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10/22/07
I. General Market Overview
Turbulence returned to the major U.S. market indices as credit worries abruptly re-emerged. The catalyst for the approximately 4.00% weekly decline was the surprisingly poor earnings report from the formerly reliable Bank America (BAC). Strangely enough, BAC was one of the few financial institutions that did not for warn investors by pre-announcing an earnings shortfall in the prior confession period. The 32% decline in earnings at BAC, coupled with a 57% decline at Citibank, surprised the markets and ignited a broad decline in all financial related equities. The decline in financials spilled over to the broader market, and the rout was on. The euphoria created by the Fed rate cuts has been replaced by the fear of further credit market deterioration. The lack of price transparency in the murky world of credit derivatives (SIV-structured investment vehicles and CDO-collateralized debt obligations) has once more created heightened uncertainty. Markets never react in a positive fashion to uncertainty. Will the Federal Reserve rescue the markets from financial institution misgivings once again? With ninety dollar oil and a sickly U.S. dollar, the Federal Reserve is painted in to a corner once more. We would like to see the Fed encourage financial institutions to come clean and define their associated derivative risks rather than cut interest rates and continue to fuel moral hazard. Can Chairman Bernanke display independence and withstand the political influence of the miscreants in the financial community? Stay tuned as the conundrum continues.
The coming week brings a continuation of the third quarter earnings parade. Highlights will come from Merrill Lynch (pre-announced $4.5 bln in losses), Amazon.com (high expectations) and various energy companies, including the likes of Conoco Phillips (COP), Haliburton (HAL), XTO Energy(XTO), Baker Hughes (BHI) and Ensco (ESV).
The economic calendar is light, with Durable Goods due on Thursday.
The market sector indices within our realm of coverage that have positive technical weekly momentum are the Steels (SLX), large integrated oils (XOI), Natural Gas Index (XNG), and the Biotech Index (BBH).
The IEF-84.91 (I-share 7-10 year Treasury bond) advanced sharply on the week as the yield on the ten-year treasury decreased from 4.87% to 4.40%. The flight to safety has resumed in the bond market as a result of equity market weakness. The IEF is currently testing the high end (85.00) on a nine week trading range.
The sector indices under coverage that remain with negative technical implications are the Builders (XHB-20.90), Transportation index (IYT-86.25) and the Semiconductors (SMH-35.63). Several fresh weekly signals of weakness were generated due to the market weakness of the past week. The Financials (XLF-32.60), Brokerage (XBD-223.86), Oil Service (OIH-186.78), Internet Holders (HHH-64.50), Retailers (RTH-96.48) and the Large Cap Pharmaceuticals (PPH-79.73) are all indicating pending weakness.
In the Semiconductor space Intel (INTC-26.30) is in the most favorable technical condition. Texas Instruments (TXN-33.92) is due to report earnings this week. We do not like the technical pattern of TXN. We would continue to avoid SNDK, MU, AMAT, and ADI.
The Builders (XHB-20.90) keep getting uglier. Earnings reports are due this week from Centex (CTX-24.47), Pulte Homes (PHM-13.67) and Ryland (RYL-23.91). Expectations are quite low for these stocks and the charts are deeply oversold. Traders should look for possible short covering bounces accompanying the earnings reports. These are potential short term long trades; we are by no means attempting to call a bottom here.
The Brokerage (XBD-223.86) sector will rely heavily on the earnings due this week from Merrill Lynch. After already confessing to $4.5 bln in credit derivative losses, are there any more skeletons in this closet? The weekly charts of the major brokerage firms are all indicating further weakness to come. Look for extended rallies to reduce long positions.
The Internet (HHH-64.50) sector despite the strong performance of component Google (GOOG-644.71), is indicating that the six week bullish run is near conclusion. The earnings due this week from Amazon.com (AMZN-89.76) better satiate investors as expectations appear quite ebullient.
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-22.96(CBOE Volatility Index) increased from a reading of 17.73 the previous week. Last week we warned readers that the VIX appeared to have concluded the correction from the August highs by successfully holding the 16.00 level. Fear has dramatically returned to the marketplace as the VIX now appears destined to test the 27.00-28.00 area. We see 17.70 a weekly price support for the VIX.
II. GOLD
GLD (streetTracks gold index) – The GLD-(75.70) advanced $1.11 or 1.49% for the week. The GLD index is up 18.12% year to date. On 10-04-07, we initiated a long position in the GLD at 71.40. In order to insure profitability, our protective sell stop has been lifted to 73.40. 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), is beginning to show early signs of divergence.
The Large Cap Integrated Oils that have managed to maintain upside momentum are Exxon Mobil (XOM-92.14), British Petroleum (BP-74.84) and refiner Tesoro (TSO-51.70). Issues in the group that appear troublesome are Chevron Texaco (CVX-89.27), Conoco Phillips (COP85.07) and refiner Valero (VLO-68.47).
The Oil service (OIH-186.78) was negatively impacted by the 12 point post earnings drubbing of Schlumberger (SLB-99.32). Earnings reports are due this week from OIH components Halliburton (HAL-38.85), Baker Hughes (BHI-90.79) and Ensco (ESV-53.53). Could these issues be destined for a similar fate to that of Schlumberger? The sector appears over bought and remains vulnerable to corrective cleansing.
Natural Gas (XNG-539.10) currently appears to be on the most favorable technical footing. Earnings reports are due this week from XTO Energy (XTO-63.89) and Encana (ECA-65.15). Chesapeake Energy (CHK-37.60) continues to grind higher.
The Coal sector has maintained favorable technical status. Arch Coal (ACI-35.30) and Peabody Energy (BTU-50.58) remain in favorable patterns.
IV. Dow 30 Analysis
Our Weekly Trend Indicator (WTI) measures in at -2, a decrease from the previous week reading of +22. The Dow Jones Industrial average plunged 4.08% for the week to 13518.20. The average is currently up 8.57% for all of 2007. Large Cap issues continue to outperform their small cap brethren. The S&P 500, as measured by the SPY (149.67) is positive for the year by 5.79%. Small caps issues, as measured by the IWM (IShares Russell 2000 Index Fund-83.82), declined 5.64% for the week and are now positive by 1.63% for 2007.
The euphoric rally that resulted from the Fed rate cut has seemingly left the Dow Jones vulnerable to mild earnings disappointments. The negative post earnings price reactions from MMM, CAT, and UTX, exhibit the vulnerability of heightened expectations.
As noted below, several weekly troublesome signals were generated in the past week. The DIA (134.93) now looks vulnerable to the 130.00 price support area. We see near term price resistance at the 140.00 area.
Readers should take note that six Dow Jones Industrial components, AXP, BA, DD, MRK, MSFT and T are scheduled to report quarterly earnings this week.
Dow 30 stocks with positive weekly signals:
AA, GE, GM, HPQ, INTC, JPM, KO, MCD, MO, MRK, MSFT, PG, WMT, XOM
Dow 30 stocks with negative weekly signals:
AIG, AXP, BA, C, CAT, DD, DIS, HD, HON, IBM, JNJ, MMM, PFE, T, UTX, VZ
· 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 22
Economics
Earnings
Before: ASTE, AUO, BOH, CRNT, CHKP, ECL, GNTX, HAL, HAS, JAKK, KMB, MRK, PETS, PVTB, RGS, RCL, SGP, VECO, WFT, ZBRA
After: ALB, AXP, AMIS, APOL, AAPL, BRO, BKI, CR, DSCM, DST, EXP, EW, EFX, RE, XJT, FWRD, HXL, HUBG, JDAS, KRC, LNCR, NFLX, OMI, PTV, PRE, PCL, PLXT, RGA, SLG, TCO, TXN, TNB, TSS, UCTT, VLTR, BER, WCN, ZRAN
Events
Standard & Poors U.S. Corporate Health Care Conf. AACR-NCI-EORTC International Conf. Credit Suisse Column Housing Conf.
Tuesday, October 23
Economic
Earnings
Before: FLWS, AKS, ALDN, AXE, AIT, ARW, ARTG, T, AVY, BKUNA, BIIB, EAT, BNI, CE, CNC, CNH, COH, CMCO, CBE, DD, ELON, FMER, ICLR, IHP, IIVI, JBLU, JCI, JRN, KELYA, KCI, LAB, LVLT, LXK, LMT, MDU, MICC, MNRO, NYT, OMC, OXPS, PCAR, PNR, PTEC, PCP, PRSP, RDWR, RYN, ROH, SAY, POOL, SHW, SII, STFC, TRWO, AMTD, TLAB, TNC, TRAD, UAUA, UIS, USAP, UPS, USG, VTNC, WDR, WAT, WU, WHR, WTNY, WRLD, XTO, TZOO
Events
Deutsche Bank Hedge Fund Managers Forum 2007 Armed Forces Communications & Electronics Infotech 2007 CanaccordAdams Global Energy Conf. FirstEnergy Capital Trust Conf. Dow Jones Newswires Alternative Energy Innovations Conf. SID Display Applications Conf. & Supplier Showcase AeA Sales Leadership Roundtable American Society of Human Genetics Annual Meeting
Wednesday, October 24
Economic
10:00 Existing Home Sales: 5.30 mln cons. 10:30 Crude Inventories: 1784 k prior
Earnings
Before: AMG, APD, ATI, ABK, AEP, ABI, ACAT, ASPM, ATMI, AN, BA, BOBJ, CACH, CSL, CRA, CPS, CBR, CME, CCE, COP, GLW, CFR, DAI, DOV, ETH, FCS, GD, GENZ, HSC, KEM, KMT, LM, LII, MPS, MDP, MER, MLAN, MCO, MSM, NDAQ, NCC, NOV, NSC, NOC, NCX, OXY, PAS, PFCB, PRAI, PX, DGX, RAI, RES, R, SEE, SLAB, SNA, SWK, TASR, TIN, MDCO, TRB, UNF, WAB, WLP, BUD, EGN
Events
Paydirt Media Pty. Conf.- Australian Nickel Conf. Euromoney Institutional Investor Spanish Capital Markets Forum Windhover Information Therapeutic Area Partnerships 2007 Forbes MEET II Forum
Thursday,
October 25 Economic
8:30 Durable Orders: 1.5% cons. 8:30 Initial Claims: 337 k prior 10:00 New Home Sales: 785 k cons.
Before: ACPW, EYE, AET, ATG, ALK, ACV, ALXN, AMED, APA, ARQL, AGIX, ALV, AVT, AVX, BLL, BLDP, BDC, BLC, BHE, BDK, BKHM, BWA, BOW, BMY, BW, BG, CCMP, CRR, CBZ, CCBL, CDI, CELG, CEN, CXG, CMCSA, CNMD, CNX, COT, CVTI, CMI, DLX, DO, DRAD, DTG, DDE, DVD, DOW, DEP, ELNK, ELN, EMC, EME, ECA, ENDP, ESV, EPD, EQT, EL, SSP, FCSX, FSS, FLIR, BEN, GMT, GGL, GR, GHL, HBI, HET, HHS, HCR, HTV, HMC, HUB.B, HUN, ICTG, IKN, IMN, IMCL, IPCC, IDC, ICE, ESI, JNS, KSU, KEYS, FSTR, LLL, LH, LMS, LTM, LIFC, LECO, LIZ, LKQX, ERIC, LYTS, LYO, MGLN, MATR, MBI, MWV, MEDE, MSTR, MEH, MKSI, MOT, MPS, NWL, NFX, NIHD, CHUX, OMX, ODFL, ORI, OFIX, PTIE, PMTI, PTI, PCCC, PENN, PCZ, PNW, PLUG, POT, PCH, PDS, PLD, QLTI, PHD, , RSH, RJF, RTN, RGC, RTIX, RESP, ROK, SFUN, SEIC, SIFY, SLGN, SPIL, SO, SPAR, HOT, SU, SY, SNV, SYNT, SYPR, TSM, TDY, TRA, TMO, TSCM, TOC, TBL, TKR, TRV, UMC, LCC, UST, VDSI, VIGN, WMAR, WHQ, WEC, WWY, XEL, XMSR, PPP, TOMO
After: AEA, AYE, ACAP, AMGN, ANEN, AMCC, APLX, ARBA, ARTC, ASIA, AZPN, AVID, BIDU, BEZ, BJRI, EPAY, BFAM, BPL, BLDR, BLG, COG, CALD, CSH, POS, CLS, CX, CENX, CF, CTHR, CHRT, CKFR, CLF, CNET, COHU, COLM, CVGI, CTV, DVW, CCI, CW, CYTC, DECK, DV, DRIV, DBTK, DDR, BOOM, EMN, ELX, ESLR, FALC, FII, FCTR, FMD, FDRY, FRNT, GNW, HAR, HIG, HITT, IKAN, IM, ISSI, IBKR, ITMN, XXIA, KCP, KLAC, LDSH, LFL, LSCC, LPNT, LAD, LAVA, MEE, MFE, WFR, MMSI, MCRL, MCRS, MSFT, MTX, MOBE, MRT, NATI, NTGR, NTCT, NEXT, EGOV, NINE, NVTL, ORCC, OPWV, OPLK, OSIP, PSEM, PKI, PYX, POWI, PWER, PSYS, RACK, RADS, RADN, ROP, RRR, SCSC, CKH, SIGI, SWIR, SKX, SNCI, STMP, SPF, STNR, SRCL, SNCR, TNL, TTEC, TRID, TMWD, ULTI, UNTD, VSEA, EICU, VPRT, VVUS, WEN, GB, YRCW, ZIGO
Events
SID 3rd Annual Consumer Focus Forum Standard & Poors New Assets Hot Topics Halloween Conf. Cambridge Energy Research Mexico Energy Executive Roundtable Connect For Success Investment Conf. Dow Jones Newswires MicroVentures Conf. Australian Stock Exchange Conf. - Trading & Investing Expo
Friday, October 26
10:00 Michigan Sentiment – Rev: 82.5 Cons.
Earnings
Before: CAS,
ALEX, ALE, ABFS, BHI, BC, CCUR, CVG, CFC, CVH, EXC, FO, HMA, IDXX, IR, ITT, KIM,
LZ, LABL, SAIA, TDW, THI, VVI, WMI
Events
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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. |
