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11/19/07
Note: Event Calendar is located at bottom of page
I. General Market Overview
The major U.S markets indices managed to post marginal gains after another volatile week of trading. The markets continue to digest the deflating housing market and resultant unraveling of the related credit market derivatives. As mentioned in the prior week report, we believe that the healing process has begun. As more and more companies disclose their liabilities to the illiquid credit derivative markets, the elevated level of uncertainty that currently plagues the equity markets will begin to ease. We believe that we are still very early in this healing process. As we peruse the charts of market indices and companies within our universe of coverage, we see a short term over sold condition that is holding just above levels that if violated, could send the markets in to a severe tailspin. With a shortened holiday week approaching we see the potential for a slight drift upwards from current depressed levels. With this being stated we remain of the opinion that the markets are in a distribution phase and investors should reduce long exposure upon any significant market advances. Capital preservation shall remain the dominant theme.
The market sector indices within our realm of coverage that have positive technical weekly momentum are the Steels (SLX) and Pharmaceutical (PPH-80.75) issues.
A positive weekly technical signal was generated last week in the PPH. The PPH, defensive in nature, appears to be benefiting from the growing fears of recession. We see technical price support for the PPH at the 78.00 price level. Notwithstanding an overall market collapse, the PPH has the potential to appreciate in value to the 84.00-86.00 levels. We shall look to be buyers of weakness in the PPH around the 79.00 price level. Any weekly closing price below 78.74 will cause us to exit this trade immediately. Favored names within the sector include Merck (MRK-58.38), Johnson & Johnson (JNJ-67.75) and Abbott Laboratories (ABT-55.21).
The Steel sector index (SLX-81.35) has maintained bullish momentum but the underlying components continue to show signs of deterioration. U.S. Steel (X-89.58), Nucor (NUE-52.46) and Arcelor Mittal (MT-70.75) although in near term oversold conditions, remain in the technical distribution category. The chart of Steel Dynamics (STLD-49.36) has managed to maintain favored technical status by the thinnest of margins.
The IEF-86.10 (I-share 7-10 year Treasury bond) continued to trend higher on the week as the yield on the ten-year treasury decreased from 4.22% to 4.15%. Investor flight to the safety of treasuries continues to benefit the IEF. The next stop for the IEF appears to be the 87.00 price level. Any weekly closing price below the 85.23 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-20.04), Transportation index (IYT-81.92), the Semiconductors (SMH-32.79), the Financials (XLF-30.51), Brokerage (XBD-208.90), Oil Service (OIH-182.24), Internet Holders (HHH-58.55) and the Retailers (RTH-94.76) are all indicating continued weakness.
In the Semiconductor space Intel (INTC-25.51) remains in the most favorable technical condition. A weekly closing price below the 25.00 level will cause us to alter our bullish stance. Although appearing to be in a near term oversold condition, we would continue to avoid TXN, SNDK, MU, AMAT, and ADI at this time.
The Builders (XHB-20.04) although appearing deeply over sold, remain 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-21.23) and Ryland Homes (RYL-25.97). 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-208.90) was unchanged for the week and managed to hold above the critical price support level of 200.00. The shares of Lehman Bros. (LEH- 62.38) performed admirably and now bear watching for a potential change of trend from negative to positive. The shares of GS, MS, MER, and BSC all continue to remain in distribution mode.
The Internet (HHH-58.55) sector was unchanged on the week after collapsing 9.00% in the prior. The powerful upside move in Google (GOOG-633.63) continued to correct from an over bought condition and now must hold the psychological 600.00 price level. Yahoo (YHOO-26.82) advanced after an analyst reported a potential acquisition of the company by Microsoft. A weekly close above the 27.13 level will generate further buy interest in YHOO. We would continue to avoid the shares of EBAY (EBAY-32.74), Amazon (AMZN-78.60), as both remain 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-25.49(CBOE Volatility Index) decreased ten percent from a reading of 28.50 the previous week. Early in the week the option fear gauge eclipsed the critical 30.00 level. While the weekly trend continues to point toward higher volatility, the failure to close above the 30.00 level may signal a temporary easing as we enter a holiday week. We remain of the opinion that any weekly close for the VIX above the 30.00 level will reflect a marketplace in the midst of a precipitous decline.
II. GOLD
GLD (streetTracks gold index) – The GLD-(77.75) declined $4.43 or 5.40% for the week. The GLD index is up 23.19% year to date. In the past few letters we expressed our concern over the recent rapid ascent in the price of the GLD. It was stated that the rate of increase had reached the unsustainable stage. The GLD is indicating that a price correction is now at hand. It is time to test the resolve of those who are long the GLD at elevated prices. We now see significant price resistance at the 80.00-81.00 levels. The current distribution phase for GLD appears destined for a drop to the major price support area of 69.00-70.00. We shall look to initiate a short position upon any move to our 80.00-81.00 price resistance zones. Any weekly close above the 80.68 level will cause us to abort this trade.
III. Energy
The energy complex (Oil, Oil Service, Natural Gas and Coal), is now officially in an overall corrective phase as the Coal sector has joined the other three sub sectors and signaled a price correction.
The Large Cap Integrated Oils, have succumbed to profit taking as investors appear to be offsetting losses in other sectors of the marketplace. Refiner Tesoro Petroleum (TSO-55.84) 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” a week ago and now appears vulnerable to a price correction to the 69.00-70.00 price support area. Although appearing in a near term over sold condition, we remain negative on Exxon Mobil (XOM-85.10), Chevron (CVX-85.98), Conoco Phillips (COP-78.93) and Valero (VLO-67.66).
The Oil Service (OIH-182.24) appears to be suffering from the same fate as the Large Cap Oils. The 195.00-196.00 level is now major price resistance for the OIH with near term price support around the 170.00 level. New weekly sell signals were generated in previously strong names Halliburton (HAL-37.02) and Transocean (RIG-118.25) and have now joined SLB, BHI, ESV, and BJS in price retreat mode.
Natural Gas (XNG-545.94), after reaching all-time highs at the end of October, continued to decline after our warning two weeks ago that the risk/reward 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 most attractive chart in the group, Chesapeake Energy (CHK-38.18) is now flashing a weekly sell signal. We would continue to avoid El Paso (EP-16.19), XTO Energy (XTO-63.58) and Encana (ECA-68.04), as we feel that they currently reside in corrective phases.
The Coal sector, a week ago the last bullish sub sector of the energy complex, has now turned negative on the weekly charts. Last week we warned that Arch Coal (ACI-35.17) and Peabody Energy (BTU-52.41) were both technically extended to the upside and therefore susceptible to sharp price corrections. The price corrections in Coal equities have now begun.
IV. Dow 30 Analysis
Our Weekly Trend Indicator (WTI) measures in at -14, a slight improvement from the previous week reading of -18. The Dow Jones Industrial average advanced 0.15% for the week to 13171.26. The average is currently up 6.07% 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 (145.79) is positive for the year by 3.31%. Small caps issues, as measured by the IWM (IShares Russell 2000 Index Fund- 76.17), declined 0.88% for the week and are now negative by 1.95% for 2007.
Despite the small uptick of our indicator the unfortunate reality is that only 26% of the Dow components are currently in positive weekly formations. With the markets in a near term over sold condition and a shortened holiday week approaching, we see the potential for the DIA to rally on the week up to near term resistance levels. From a technical perspective we are of the opinion that the DIA (131.44) continues to face formidable overhead price resistance in the 136.00 range. Any failure of the DIA to maintain the 130.00 level on a weekly closing basis will indicate a potential swift decline to the 120.00-122.00 major price support area.
The highlight of the coming week will be the earnings report due from Hewlett Packard (HPQ-50.75). Unfortunately the technical picture for HPQ is very similar to that of Cisco Systems (CSCO-29.94) prior to their earnings release. With expectations for HPQ quite high, the stock appears destined for the same corrective fate that CSCO suffered post earnings.
Readers should take note that Dow Jones Industrial component HPQ is scheduled to report quarterly earnings this week.
Dow 30 stocks with positive weekly signals:
INTC, JNJ, KO, MCD, MO, MRK, PG, WMT
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, T, UTX, VZ, 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 19
Economics
Earnings
Before: CPB, CYBX, DHT, ITRN, LOW, NUHC, TDG, TWB, VAL
After: CNQR, DY, EGLT, FMCN, HPQ, HRAY, KONG, MDT, NINE, JWN, PERY, PLNR
Events
IIC Hard Assets Conference Credit Suisse China Healthcare Sector Day-London Credit Suisse Public Transportation & Logistics Conf. Credit Suisse Capital Introduction Roundtable Banc of America Securities Defense Day SWIFTNet Funds Forum-Australia
Tuesday, November 20
Economic
8:30 Housing Starts: 1160k cons. 8:30 Building Permits: 1190k cons. 2:00 FOMC Minutes
Earnings
Before: BKS, BJ, BCSI, CHINA, DKS, DHI, EV, FRE, GME, HRL, MWRK, NWY, RTLX, ROST, SKS, SCVL, SSI, TGT, UNFI, ZLC
Events
Mining Communications Ltd. Conference- Australia Day/Mines and Money 2007 Richmond Events, Inc. PIMS at Savoy Place Forum Terrapin Alternative Investment Summit Russia Financial Times-FT/MM Private Equity Insight Forum BMO Capital Markets Income Trust Conf. Scotia Capital Telecom & Tech Conference EuroFinance- Cash, Treasury and Risk Management in China Conf. Global Equities Research Fit for the Future Presentation Piper Jaffray Global Internet Summit
Wednesday, November 21
Economic
8:30 Initial Claims: 339k prior 10:00 Leading Indicators: -0.4% 10:00 Michigan Sentiment-Rev: 75.0 cons. 10:30 Crude Inventories: 2814k prior
Earnings
Before: ANF, CHRS, DE, GMTN, GCO, MESA, ODP, PDCO, POSS, SHMR, SOLF, BKE, TSL, GPS
Events
Credit Suisse Sub Prime Crisis Event SMi Group Ltd. Benelux PPP Forum 2007 Financial News USA Investing in Infrastructure Conf. IIR Finance-2nd Annual Private Equity in CEE Conf. Mining Communications Ltd.-Investor Forum Credit Suisse China Healthcare Sector Day-Hong Kong
Thursday,
November 22 Economic
Before:
After:
Events
Marcus Evans 5th Annual Building Winning Brands Conf.
Friday, November 23
Earnings
Before: WATG
Events
Credit Suisse China Healthcare Sector Day Singapore
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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. |
