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11/12/07
Note: Event Calendar is located at bottom of page I. General Market Overview
Loyal readers of this column have repeatedly been warned of the negative issues facing the U.S. stock market. It has taken some time, but the markets have finally begun to address said issues. The distress from the financial sector is beginning to spill over to the previously strong sectors of the market. We are currently at the stage where market participants “sell what they can”. This is quite evident by the sharp drop in this past week of the “momentum investing” names. To name a few, high flier companies such as Apple Computer, Amazon.com, Under Armour, and Crocs are all experiencing disturbing vacuum type declines. This is an indication of forced margin liquidation.
On a positive note we firmly believe that the American credit addiction problem has taken the first step toward the rehabilitation process. The rehab process can only begin when the addict finally admits the problem. For several months we have listened to numerous company executives and our trusted public officials blatantly misinform the investing public. These “trusted” officials repeated assured the investing public that the subprime credit derivative issues were “well contained” and they would not adversely affect the broader U.S. economy. The tone of these “trusted” officials has certainly done an about face over the course of the past two weeks. Major U.S. financial institutions (CitiBank, Merrill Lynch, Washington Mutual, Countrywide Financial –to name just a few) have finally begun to disclose massive losses from the house of cards called credit derivatives. The important point to watch now is whether the recent negative disclosures are full and conclusive. If this is truly the case, the financial sector can begin the bottoming process. This process could take weeks, maybe months, and will be characterized by the stemming of the sharp decline followed by an extended period of sideways price movement.
Overall, we remain of the opinion that the market is in an environment of distribution and capital preservation is the name of the game.
The market sector indices within our realm of coverage that have positive technical weekly momentum are the Steels (SLX) 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-83.75) has maintained bullish momentum but the underlying components are beginning to develop signs of weakness. U.S. Steel (X-87.97), Nucor (NUE-54.79) and Arcelor Mittal (MT-73.01) are all flashing weekly signals of impending decline. The chart of Steel Dynamics (STLD-49.58) must hold the 46.40 price level to maintain bullish momentum.
The Coal sector is discussed in the Energy notes below.
The IEF-85.85 (I-share 7-10 year Treasury bond) crept slightly higher on the week as the yield on the ten-year treasury decreased from 4.29% to 4.22%. Fear is the dominant market emotion and the IEF is benefiting from a market flight to safety. The next stop for the IEF appears to be the 87.00 price level. Any weekly closing price below the critical 84.50 price support level will indicate a change of trend for the IEF.
The sector indices under coverage that remain with negative technical implications are the Builders (XHB-20.31), Transportation index (IYT-82.42) and the Semiconductors (SMH-32.94), the Financials (XLF-30.14), Brokerage (XBD-208.37), Oil Service (OIH-189.19), Internet Holders (HHH-58.55), Retailers (RTH-91.46) and the Large Cap Pharmaceuticals (PPH-78.74) are all indicating continued weakness.
In the Semiconductor space Intel (INTC-25.15) remains in the most favorable technical condition. A weekly closing price below the 25.00 level will cause us to alter our bullish stance. The positive signal for Micron Technology (MU-9.64) has been negated. Although appearing to be in a near term oversold condition, we would continue to avoid TXN, SNDK, AMAT, and ADI.
The Builders (XHB-20.31) although appearing deeply over sold, remains in a pattern of distribution. A weekly closing price above the 21.25 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-21.04) and Ryland Homes (RYL-26.29). 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-208.37) continued to decline along with the daily disclosures of loss write downs weigh negatively on the sector. Last week we mentioned Goldman Sachs (GS-211.33) as the only positive chart in the sector. Goldman has now joined the others in the group and now faces significant price resistance at the 225.00 level. The shares of MS, MER, LEH, and BSC all continue to remain in distribution mode.
The Internet (HHH-58.55) sector swooned almost 9.0% as momentum players headed for the exit door. The powerful upside move in Google (GOOG-663.97) has been exhausted and now appears vulnerable to a corrective decline to the 570.00 area. Yahoo (YHOO-25.79) declined along with other momentum names and now is a sale upon any significant price bounce. We would continue to avoid the shares of EBAY (EBAY-33.46), Amazon (AMZN-78.89), as both remain in weekly corrective patterns.
The Pharmaceutical sector (PPH-78.74) should benefit from an economy that is on the brink of recession. The PPH remains in negative mode by our work. Issues in the group with positive weekly technical formations are Merck (MRK-55.90), Johnson & Johnson (JNJ-65.16) and Abbott Labs. (ABT-54.12). Companies that we would currently avoid include Pfizer (PFE-22.83), Wyeth (WYE-45.02) and Eli Lilly (LLY-51.51).
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-28.50(CBOE Volatility Index) surged higher from a reading of 23.01 the previous week. The option fear gauge has elevated as fear has clearly taken over as the predominant emotion on Wall Street. The weekly chart of the VIX is in a very precarious position. Any weekly close above the 30.00 level will indicate an extended period of heightened volatility. Conversely, any weekly close below the 19.48 level will point to a near term peak for the fear index.
II. GOLD
GLD (streetTracks gold index) – The GLD-(82.18) advanced $2.35 or 2.94% for the week. The GLD index is up 28.59% year to date. With the clarity of hindsight, we obviously exited our long position a little early, approximately 5% early, as of this writing. While the weekly technical trend remains to the upside for the GLD, we feel that the slope of the ascent has reached the excessive stage. We would not advise initiating new long positions at current levels. Any weekly closing price below the 79.11 level will indicate an exhaustion of the recent meteoric rise for the price of Gold. For the time being we shall remain on the sidelines here.
III. Energy
The energy complex (Oil, Oil Service, Natural Gas and Coal), with the exception of Coal, has now entered a corrective phase.
The Large Cap Integrated Oils, strong upside performers year to date, are now in a full blown distribution phase. Refiner Tesoro Petroleum (TSO-56.02) remains the most technically attractive with critical price support around the 50.00-52.00 levels. British Petroleum (BP-75.13) put in a negative “key reversal” last week and now appears vulnerable to a price correction to the 70.00 area. We remain negative on Exxon Mobil (XOM-86.85), Chevron (CVX-87.26), Conoco Phillips (COP-82.56) and Valero (VLO-68.52).
The Oil Service (OIH-189.19) succumbed to overall market weakness and remains in a corrective mode. The 196.60 level is now major price resistance for the OIH with near term price support around the 170.00 level. The shares of Halliburton (HAL-38.47) and Transocean (RIG-125.36) 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-554.62), after a nice ten week appreciation, is signaling an end to the rally. Last week we warned that the risk/reward in Natural Gas stocks had shifted to the risk side. We clearly stated that we would not initiate long positions in the space and would raise our protective sell stops to preserve profits. The XNG is flashing a weekly sell signal. We would exit all longs are at the very least reduce long exposure at this time. The most attractive chare in the group is that of Chesapeake Energy (CHK-40.22). We would avoid El Paso (EP-16.90), XTO Energy (XTO-63.43) and Encana (ECA-71.55), as we feel that they have entered in to corrective phases.
The Coal sector, from a technical standpoint, managed to maintain bullish momentum despite the overall negative market atmosphere. Arch Coal (ACI-38.10) and Peabody Energy (BTU-55.87) have both appreciated sharply over the past ten 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 -18, a decline from the previous week reading of -8. The Dow Jones Industrial average declined 3.29% for the week to 13152.16. The average is currently up 5.92% for all of 2007. Large Cap issues continue to maintain their out performance over small cap issues. The S&P 500, as measured by the SPY (145.14) is positive for the year by 2.86%. Small caps issues, as measured by the IWM (IShares Russell 2000 Index Fund- 76.85), declined 3.37% for the week and are now negative by 1.07% for 2007.
In the previous letter we warned that the positive leadership had narrowed considerably for the Dow components. That leadership continued to narrow in this past week as we now currently have only six Dow components with positive weekly formations. From a technical perspective we are of the opinion that the DIA (130.31) now faces formidable price resistance in the 136.00 range. We see initial technical price support around the 128.00-130.00 price levels. Any failure to hold the 128.00 price level could signal a further drop to the 120.00-122.00 area.
Readers should take note that two Dow Jones Industrial components, HD and WMT are scheduled to report quarterly earnings this week.
Dow 30 stocks with positive weekly signals:
INTC, JNJ, KO, MCD, MO, MRK
Dow 30 stocks with negative weekly signals:
AA, AIG, AXP, BA, C, CAT, DD, DIS, GE, GM, HD, HPQ, HON, IBM, JPM, MMM, MSFT, 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 12
Economics
Earnings
Before: BX, DISH, HEW, NSSC, NVAX, TSN
After: JOBS, BOBE, CNK, ESE, GCOM, HINT, LINE, OWW, FACE
Events
German Equity Forum BIO-Europe 2007 International Partnering Conf. Deutsche Bank BRICS Metals & Mining Conf. Financial Times Innovate Conf. Piper Jaffray Industrial Growth & Business Services Symposium Sandler O’Neill: East Coast Financial Services Conf. AMR Research Executive Leadership Conf. Deutsche Bank Japan Corporate Day Deutsche Bank Gaming Investment Forum 2007 KVIC Partners Forum
Tuesday, November 13
Economic
10:00 Pending Home Sales: -2.0% 2:00 Treasury Budget: -$53.0 bln cons.
Earnings
Before: GTLS, ERJ, FIG, FOSL, GILT, HD, IAG, NAFC, PPC, SCHS, TJX, USBE, WMT, LNY, RAME
Events
Credit Suisse Investor Summit ICBI Private Equity, Venture Capital & Institutional Investment Summit Lincoln National Investors & Bankers Conf. UBS Global Technology & Services Conf. Bear Stearns SMid Cap Investor Conf. JMP Securities Healthcare Focus Conf. Sybase Conf. at UBS Global Technology & Services Conference Aberdeen Group 2007 CPO Summit Private Equity International 2007 PERE Forum Deutsche Bank Launching Your 130/30 Strategy Conference Avondale Partners Future of Prison Services & Privatization Conf. Canaccord Adams Cardiovascular Conf. Dow Jones Newswires Infrastructure Summit FirstEnergy Capital Corporation EnergyGrowth Conf. Paulson Investment Co. Westergaard Conf. IMN Great Plains Conference Global Equities Research Fit for the Future Presentation Piper Jaffray Global Internet Summit
Wednesday, November 14
Economic
8:30 Retail Sales: 0.2% 8:30 Retail Sales ex-auto: 0.3% 8:30 PPI: 0.2% cons. 8:30 Core PPI: 0.2% 10:00 Business Inventories: 0.3% cons. 10:30 Crude Inventories: -821k prev.
Earnings
Before: APU, MT, ARM, CSIQ, DAKT, DWSN, DSX, ESLT, GIGM, M, MDTH, VIVO, PCS, NUAN, UGI
Events
Forrester Research Marketing Forum 2007 World Energy Congress RBC Capital Markets Gold Conf. Deutsche Bank Japan Conf. Bear Stearns Transport Regulatory, Infrastructure & Labor Conference Marine Finance Forum – Latin America & the Carribbean RBC Capital Markets Maple Market Symposium Forrester Financial Services Forum SourceMedia Conferences: The Bond Buyer’s 5th Annual Metro Finance Conference WJB Capital Carbo Ceramics Conference Call RBC Capital MLP Conference PennWell Corporation Houston Energy Financial Forum IMN Great Lakes Public Finance Conf.
Thursday,
November 15 Economic
8:30 CPI: 0.3% cons 8:30 Core CPI: 0.2% cons. 8:30 Initial Claims 8:30 NY Empire State Index: 21.0 cons. 12:00 Philadelphia Fed: 6.0 cons.
Before: BIG, CTR, CHINA, CPA, DKS, DHT, FCSX, GMTN, GSOL, GMCR, GBE, HP, HB, JCP, KIRK, KLIC, MMS, NWY, NJR, PTRY, SHLD, SHMR, SCVL, SOLF, SSI, SMRT, SPH, STP, BKE, TDG, TWB, TYC, VSE, WTSLA, ZOLL
After: A, ADSK, STV, CHRD, DDS, DITC, DHOM, EXLS, FL, FORM, HMIN, DISK, PODD, INTU, SJM, KSS, MSCC, MTSC, CRM, SINA, SBUX, SNS, TOA, NCTY, UNCA, VRGY, VIMC, WEDC
Events
Friday, November 16
9:00 Net Foreign Purchases: -$69.3 bln prev. 9:15 Industrial Production: 0.1% cons. 9:15 Capacity Utilization: 82.1% cons.
Earnings
Before: ANN,
QXM
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. |
