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11/05/07
I. General Market Overview
The Federal Reserve gave the markets the highly anticipated quarter point interest rate cut. The language of the Fed statement intimated that further reductions might not come so swiftly. Chairman Bernanke would like the markets to know that he will be vigilant against inflation. Talk tough, act soft. Watch what they do, not what they say. Mr Bernanke has no choice but to attempt to provide liquidity to a financial system that is struggling to quantify the liabilities left behind from the murky world of credit derivatives. Rumors are rampant on a daily basis as to who will declare the next massive write down. The key question is, how far along are we in this cleansing, confessional process? Based on recent news reports of the possible” parking” of credit derivatives through off balance sheet transactions, we could quite possibly only be viewing the tip of the proverbial iceberg. It is our opinion that no matter how painful it might be, financial institutions must disclose their respective liabilities fully and completely before the markets can digest this matter and put it to rest. The fear of the unknown will continue to haunt the markets until there is proper disclosure. The healing process cannot begin until a proper diagnosis of the illness has been obtained.
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 Coal related issues. Although these sector indices have maintained favorable technical status, we are beginning to witness the deterioration of key components within each of these indices.
The Steel sector index (SLX-82.96), a stellar performer year to date, appears destined to test the key weekly price support area of 80.00. U.S. Steel (X-101.20), is flashing warning signs of change of trend from strength to weakness. Arcelor Mittal (MT-75.72), Nucor (NUE-57.91) and Steel Dynamics (STLD-51.77), although declining on the week, maintain favorable status.
The IEF-85.09 (I-share 7-10 year Treasury bond) crept slightly higher on the week as the yield on the ten-year treasury decreased from 4.38% to 4.29%. By neglecting to decline after a strong unemployment report, the strength of the IEF reflects the fear of the unknown that still exists in credit markets. The IEF is currently sitting at the high end of a two year trading range of 79.50 to 85.00. If this bond surrogate is to trade higher from current levels it will be the direct result of equity markets that are most assuredly headed lower.
The sector indices under coverage that remain with negative technical implications are the Builders (XHB-21.20), Transportation index (IYT-85.89) and the Semiconductors (SMH-34.25), the Financials (XLF-31.84), Brokerage (XBD-219.95), Oil Service (OIH-193.90), Internet Holders (HHH-64.18), Retailers (RTH-96.20) and the Large Cap Pharmaceuticals (PPH-80.11) are all indicating continued weakness.
In the Semiconductor space Intel (INTC-26.80) remains in the most favorable technical condition. A new positive signal has been generated in the shares of Micron Technology (MU-10.47). Micron must stay above 9.79 on a weekly closing basis for this signal to be validated. Although appearing to be in a near term oversold condition, we would continue to avoid TXN, SNDK, AMAT, and ADI.
The Builders (XHB-21.20) has been contained within a three week trading range of 20.50 to 23.00. A weekly closing price above the 23.00 price level will signify a potential bottom for the XHB. While we have stated repeatedly in recent letters that the Builders were deeply oversold, we are not ready to declare a bottom in this sector. This being stated, we do like the technical patterns of Toll Brothers (TOL-22.15) and Ryland Homes (RYL-26.15). Both stocks appear to be in “buy the dip” mode. We would continue to avoid the shares of CTX, PHM, and LEN.
The Brokerage (XBD-219.95) declined 6.00% on the week after disturbing news reports regarding prominent chief executives in the industry. It seems that certain brokerage CEO’s were fiddling while Rome was burning. According to news reports, with credit derivative problems mounting, Stanley O’Neal, of Merrill Lynch was more concerned about his golfing handicap while his counterpart at Bear Stearns, James Cayne, was busy playing bridge while inhaling an occasional chronic. Both executives neglected the most important task of their employment, risk management. The only name in this space that we consider in bull mode is the almighty Goldman Sachs (GS-229.60). The shares of MS, MER, LEH, and BSC all continue to remain in distribution mode.
The Internet (HHH-64.18) sector rallied back to the critical pivot area of 67.33, and failed. Google (GOOG-711.25) and YHOO-31.11), although appearing over-bought at this stage, remain the most technically attractive. We would currently avoid the shares of EBAY (EBAY-35.02) and Amazon (AMZN-85.98), as both appear to be in weekly corrective patterns.
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-23.01(CBOE Volatility Index) surged higher from a reading of 19.56 the previous week. The option fear gauge is currently trending higher with the 18.00 level being support. Any short term spike to the 28.00 – 30.00 area may indicate an apex for fearful sentiment.
II. GOLD
GLD (streetTracks gold index) – The GLD-(79.83) advanced $2.14 or 2.75% for the week. The GLD index is up 25.65% year to date. On 10-04-07, we initiated a long position in the GLD at 71.40. On 10-29-07 we decided to exit our long trade in the GLD at 78.25 for a net gain of 9.59%. Although the GLD cruised higher for the week, we felt it prudent at this time to book our profit and look to possibly re-enter this trade at lower prices. It is our current belief that the nine-week 20% price appreciation has tilted the risk/reward scale in favor of risk. The steep price appreciation has left the GLD vulnerable to a 5% to 7% correction to the 74.00-76.00 level. Any weekly closing price below the 73.78 level will cause us to revaluate our overall weekly bullish stance on the GLD. At this time, although currently in a short term over bought stage, the weekly price trend remains positive for the price of Gold.
III. Energy
The energy complex (Oil, Oil Service, Natural Gas and Coal), as mentioned in previous columns, continues to show diverging technical patterns.
The Large Cap Integrated Oils that have managed to maintain upside momentum are British Petroleum (BP-78.39) and refiner Tesoro (TSO-57.35). The shares of Exxon Mobil (XOM-87.93) declined roughly 5% this past week after reporting earnings. There is now major technical price resistance overhead for XOM. We see the 94.00 price level as quite formidable. The shares of XOM now appear vulnerable to a price correction to the 82.00-83.00 price support levels. Issues in the group that continue to remain vulnerable to price correction are Chevron Texaco (CVX-88.48), Conoco Phillips (COP-84.57) and refiner Valero (VLO-69.68).
The Oil Service (OIH-193.90) rebounded marginally on the week but still remains technically vulnerable at this time. The 196.60 level is current price resistance for the OIH. The shares of Halliburton (HAL-40.31) and Transocean (RIG-124.43) are the most attractive charts in the space. Oil Service names that we feel remain currently in price correction phases include, SLB, BHI, ESV, and BJS.
Natural Gas (XNG-571.22) continued to trek higher in advance of the coming winter season. El Paso (EP-18.05), Chesapeake Energy (CHK-40.07), XTO Energy (XTO-67.07), and Encana (72.48) have all enjoyed sharp advances over the past eight weeks. The charts are beginning to appear over extended on the upside, leaving them vulnerable to swift short term price corrections. The risk/reward ratio does not appear favorable at this time. Long positions should look to protect profits at these lofty levels. We would not recommend initiating long positions in Natural Gas related issues at this time.
The Coal sector, from a technical standpoint, is very similar to that of Natural gas. Arch Coal (ACI-39.15) and Peabody Energy (BTU-51.36) have both appreciated sharply over the past nine weeks, but both also appear extended over the short term, making them susceptible to sharp price corrections. We would withhold initiating long positions at these levels. Current long positions are advised to raise protective sell-stops to protect profitable trades.
IV. Dow 30 Analysis
Our Weekly Trend Indicator (WTI) measures in at -8, a decline from the previous week reading of -2. The Dow Jones Industrial average declined 1.50% for the week to 13600.14. The average is currently up 9.21% for all of 2007. Large Cap issues continue to outperform their small cap brethren. The S&P 500, as measured by the SPY (151.20) is positive for the year by 6.86%. Small caps issues, as measured by the IWM (IShares Russell 2000 Index Fund- 79.53), declined 3.02% for the week and are now positive by 2.30% for 2007.
The strength of the Dow Jones components has narrowed considerably. The M’s seem like the place to be. Microsoft (37.06), McDonalds (MCD-59.02), Merck (MRK-56.04) and Altria (MO-72.11) all enjoy favorable technical patterns. This week new positive signals were generated in Boeing (BA-97.76) and Johnson & Johnson (JNJ-64.78). Fresh weekly negative signals have developed in General Motors (GM-36.99), JPMorgan (JPM-43.15), Proctor Gamble (PG-69.55), WalMart (WMT-44.19) and Exxon Mobil (XOM-87.93). From a technical perspective we are of the opinion that the DIA (136.05) will face formidable price resistance around the 140.00 level. We see current technical price support around the 130.00-132.00 price levels.
Readers should take note that three Dow Jones Industrial components, AIG, DIS, and GM are scheduled to report quarterly earnings this week.
Dow 30 stocks with positive weekly signals:
AA, BA, GE, HPQ, INTC, JNJ, KO, MCD, MO, MRK, MSFT
Dow 30 stocks with negative weekly signals:
AIG, AXP, C, CAT, DD, DIS, GM, HD, HON, IBM, JPM, MMM, PFE, PG, T, UTX, VZ, WMT, XOM
· 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% SNDK-10/11/07 Long@ 50.00 / exit 10/12/07@ 48.00 Loss of 4.00% GLD- 10/04/07 Long@ 71.40 / exit 10/29/07@ 78.25 Gain of 9.59%
2007 NET RESULTS ON CLOSED TRADES ASSUMING EQUAL DOLLAR AMOUNT INVESTED IN EACH TRADE: 16 trades, net return of + 28.22%
VII. KEY EVENTS IN THE WEEK AHEAD:
Monday, November 5
Economics
10:00 ISM Services: 54.0 cons
Earnings
Before: AIMC, BKC, CAPA, CSAR, CAH, ETR, GVHR, IGLD, KEI, KBALB, LMS, MVL, MCY, MFLX, NUS, NS, SYY, TTI, WCG
After: ATVI, ASCA, APC, BRS, CRL, CCRT, DNB, XCO, FST, HLEX, HLS, KND, NTY, QGEN, QMAR, RADN, RSCR, WINS, SIE, SGY, JAVA, SYKE, TNS, UDR, WRNC, WMS
Events
Intertech Advanced Batteries for Portable and Automotive Applications Conference Credit Suisse China Emerging Corporate Days- London JPMorgan SMid Cap Conference Super-Community Bank Conferences Mid-Atlantic Conf. Argus Eyes on the Global Economy Conf. Strategic Research Institute Chief Marketing Officers Sidoti & Company 3rd Annual Midwest Cash Flow Value Conf. Credit Suisse Natural Gas Globalization Conf. IBF Biotech Investing Conf. Comerica Incorporated Business and Government Conf.
Tuesday, November 6
Economic
Earnings
Before: ABY, AGN, AFR, AHII, ADM, BLT, CSE, FUN, CSK, CHD, CZN, CTSH, CTB, CXR, DSCO, EP, EMS, EXPD, GLBC, WOLF, GBX, HW, HOC, HOLX, ISE, IPGP, SFI, JEC, KSWS, LEA, LCUT, LIOX, MMP, MGA, MCC, MM, TAP, NT, ORCT, OSIS, BTU, PFGC, PNK, PXD, KWK, ROIAK, RGS, REV, JOE, SWSI, TSCM, TWP, USM, VCI, VLO, WPI
Events
EuroFinance Cash, Treasury and Risk Management in India Conf. Financial Times Gulf Property Investment Conf. Credit Suisse European Large Cap Pharmaceutical Conf. Richmond Events Human Resources Forum NYSSA Energy Conference Brean Murray One on One Small Cap Technology Conf. Raymond James Investors Conference Keefe Bruyette & Woods Securities Brokerage Conf. BMO Capital Markets Interactive Entertainment Conf. Western New York Investors Conf. IncreMental Advantage Reputation Management Conf. Robert Baird Industrial Conf. Longbow Research Packaging Conference IPAA/HAPL Gulf of Mexico Industry Briefing 2007
Wednesday, November 7
Economic
8:30 Productivity- Prel: 2.5% cons 10:00 Wholesale Inventories: 0.1% 10:30 Crude Inventories: -3894k prev. 2:00 Consumer Credit: $8.0 bln cons.
Earnings
Before: AL, ALD, AMT, WTR, STST, BBG, XEC, CLHB, CCOI, CMLS, DVN, DTV, DTG, ENB, EPL, ENG, EXPE, FLR, FWLT, FTO, GM, GNA. GCA, HET, HCR, IHR, VTIV, MIC, NICE, PKD, PLA, RL, RTK, SBH, SLE, SBSA, TRK, SURW, TWX, TWC, TWGP, WTI, WNR
Events
Kaupthing Bank Conference-Thinking Beyond Iceland CMSA Europe Conference Financial Times World Telecoms Conference Adam Friedman Associates China Growth Conf. Dow Jones Media and Money Conf. BancAnalysts Assoc. of Boston Conf. Credit Suisse China Emerging Corporate Day- Boston Southeast BIO Investor Conference IBF General Partner Summit CERA North American Natural Gas Executive Roundtable CERA North American Electric Power Executive Roundtable GreenBuild 2007 Global Crown Nanotechnology Investment Conf. Deutsche Bank Semiconductors Industry Day Marine Money Magazine Korea Ship Finance Forum DisplaySearch Taiwan TV Supply Chain Conf. IMN China Securitization, Real Estate & Finance Summit
Thursday,
November 8 Economic
8:30 Initial Claims: 327k prior
Before: ABBI, ARXT, ACM, AER, AES, AIRM, ARD, ARCC, BRL, BZH, BVF, CVC, GTLS, CHTR, CDL, CCU, CCO, CNSL, XTEX, XTXI, CRYP, CYPB, DF, DK, DSW, DYN, DNER, FLO, F, GBE, HEES, HANS, HTV, HL, HSP, KOP, KYPH, LAMR, MMC, MGPI, MDH, MNTG, MWIV, NSSC, NNN, NRG, NOVN, NWN, PRFT, HK, PLMD, PRAI, PWR, RRI, ROK, RCKY, SGR, STN, STRL, SMA, RMIX, USPH, UIC, URBN, VG, WW, WCI, WLSC, WIN
After: NDN, AMIS, AZPN, AGO, ATPG, BAS, BOL, CELL, CPKI, CEPH, CHIC, CQB, CXW, DCEL, DTE, EZPW, FOE, GES, HTCH, IMAX, ME, NABI, NFI, NVDA, PCR, PCLN, PSA, QCOM, RRGB, SNDA, SINA, SONS, BID, VOLC, DIS, INT
Events
Mass Opportunities: Biotechnology Investment Conf. Prudential Equity Group NYC Technology Meetings CCMI Total Telecom Auditing Conference Forrester Research Services and Sourcing Forum SunTrust Robinson Humphrey Business & Government Services Conf. SMH Capital Investor Growth Conf. Credit Suisse China Emerging Corporate Days-N.Y.
Friday, November 9
8:30 Export Prices ex-ag: 0.0% 8:30 Import Prices ex-oil: -0.2% 8:30 Trade Balance: -$57.6 bln 10:00 Michigan Sentiment- Prel: 81.0 cons.
Earnings
Before: AEE,
BRKS, PLTE, CLWR, CHCI, DRS, ETM, FTD, GG, HUN, IART, JASO, SIX, SUG, TTEC, WCRX
Events
UBS Currency Management Conference Standard & Poors Metals & Mining Forest Products and Chemicals Hot Topics 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. |
