generated by the Brokers, Retailers, Semiconductors, and Telecom indices.
The brokers were aided by a strong earnings report from Goldman Sachs (GS-209.98). The Goldman executives characterized the quarter as talented trading; the firm earned $3.1 billion trading in the quarter. The majority of profits came from shorting mortgage related products. It seems that Goldman astutely took advantage of there clients troubled positions to profit enormously. Could the proprietary trading of Goldman have exacerbated mortgage related troubles? At the very least do there actions border on insider trading? All hail Goldman Sachs, if there trading desk can legally act on non-public information to benefit, buy the stock with both hands !!!
The Retailers, in particular, WalMart (WMT-44.23), BestBuy (BBY-46.76) and Kohl’s (KSS-60.27) are all displaying trend reversing characteristics at this time. At this time we would be looking to buy weakness in these names.
The preferred company in the Semiconductor space at this time is Texas Instruments (TXN-36.62). Look for price retreats to the 35.00 area to initiate long positions.
The IEF-83.43 (I-share 7-10 year Treasury bond) declined on the week as the yield on the ten-year treasury increased from 4.46% to 4.63%. The IEF has stalled after an impressive nine week price appreciation. The Fed bail out has eased the run to safety. It appears the time has come to sell rallies in the IEF.
The sector indices under coverage that remain with negative technical implications are the Builders (XHB), Transportation index (IYT-86.68), and the Financial Select Index (XLF-34.60).
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-19.00 (CBOE Volatility Index) decreased from a reading of 24.92 the previous week. After the fear gauge reached a panic high of 37.50 on Thursday, August 16, the fear gauge has collapsed as the cavalry (Federal Reserve) has come to the rescue. We now view the 16.00-18.00 level as support for the VIX. It is our view that the VIX must correct to this price area before current bullish sentiment will subside. (Never Fear Ben Bernanke is near!!!)
II. GOLD
GLD (streetTracks gold index) – The GLD-(72.34) advanced $2.35 or 3.36% for the week. The GLD index is up 13.53% year to date. The inflationary ramifications of the recent Federal Reserve action (weak U.S. Dollar) have propelled the price of gold to a twenty-seven year high. The fundamental underpinnings appear to be in place for a test of the all time high of $850.00 an ounce for the yellow metal. The question at hand is “where do we buy”? Using the GLD exchange traded fund as our trading vehicle, we see solid price support around the 70.00 level. The trading quandary is whether to wait for a price pullback or jump on the moving train. We shall look for any price retreat to the 71.00-71.50 area to initiate a long position. The problem with this plan is we may be left standing at the station.
III. Energy
The energy complex (Oil, Oil Service, Natural Gas and Coal), continues to outperform relative to the broader market. Crude Oil, priced in dollars, continued to march upwards in response to the collapsing U.S. Dollar. The strongest sub-sector of the complex continues to be the Large-Cap integrated oil companies. Exxon Mobil (XOM-92.31), Chevron Texaco (CVX-94.84), British Petroleum (BP-71.41) and Conoco Phillips (COP-88.94) 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-195.50) price action continued strong in the past week. The OIH shredded our 184.00 price resistance level and closed the week at all-time highs. The leaders in this space continue to be Schlumberger (SLB-106.20) and Transocean (RIG-114.19) and Halliburton (HAL-38.95). The shares of BJ Services (BJS-27.81) have eclipsed our weekly price resistance and now appear poised to join the others and ascend higher. ENSCO International (ESV-56.79) is the outlier of the sector with significant overhead price resistance at the 59.50-60.00 area.
The Coal area, Arch Coal (ACI-33.40), Peabody Energy (BTU-48.10), and Massey Energy (22.62), remains technically attractive at this time.
The Natural gas sector has now joined the upside celebration. The shares of Chesapeake Energy (CHK-35.56,), XTO Energy (XTO-62.87) and Encana Corp. (ECA-62.61) appear ready to make an assault to new high price levels.
IV. Dow 30 Analysis
Our Weekly Trend Indicator (WTI) measures in at +18, a sharp increase from the previous week reading of 0. The Dow Jones Industrial average advanced 2.56% for the week to 13821.57. The average is currently up 10.69% 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-80.86), is now positive by 3.78% for 2007.
We have been stopped out of our short position in the DIA. The position, initiated on 9-13-07 at a price of 134.30, was stopped out on 9-18-07 at 137.31, a loss of $3.01 or 2.24%.
With hindsight as our guide, we obviously grossly misjudged the political independence of our current Federal Reserve board. From a trading perspective this loss is a perfect example of why one must have a defined strategy when entering any trade. Traders and investors should always devise a plan and execute said plan.
Positive highlights from our weekly technical work include the shares of Alcoa (AA-37.40), American International Group (AIG-67.23), Boeing (BA-102.59), Honeywell (HON-58.69), Hewlett Packard (HPQ-50.53), Altria Group (MO-68.54), Merck (MRK-51.82), Verizon (VZ-44.38) and WalMart (WMT-44.23). All are indicating possible change of trend from sell strength to buy weakness.
There were no negative weekly signals generated in the past week, but the shares of American Express (AXP-59.28), Caterpillar (CAT-78.16) and Home Depot (HD-34.47) continue to appear on our underperform list.
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, BA, DD, DIS, GE, GM, HON, HPQ, JNJ, JPM, KO, MCD, MMM, MO, MRK, MSFT, PFE, PG, T, UTX, VZ, WMT, XOM
Dow 30 stocks with negative weekly signals:
AXP, C, CAT, HD, IBM, INTC
· 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% DIA-9/13/07 Short@ 134.30 / exit 9/18/07@ 137.31 Loss of 2.24%
2007 NET RESULTS ON CLOSED TRADES ASSUMING EQUAL DOLLAR AMOUNT INVESTED IN EACH TRADE: 13 trades, net return of + 22.63%
VII. KEY EVENTS IN THE WEEK AHEAD:
Monday, September 24
Economics
Earnings
Before: ALOG
After: LTRE, SNX
Events
Terrapin Private Equity World Germany 2007 Credit Suisse Economics Seminar-Paris IQPC Global Local Content Summit Terrapin Asset Allocation Summit USA 2007 John Herold 16th Annual Pacesetters Energy Conf. RBC Capital Markets Financial Institutions Conf. ASIS International Conf. GTC East 3D Systems World Conf. IQPC Credit Derivatives Conf. Orion’s Emerging Oil Sands Conf. Biotechnology Industry- BIO Mid-America Venture Forum Solar Power 2007 Piper Jaffray Solar Power Conf. Solar Electric Power Assoc. Conf. Standard & Poors Cable & Media Industry Hot Topics Worldwide Business Research TradeTech West 2007
Tuesday, September 25
Economic
10:00 Consumer Confidence: 104.5 cons. 10:00 Existing Home Sales: 5.55 mln. cons.
Earnings
Before: FDS,
LEN, MCS
Events
Marine Money Asia Week IQPC Nordic Alternative Assets Investment Forum Omega International Business Frankfurt Mining Roadshow RetailVision Europe Autumn Friedland Capital, Inc. Undervalued Equities Conf. N.Y. Society of Security Analysts Construction Materials Conf. RSM EquiCo Government Services Symposium Credit Suisse 16th Annual Chemical Conf. Robotti & Co. 4th Annual Manufactured Housing Conf. SourceMedia Financial Services M&A Conf. WiMAX World USA Forrester’s Technology Leadership Forum 2007 American Electronics Assoc. Sales Leadership Roundtable
Wednesday, September 26
Economic
8:30 Durable Orders: -2.5% cons. 10:30 Crude Inventories: -3874 k prev.
Earnings
Before: ATU
Events
CFO European Summit CIBC World Markets Eastern Institutional Investor Conf. BB&T Capital Markets Defense Technology/IT Services Credit Suisse Small & Mid Cap Energy Conf. RBC Capital Markets Fixed Income Leaders Invitational
Thursday,
September 27 Economic
8:30 Chain Deflator-Final: 2.7% 8:30 Initial Claims: 311 k prev. 10:00 Help Wanted Index: 24 cons. 10:00 New Home Sales: 830 k cons.
Before:
CHTT< CRAI, KBH, MKC, RAD, TXI, MTN
Events
ACT Industry Day Deutsche Bank Global Oil & Gas Conf. JPMorgan Australasian Investment Conf. N.Y. Society of Security Analysts Investing in Brazil Conf. Bear Stearns US Rates London Conf. Credit Suisse Swiss Equities Conf. BMO Capital Markets Alberta Power Market Luncheon Standard & Poors Toll Road Roundtable JPMorgan West Coast International 1 on 1 Conf.
Friday, September 28
8:30 Personal Income: 0.4% cons. 8:30 Personal Spending: 0.4% cons. 8:30 Core PCE Inflation: 0.2% cons. 9:45 Chicago PMI: 53.5 cons. 10:00 Construction Spending: -0.1% 10:00 Michigan Sentiment-Rev: 84.0
Earnings
Before:
AZZ
Events
European Investment Bank Forum 2007 Equities Transatlantic Conf. Securities Industry Assoc. Research Management Conf. JPMorgan Federal IT Services Forum FirstEnergy Capital Global Energy Conf.-Toronto |
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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. |
