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10/01/07
Note: Event Calendar has been moved to bottom of page
I. General Market Overview
The major U.S. stock markets closed out the third quarter by advancing roughly 0.50% for the week. Crude Oil and Gold continued to trek higher as the U.S. Dollar remained under selling pressure in response to the Fed rate cut. The highlight of the week was the agreement by General Motors (GM) and the United Auto Workers (UAW), ending a very short-lived strike by the UAW. With this historic agreement in place, GM has apparently finally addressed the legacy cost issue by shifting the healthcare burden to the UAW. General Motors can now hopefully begin to compete more efficiently on the global stage. A good start might be the development and production of more fuel efficient cars coupled with quality workmanship. Can they finally begin to “get it right” in Detroit?
The main event of this new week will come on Friday with the Unemployment report for September. We shall see if the miserable August report was just an aberration or the beginning of a negative trend. With the continuing weakness in the housing and mortgage related industries, we fear that rising layoffs is the trend that bears watching. One thing is for certain, one should never underestimate the creativity of governmental statistical accounting. The current consensus estimates are for the economy to have created 100k jobs in the month of September.
The coming week is also prime time for companies to pre-announce in advance of third quarter earnings. With option volatility (VIX-18.00) having collapsed from a panic high of 37.00 in mid-August, it might be time for option players to once again begin looking to increase exposure through long volatility spread positions.
After perusing the weekly charts it appears that the Federal Reserve action has left the markets with a more attractive technical underpinning heading in to the fourth quarter. That being said we believe that the major U.S. market indices now reside closer to the high end of their trading range. Any near term strength from current levels will push the indices to overbought levels.
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).
In regards to the Brokerage (XBD-230.69) sector, the strength in Goldman Sachs (GS-216.84) has buoyed the group. Goldman, with its political connections and savvy trading acumen, seems to print money in any market atmosphere. It is interesting to note that after a few analysts drastically reduced earnings estimates for Merrill Lynch (MER-71.28) in the past week the stock did not decline commensurately. Watch MER closely in the coming weeks, when a stock does not decline on bad news it could be signaling and end to the retreat.
In the Semiconductor (SMH-38.30) space the shares of SanDisk (SNDK-55.10) are indicating possible near term strength. The 50.00 area now looks like a reasonably strong price support area. The shares of SNDK appear headed toward the 65.00-70.00 level. We shall look for an opportunity to initiate a long position in SNDK.
The IEF-83.88 (I-share 7-10 year Treasury bond) appreciated ever so slightly on the week as the yield on the ten-year treasury decreased from 4.63% to 4.57%. The IEF has stalled after an impressive nine week price appreciation. The Fed bail out has eased the investor run to safety. For now, the trade remains to sell rallies in the IEF. The 84.50 level looks to be formidable price resistance for the IEF.
The sector indices under coverage that remain with negative technical implications are the Builders (XHB-21.40), Transportation index (IYT-86.65), and the Financial Select Index (XLF-34.32).
The Builders (XHB-21.40) probably cannot look any weaker at this point in time. With the month of October being the end of the fiscal year for the majority of mutual funds, we would look for climactic selling in this sector towards the end of this month.
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-18.00 (CBOE Volatility Index) decreased from a reading of 19.00 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 remain of the view that the 16.00-18.00 level is a support area for the VIX.
II. GOLD
GLD (streetTracks gold index) – The GLD-(73.51) advanced $1.17 or 1.62% for the week. The GLD index is up 15.15% 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-92.56), Chevron Texaco (CVX-93.58), British Petroleum (BP-69.35) and Conoco Phillips (COP-87.77) 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-191.75) price action, while down on the week, continues to remain in a positive technical trend. The leaders in this space continue to be Schlumberger (SLB-105.00) and Transocean (RIG-113.05) and Halliburton (HAL-38.40). ENSCO International (ESV-56.10) is the outlier of the sector with significant overhead price resistance at the 59.00-60.00 area.
The Coal area, Arch Coal (ACI-33.74) and Peabody Energy (BTU-47.87) remains technically attractive at this time. Massey Coal (MEE-21.82) is indicating that the price bounce from 16.00 to roughly 24.00 has run its course. We would avoid MEE at this time.
The Natural Gas sector (XNG-520.04), unchanged on the week, remains technically attractive at this time. The shares of Chesapeake Energy (CHK-35.26), XTO Energy (XTO-61.84) and Encana Corp. (ECA-61.85) all appear ready to make an assault to new high price levels.
IV. Dow 30 Analysis
Our Weekly Trend Indicator (WTI) measures in at +18, unchanged from the previous week reading of +18. The Dow Jones Industrial average advanced 0.54% for the week to 13895.54. The average is currently up 11.23% 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-81.00), is now positive by 3.78% for 2007.
The DIA spent the week in a rather narrow trading range seemingly digesting the prior week advance after the Federal Reserve action. There were no new weekly buy or sell signals generated in Dow 30 stocks in the past week.
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, October 1
Economics
8:30 ISM Index: 52.5 cons. 5:00 Auto Sales: 5.1 mln cons. 5:00 Truck Sales: 7.2 mln cons.
Earnings
Before: WAG
After: ANGO, PALM
Events
RIFD Europe Conference NFC Europe 2007 Equities Transatlantic Conference Financial Times Commercial Property Conf. Bear Stearns London CDO Conf. BioProcess International Conf. Sibos 2007 Boston IBC BioProcess Conference FirstEnergy Capital Global Energy Conf.-London IQPC Hedge Fund Operations & Compliance Conf. Opal Financial Group Private Equity Summit CEATEC JAPAN 2007
Tuesday, October 2
Economic
10:00 Pending Home Sales: Prior -12.2%.
Earnings
Before: PBG
Events
Sachs Assoc. Biotech Europe Investor Forum UBS Climate Change- Impact & Opportunities Conf. CIBC World Markets 2nd Annual Industrials Conf. 2007 Private Equity Energy Forum Credit Suisse Leveraged Finance Research Conf. Davenport & Co. Metals & Mining Symposium Informed Investors Security & Defense Forum Credit Suisse 130/30 Seminar Global CDO & Credit Opportunity Fund Conf. Deutsche Bank Leveraged Finance Conf. SID Mobile Displays 2007 Webcom Software Business 2007 Conf. Reed Exhibitions 10th Design Engineering & Manufacturing Solutions Expo
Wednesday, October 3
Economic
10:00 ISM Services: 55.0 cons. 10:30 Crude Inventories: 1842 k prior
Earnings
Before: RPM, WWW
Events
Deutsche Bank Strategy & Solutions Derivatives Conf. Credit Suisse Aerospace & Defense Conf. Borsa Italia Star Conf. UBS Climate Change- Impact & Opportunities Conf. Bear Stearns Lisbon CDO Conf. William Blair Micro / Small-Cap Growth Conf. Banc of America Securities Debt Capital Markets Conf. CAGNY Monthly Meeting October 2007 Standard & Poors Hot Topics in RMBS Conf. Windhover Information East Conf. Leerink Swann & Co.: Aesthetics Roundtable Conf. BioContact Biopharmaceutical Partnership Symposium Gabelli & Co. 3rd Annual RFID Conf. Strategic Research Institute 4th Annual Energy Tech Investor Conf.
Thursday,
October 4 Economic
8:30 Initial Claims: 298 k Prior 10:00 Factory Orders: -2.5% cons.
Before:
AYI, CYCL, STZ, FDO, GRB, ISCA, MAR, MTRX
Events
Credit Suisse European Special Situations Conf. ThinkEquity Forum for Healthcare Investors Informed Investors Real Estate Conference Gov’t Technology Michigan Digital Gov’t Conf. Infectious Diseases Society of America Conf. Strategic Research Institute Legal Industry Outsourcing Forum
Friday, October 5
8:30 Nonfarm Payrolls: 100 k cons. 8:30 Unemployment Rate: 4.7% cons. 8:30 Hourly Earnings: 0.3% cons. 8:30 Average Workweek: 33.8 cons. 3:00 Consumer Credit: $9.0 bln cons.
Earnings
Before:
EMMS, MERX
Events
Financial Research Hedge Fund Financial Reporting Seminar New Jersey Technology Council Public/Private Company Showcase
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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. |
