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Note: Event Calendar has been moved to bottom of page
I. General Market Overview
The major U.S. market indices lunged higher once again after the Government statisticians did not disappoint and delivered a healthy employment report for the month of September. The revision of the August report from a loss of 4k jobs to an increase of 89k jobs was like icing on the cake. This rosy report was celebrated by market participants as the seemingly inevitable looming recession now appears to be just a distant afterthought. At some point in the near future the markets will come to the realization that the recent Federal Reserve rate cuts may be a “one and done” scenario. For the time being the Federal Reserve action has succeeded in resuscitating sickly credit markets, enabling the major indices to stage remarkable recoveries from the mid-August turmoil. From our admittedly cynical standpoint, we remain skeptical of the sustainability of the recent market advance. Housing will remain a drag for some time to come. We do not see a return to the “easy credit” party that consumers and private equity players have enjoyed over the past few years. Contrary to the thinking of our esteemed government officials, we do not view inflation as being “contained”. At some point in time these problematic issues will reemerge and the markets will take notice. For the current time being we will respect the fact that the momentum currently resides with the bullish side.
Last week was very unique in an almost religious sort of way. Most worldly religions offer followers the opportunity to confess their misdoings aloud to the appropriate deity, perform some type of penance, and their sinful ways are forgiven. This ritual wipes the sinner slate clean, off the hook to sin once again. It seems that the markets have provided this opportunity to several large financial institutions. Citibank, Merrill Lynch, Washington Mutual and Deutsche Bank, to name a few, all confessed some rather large losses in the past week. Each company saw their shares rise rather sharply in response to the negative pre-announcements. Apparently the cloud of uncertainty has been lifted. It shall be interesting to see if the religious parallel plays itself out completely. All of these companies have confessed their sins; the markets have apparently forgiven them. Will these companies learn their lessons or are they free to now once again resume their sinful (poor investment) ways?
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). The Financial Select Sector (XLF-35.89) is indicating a possible end to a nearly four month decline. Readers should watch this index intently for if the financial sectors can maintain upside momentum in the coming weeks the major averages will do quite well. We see 33.47 as critical weekly price support for the XLF.
In the Semiconductor (SMH-38.45) space the shares of SanDisk (SNDK-52.10) 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 as it approaches our 50.00 price support level in the week ahead. A weekly closing price for SNDK under the 50.00 support level will reverse our bullish stance on the shares of SNDK.
The IEF-83.20 (I-share 7-10 year Treasury bond) declined on the week as the yield on the ten-year treasury increased from 4.57% to 4.64%. 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-23.37) and the Transportation index (IYT-89.35). Also, although we do not follow an ETF (exchange traded fund) for the sector, the managed Healthcare stocks (UNH-47.70, WLP-78.46) look vulnerable to price corrections.
The Builders (XHB-23.37) were mentioned in this column last week as being potentially washed out. Aided by a few analyst upgrades, the XHB had a nice 9% bounce in the past week. We would certainly not chase the upside momentum in these stocks. It is the opinion of this writer that the Builders will retest their lows as mutual fund fiscal year end selling climaxes at the end of October.
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-16.91 (CBOE Volatility Index) decreased from a reading of 18.00 the previous week. The descent of the option fear gauge continued as the market apprehension over credit worries has dissipated. From a technical standpoint we see the 16.00 level as a critical support area for the VIX. A weekly close below 16.00 would indicate a further drop to the 12.00 area.
II. GOLD
GLD (streetTracks gold index) – The GLD-(73.40) declined $0.11 or 0.14% for the week. The GLD index is up 15.01% year to date. In the past few letters we have stated our desire to initiate a long position in the GLD. We said we were looking for a price retreat to the 71.00-71.50 area to enter said long position. On 10-04-07 we were afforded our opportunity. We initiated a long position at 71.40. Our protective sell stop shall be placed at 68.40. A weekly close below the 70.00 level will cause us to revaluate our current bullish stance on the GLD. At this time we are looking for the price of Gold to test the all time high of $850.00 per ounce.
III. Energy
The energy complex (Oil, Oil Service, Natural Gas and Coal), was relatively stagnant in the past week as financial stocks benefited from some sector rotation.
The bullish trends remain intact in the Large Integrated Oil space. The shares of Exxon Mobil (XOM-91.36), Chevron (CVX-92.32) and British Petroleum (BP-70.21) continue to have favorable technical patterns. Readers should be aware of potential double top formations in both XOM and CVX. The shares of Conoco Phillips (COP-84.20) are indicating looming underperformance. We would continue to avoid refiners Valero (VLO-68.35) and Tesoro (TSO-48.77) until the technical picture improves.
The Oil Service Index (OIH-192.60) price action remains favorable at this time. The leaders in this space continue to be Schlumberger (SLB-104.93) and Transocean (RIG-112.87) and Halliburton (HAL-38.98). ENSCO International (ESV-54.76) is the outlier of the sector with significant overhead price resistance at the 59.00-60.00 area.
The Coal area, Arch Coal (ACI-33.86) and Peabody Energy (BTU-48.79) remains technically attractive at this time. Massey Coal (MEE-22.57) 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-534.04), with winter approaching is bumping up against all-time highs. A weekly close above the 540.00 level could indicate significantly higher prices levels for the XNG. The shares of Chesapeake Energy (CHK-36.87), XTO Energy (XTO-62.69) and Encana Corp. (ECA-62.61) all remain technically sound and continue to be in “buy the dip” mode.
IV. Dow 30 Analysis
Our Weekly Trend Indicator (WTI) measures in at +22, a slight increase from the previous week reading of +18. The Dow Jones Industrial average advanced 1.23% for the week to 14065.93. The average is currently up 12.46% 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-84.13), is now positive by 7.64% for 2007.
The DIA posted an all-time high close on Friday after the Government reported a strong jobs number for the month of September. The revision of the August report from a loss of 4000 jobs to a gain of 89,000 helped ease recession fears and propelled the markets higher. After a remarkable recovery from the mid-August lows, although appearing technically over-bought, the momentum currently resides with the bulls.
As listed below, there were two positive weekly signals generated last week in the Dow 30. Citibank (C-48.30) and Caterpillar Tractor (CAT-80.33) are now in “buy the dip” mode.
Readers should take note that Dow Jones Industrial components AA and GE are scheduled to report quarterly earnings this week.
Dow 30 stocks with positive weekly signals:
AA, AIG, BA, C, CAT, 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, HD, IBM, INTC
· Underline names have changed from previous week*
V. OPEN POSITIONS
GLD- 10/04/07 Long@ 71.40 / Sell stop@ 68.40
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 8
Economics
Earnings
Before: MERX
After: QMED, YUM
Events
CF & B Communication Mid Cap Conference Biotech 2007 Symposium Tuesday, October 9
Economic
2:00 FOMC Minutes
Earnings
Before: CMN, CBSH, MTB, OXM
Events
Cowen 10th Annual Therapeutics Conference Dow Jones Newswires Limited Partners Summit Chadbourne & Parke LLP Coal to Liquids Conf. Human Resources Executive Magazine Technology Conf. Biotechnology Industry Organization Investor Forum
Wednesday, October 10
Economic
10:00 Wholesale Inventories: 0.3% cons. 10:30 Crude Inventories: 1138 k prior
Earnings
Before: ACGY, COST, HELE, HST, INFY, MON, PGR
Events
DisplaySearch HDTV Conference 2007 Scotia Capital Energy Conference
Thursday,
October 11 Economic
8:30 Export Prices ex-ag: 0.1% prior 8:30 Import Prices ex-oil: 0.1% prior 8:30 Initial Claims: 317 k prior 8:30 Trade Balance: -$59.0 bln cons. 2:00 Treasury Budget: $100.0 bln cons.
Before:
FAST, FCSX, GRB, PEP, SWY, SLM, SVU, WGO
Events
Credit Suisse Group Volatility Seminar AGA Mini-Forum for New York Financial Analysts Marcus Evans Pharma Market Research Excellence Conf. Marcus Evans Risk Management Commercial Real Estate Conf. Edgewater Research Partners LLC Investor Conf. Argyle Executive Forum 2007 CEO Leadership Forum Forrester Research Consumer Forum 2007 I2 Technologies Aerospace & Defense Industry Day IBF Early Stage Venture Investing Conf.
Friday, October 12
8:30 Retail Sales: 0.2% cons. 8:30 PPI: 0.4% cons. 8:30 Core PPI: 0.2% cons. 10:00 Business Inventories: 0.3% 10:00 Michigan Sentiment-Prel: 84.0 cons.
Earnings
Before: GE
Events
Credit Suisse 2007 HOLT 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. |
