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10/15/07
Note: Event Calendar has been moved to bottom of page
I. General Market Overview
The major U.S. market indices closed the week relatively unchanged in advance of third quarter earnings reporting season. The highlight of the week was the sharp sell-off on increased trading volume that occurred on this past Thursday. This abrupt decline demonstrated the fragility and apparent vulnerability of the current market advance. Market emotion can turn at a moments notice and the price action of last Thursday is a humble reminder to all market participants of said vulnerability.
The coming week brings a multitude of third quarter earnings reports. Numerous large banking institutions which have already confessed their prior missteps, will official declare these misgivings this week. Future guidance from these companies will be critical as to whether the stock market can truthfully look past the error of their ways. From a technical perspective, the price action continues to be constructive for the Large-Cap financials. A strong financial sector will be a very important contributor to the sustainability of the current market advance.
On Wednesday, Oct. 17, we shall get the Consumer Price Index (CPI). The consensus estimates are for a rise of 0.2% with the Core CPI rise 0.2% as well. We would be very surprised to see these estimates exceeded on the upside. For one, these are statistics generated by the Federal government (subject to many a revision). Also, any upside inflationary spike will derail the containment theory of the Federal Open Market Committee (FOMC) and create uncertainty as to the future direction of interest rates. Is there a conundrum on the horizon?
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), and Telecom (TTH).
The Financial Select Sector (XLF-35.54) should be monitored closely this week in response to the earnings reports due from several large banking institutions. (BAC, C, WFC, JPM, WM, STT, all due to report earnings this week)
The Internet sector (HHH-67.33), a strong performer year to date will be tested with earnings reports due this week from EBAY, GOOG and YHOO. Can the incredible upside momentum be maintained?
The IEF-83.05 (I-share 7-10 year Treasury bond) declined on the week as the yield on the ten-year treasury increased from 4.64% to 4.87%. The recent IEF weakness reflects less investor demand for the safety of government bonds. The weakness also displays rising market hesitancy in regards to the future of Fed rate cuts. For now, the trade remains to sell rallies in the IEF. The 83.79 level is current technical weekly price resistance.
The sector indices under coverage that remain with negative technical implications are the Builders (XHB-22.99) and the Transportation index (IYT-88.10). A new weekly sell signal has been generated in the Semiconductor (SMH-36.34) index. With earnings reports due this week from Intel (INTC-25.55) and SanDisk (SNDK-47.40), this could be a trying week for the SMH. The shares of Texas Instruments (TXN-35.39) are also flashing signs of impending weakness.
In prior letters we have expressed our desire to initiate a long position in the shares of SanDisk (SNDK-47.40) upon a price retreat to the 50.00 price support area. We executed a long trade in SNDK on 10-11-07 at our 50.00 level. Unfortunately we encountered an analyst downgrade the next day and were stopped out of our long position at the 48.00 price level. This is a loss of $2.00 or 4.00%. The stock closed the week at 47.40, below our 50.00 weekly price support level; therefore we are no longer positive on the shares of SNDK.
The Builders (XHB-22.99) continue to act poorly and languish around the lows. Contrary to the opinion of several public officials we see no end in sight to the current decline in the industry. That being stated, there are three building companies that bear watching as possible long trades. Centex (CTX-28.00), Ryland (RYL-26.00) and Toll Brothers (TOL-22.74) all appear poised to outperform relative to their peers. We would continue to avoid the shares of Pulte Homes (PHM-15.16), Lennar (LEN-24.20) and Beazer Homes (BZH-9.38).
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-17.73(CBOE Volatility Index) increased from a reading of 16.91 the previous week. The option fear gauge which peaked in August at 37.50, appears to have found a near term bottom by holding the 16.00 support level. The end to the decline of the VIX corresponds well to the traditionally volatile beginning of the third quarter earnings reporting season. A weekly close above the 20.00 level will confirm a more violent price atmosphere. Conversely, a weekly close below 16.00 would project a further drop to the 12.00 area.
II. GOLD
GLD (streetTracks gold index) – The GLD-(74.59) advanced $1.19 or 1.62% for the week. The GLD index is up 16.63% year to date. On 10-04-07, we initiated a long position in the GLD at 71.40. Our protective sell stop shall be lifted to 70.90. A weekly close below the 71.98 level will cause us to revaluate our current weekly bullish stance on the GLD. At this time the weekly price trend remains positive for the price of Gold. We remain of the opinion that the price of Gold is on track to test the all time high of $850.00 per ounce.
III. Energy
The energy complex (Oil, Oil Service, Natural Gas and Coal), continued to charge ahead with the Oil Service (OIH-200.10) and Natural Gas (XNG-549.85) sectors closing the week at all time highs.
The bullish trends remain generally intact for the Large Integrated Oil space. The shares of Exxon Mobil (XOM-93.48) and British Petroleum (BP-75.43) continue to have favorable technical patterns. Readers should take note that the bullish momentum in Chevron Texaco (CVX-91.41) is in technical jeopardy. A weekly price close below the 90.00 level in CVX will confirm a double top weekly formation. If this occurs we would expect the shares of CVX to decline to the low 80’s price area. The potentially negative technical set up also appears in the weekly chart of Conoco Phillips (COP-85.72). A weekly price close below the 83.50 levels would project a potential decline to the 75.00 area for COP. Refiners Valero (VLO-73.49) and Tesoro (TSO-54.06) performed well last week and warrant investor attention as both are indicating a possible end to their weekly price corrections.
The Oil Service Index (OIH-200.10) price action remains favorable at this time. The leaders in this space continue to be Schlumberger (SLB-109.84) and Transocean (RIG-115.91) and Halliburton (HAL-41.16). Readers should take note the SLB is due to report quarterly earnings this week. The expectations appear quite high for Schlumberger, any disappointment here will not be treated kindly in the marketplace. ENSCO International (ESV-57.69) remains the negative outlier of the sector with significant overhead price resistance at the 59.00-60.00 area.
The Coal area, Arch Coal (ACI-35.05) and Peabody Energy (BTU-51.22) remains technically attractive at this time. In past letters we have recommended avoiding Massey Coal (MEE-26.43), but the price action of last week (up 17.10%) has caused us to remove our negative stance.
The Natural Gas sector (XNG-549.85), closed last week at all-time highs. The shares of Chesapeake Energy (CHK-37.49), XTO Energy (XTO-65.50) and Encana Corp. (ECA-64.93) 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, unchanged from the previous week reading of +22. The Dow Jones Industrial average advanced 0.19% for the week to 14092.67. The average is currently up 12.65% 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-83.82), is now positive by 7.27% for 2007.
The DIA posted an all-time high close in advance of a week which shall see almost half of the Dow components report third quarter earnings. (Components due to report earnings listed below) The high volume reversal sell-off of this past Thursday has made 141.65 a near term price resistance level for the DIA. The 138.96 price level is now a critical weekly price support level.
As listed below, there were two weekly signals generated in this past week. On a positive note, American Express (AXP-63.23) is indicating a change of weekly trend, from negative to positive.
The other side of the coin is Boeing (BA-96.69), after announcing a six month delay in their highly anticipated 787Dreamliner aircraft, the resulting share decline has shifted the weekly chart in to “sell rally” mode.
Readers should take note that thirteen Dow Jones Industrial components, C, CAT, HON, IBM, INTC, JNJ, JPM, KO, MCD, MMM, MO, PFE, and UTX are scheduled to report quarterly earnings this week.
Dow 30 stocks with positive weekly signals:
AA, AIG, AXP, 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:
BA, HD, IBM, INTC
· Underline names have changed from previous week*
V. OPEN POSITIONS
GLD- 10/04/07 Long@ 71.40 / Sell stop@ 70.90
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% SNDK-10/11/07 Long@ 50.00 / exit 10/12/07@ 48.00 Loss of 4.00%
2007 NET RESULTS ON CLOSED TRADES ASSUMING EQUAL DOLLAR AMOUNT INVESTED IN EACH TRADE: 15 trades, net return of + 18.63%
VII. KEY EVENTS IN THE WEEK AHEAD:
Monday, October 15
Economics
8:30 NY Empire State Index: 14.0 cons.
Earnings
Before: SCHW, C, ETN, MAT, EDU, JNC, GWW
After: ADTN, BMI, DNA, JBHT, RBN, SONC, STLY
Events
DIA Clinical Forum BMO Capital Markets European Investor Roadshow - Zurich 4th Annual Canadian CMSA Conference Phase Forward Incorporated International Users Conf. Information Management Network Native American Finance Conference 2007 Fuel Cell Seminar Standard & Poors Oil & Gas Hot Topics Conference
Tuesday, October 16
Economic
9:00 Net Foreign Purchases: $19.2 bln prev. 9:15 Industrial Production: 0.1% cons. 9:15 Capacity Utilization: 82.2% cons.
Earnings
Before: AOS, DPZ, FRX, JEF, JNJ, KEY, MNI, PII, RF, STT, SVU, USB, WFC, CBSH, DAL
Events
Euromoney Institutional Investor regional Finance & Investment Conference EuroFinance Cash, Treasury and Finance Conference BMO Capital Markets European Investor Roadshow Jefferies 3rd Annual Automotive Conference Knight Institutional Corporate Access Credit Suisse Small-Mid Cap Healthcare Forum Standard & Poors Hot Topics in Consumer ABS Seminar CanaccordAdams Iron Ore Company Conference IncreMental Advantage Hedge Fund Due Diligence Conf. SAP Real Estate Management Conference MicroStrategy Incorporated Fall Symposium William Blair Annual Private Equity Conf. Mechatronics Technology Japan 2007
Wednesday, October 17
Economic
8:30 CPI: 0.2% cons. 8:30 Core CPI: 0.2% cons. 8:30 Housing Starts: 1285 k 8:30 Building Permits: 1300 k 10:30 Crude Inventories: -1674 prior 2:00 Fed’s Beige Book
Earnings
Before: ABT, MO, APH, ASML, BLK, CIT, KO, CMA, DSL, FCFS, GCI, ITW, JPM, LCRY, LUFK, MAN, MI, MTG, NCI, NTRS, PJC, RLI, UTX, AMR
Events
Opal Financial Group Global Real Estate Finance Summit BMO Capital Markets European Investor Roadshow AFCEA Fall Intelligence Symposium CanaccordAdams Iron Ore Company Conference Forbes Family Business Forum IBF Investing in Tech Transfer & Early Stage Conf. Bear Stearns Annual Retail Investor Outing Knight Institutional Corporate Access
Thursday,
October 18 Economic
8:30 Initial Claims: 308 k prior 8:30 Leading Indicators: 0.4% cons. 8:30 Initial Claims: 317 k prior 12:00 Philadelphia Fed: 8.0 cons.
Before:
SHLM, AMFI, ASD, AME, ARB, AVCI, BAC, BK, BAX, BBT, BGG, BBW, CDWC, CHZ, CBH,
CAL, CORS, CY, DHR, DJ, LLY, ENDP, FCX, FCSX, FHN, GPC, GAP, HSY, HNI, HBAN,
IEX, IUSA, IIIN, IONA, JAKK, JRC, NITE, KVHI, LSTR, MCD, MHP, MMR, MEG, MOT,
MSM, NOK, NVS, NUE, NVR, PH, PFE, PNC, PPG, RS, SAP, SEIC, SIFY, LUV, STJ, SPWR,
STI, TXT, TRAD, UTEK, UNP, UNH, USAK, WSO, WCC, WYE, HTLD
Events
Credit Suisse Institutional Investors Conf. Jefferies Global Clean Technology Conf. Renaissance Capital New York Investor Conf. Standard & Poors Hot Topics in RMBS Conf. Marine Money Magazine Finance Forum Knight Institutional Corporate Access DealFlow Media Inc. PIPEs Conf. Morgan Keegan Economic and Strategy Seminar
Friday, October 19
Earnings
Before: MMM,
ACO, ACI, BSX, CAT, FITB, HOG, HON, KNSY, OSTK, SLB, SON, WB, WL, XRX
Events
Knight Institutional Corporate Access
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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. |
