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11/26/07
I. General Market Overview
After another week of volatile trading, the major U.S markets indices, aided by a strong Friday rally, posted declines on average of approximately 1.50%. The downside catalyst of this past week was the stunning destruction in market capitalization from government sponsored mortgage entities Fannie Mae (FNM-32.20) and Federal Home Loan Mortgage Corporation (FRE-26.47). These latest victims of the deflating housing market and resultant credit crunch must raise much needed capital and most certainly face reductions in their dividend payouts. Both FNM and FRE, long a core holding in many a portfolio, in a span of six short weeks have experienced alarming 50% reductions in share price. Is this the climactic type of event that bottoms are made of or is a deteriorating credit situation about to turn in to a full blown panic? While we have stated that confession is the beginning of the healing process we remain uncertain as to where we are in this process. It is our feeling that the unwinding of credit derivatives will claim a multitude of victims before we see a light at the end of this dark, dreary, tunnel. Until the clouds of uncertainty lift, the U.S. stock market will remain under the pressure of distribution. Capital preservation continues to remain the number one priority at this time.
The market sector indices within our realm of coverage that have positive technical weekly momentum reside solely in the camp of the Pharmaceutical (PPH-79.67) sector.
Last week the Pharmaceutical sector (PPH-79.67) generated a weekly buy signal. By maintaining a weekly closing price above 78.79 the PPH buy signal has been confirmed. On 11-21-07 we went long the PPH at a price of 78.90. Our protective sell stop shall be placed at 77.79. Our upside target objective is the 83.00-84.00 area. Favored names within the sector include Merck (MRK-57.66), Johnson & Johnson (JNJ-66.88) and Abbott Laboratories (ABT-55.49). Individual names in the sector that should be avoided include Pfizer (PFE-22.98), Wyeth (WYE-46.90) and Eli Lilly (LLY-50.79).
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 4.15% to 4.01%. Investor flight to the safety of treasuries continues to benefit the IEF. The next stop for the IEF appears to be the 87.50 price level. Any weekly closing price below the 85.85 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-18.30), Transportation index (IYT-79.68), the Semiconductors (SMH-31.79), the Financials (XLF-29.27), Brokerage (XBD-203.09), Oil Service (OIH-187.39), Internet Holders (HHH-57.92),Retailers (RTH-94.25) and the Steel (SLX-79.60) sector are all indicating continued weakness.
The Steel (SLX-79.60) has generated a new weekly sell signal. As is most often the case, the individual components within a sector begin to deteriorate before the underlying index itself. In our letter last week we warned of this situation developing in the Steels. The weekly charts of U.S. Steel (X-93.90), Nucor (NUE-53.23) and Arcelor Mittal (MT-71.45) are all entering the fourth week of distribution. The shares of Steel Dynamics (STLD-49.19) have bucked the downside trend and maintained an upward bias. Key weekly price support for STLD resides at the 46.39 price level.
In the Semiconductor (SMH-31.79) space, Intel (INTC-25.07) barely managed to maintain 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. Note to readers, ADI is due to report quarterly earnings in the coming week.
The Builders (XHB-18.30) remain steadfast in a pattern of distribution. 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. In the past few letters we have stated our affinity for the weekly chart patterns of Ryland Group (RYL-21.78) and Toll Brothers (TOL-18.98). The charts of RYL and TOL have broken key technical support levels and now join CTX, PHM, LEN, and BZH in the “avoid”column. Continue to resist the temptation to bottom pick this group.
The Financial (XLF-29.27) sector remains in full “fear “mode. Each new day seems to claim a new victim from the black hole called credit derivatives. Technically speaking we see price support for the XLF around the year 2004 low level of 27.00. We would resist the temptation to “bottom pick” individual names in the banking sector as C, BAC, JPM, WFC, and WM all continue to trend lower. On a bright note, the shares of State Street (STT-77.76), a custodial bank, have sustained upside momentum in an otherwise troubled sector.
The Brokerage (XBD-203.09) declined to levels not seen in over eleven months but still managed to hold above the critical price support level of 200.00. The shares of Lehman Bros. (LEH- 60.86) declined on the week but maintained near term upside momentum by closing above the weekly price support level of 57.76. The shares of GS, MS, MER, and BSC all continue to remain in distribution mode.
The Internet (HHH-57.92) sector declined 1.00% in the past week. The shares of Amazon.com (AMZN-81.43) are beginning to show signs of life. It AMZN can hold above the 77.94 level a possible change of trend could be in sight. We would continue to avoid EBAY and YHOO at this time. For some unknown reason not a component of the HHH, Google (GOOG-676.70) is attempting to resume upside momentum.
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-25.61(CBOE Volatility Index) increased ever so slightly from a reading of 25.49 the previous week. It is interesting to note that the VIX continues to remain under the 30.00 level even as the major market indices continue to ratchet lower. This could be an indication that we have yet to reach a climactic panic stage for this market decline. We remain of the opinion that a weekly closing price above 30.00 for the VIX will signify a marketplace headed for a meltdown. Conversely, a weekly close under the 23.00 level will indicate a near term respite from the currently elevated volatile condition.
II. GOLD
GLD (streetTracks gold index) – The GLD-(81.25) advanced $3.50 or 4.50% for the week. The GLD index is up 27.69% year to date. In our letter last week we stated that the weekly chart was indicating a near term top for the GLD. We stated that we were looking to initiate a short position upon a rally to our 80.00-81.00 price resistance area. We also stated that a weekly close above the 80.68 price level would cause us to immediately exit this trade. On 11-23-07, in a holiday shortened trading session, we executed a short in the GLD at 80.68. We immediately covered our short position near the close of trading at 81.25 because the price was above our 80.68 resistance level, for a loss of 0.70%.
For the time being the GLD has resumed weekly upside momentum. The 77.17 price level is near term support with the recent high trade of 83.63 being near term price resistance. We shall remain on the sidelines in the GLD at this time.
III. Energy
The energy complex (Oil, Oil Service, Natural Gas and Coal), rallied slightly on the week but still remains vulnerable to 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-55.92) remains the most technically attractive with critical price support around the 50.00-52.00 levels. British Petroleum (BP-71.31) continued to descend and appears destined to test the 69.00-70.00 price support area. Although advancing for the week, we remain negative on Exxon Mobil (XOM-88.29), Chevron (CVX-86.67), Conoco Phillips (COP-79.12) and Valero (VLO-65.96).
The Oil Service (OIH-187.39) after recouping the prior week’s losses, now must recapture the 190.00 level to regain some upside momentum. The 195.00-196.00 level is now major price resistance for the OIH with near term price support around the 170.00 level. Transocean (RIG-126.28) after being added to the S&P 500, has regained upside traction. The shares of SLB, BHI, HAL, ESV, and BJS, have yet to technically display an end to their perspective declines.
Natural Gas (XNG-546.66), virtually unchanged for the week, remains poised for further decline. We would continue to avoid El Paso (EP-16.18), XTO Energy (XTO-63.65), Encana (ECA-67.93), and Chesapeake Energy (CHK-38.13), as we feel that they currently reside in corrective phases.
The Coal sector, including the likes of Arch Coal (ACI-35.72), Peabody Energy (BTU-52.61), CONSOL Energy (CNX-54.95), and Massey Energy (MEE-31.11), all face formidable overhead price resistance. We would continue to reduce long exposure upon rallies in this sector.
IV. Dow 30 Analysis
Our Weekly Trend Indicator (WTI) measures in at -14, unchanged from the previous week reading of -14. The Dow Jones Industrial average declined 1.44% for the week to 12980.88. The average is currently up 4.63% 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 (144.13) is positive for the year by 2.17%. Small caps issues, as measured by the IWM (IShares Russell 2000 Index Fund- 75.06), declined 1.46% for the week and are now negative by 3.41% for 2007.
Despite being in a near term over sold condition, with only 26% of the Dow components having positive weekly technical formations, the DIA weekly trend remains to the downside. We see significant price resistance overhead for the DIA around the 134.00 price level. Any failure of the DIA to hold above the 128.00 on a weekly closing basis will indicate further downside to come. A test of the critical 120.00-122.00 price support levels could be an unpleasant eventuality.
The shares of 3M Company (MMM-82.75) are flashing a weekly buy signal. A weekly closing price below 81.00 will immediately abort this signal.
McDonalds (MCD-57.72), a stellar upside performer year to date, is signaling time for a potential price correction to the 51.00-52.00 price support area.
Readers should take note that there are no Dow Jones Industrial components scheduled to report quarterly earnings this week.
Dow 30 stocks with positive weekly signals:
INTC, JNJ, KO, MMM, 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, MCD, MSFT, PFE, T, UTX, VZ, XOM
· Underline names have changed from previous week*
V. OPEN POSITIONS
PPH 11/21/07 Long@ 78.90 / sell stop 77.89
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% GLD- 11/23/07 Short@ 80.68 / exit 11/23/07@ 81.25 Loss of 0.70%
2007 NET RESULTS ON CLOSED TRADES ASSUMING EQUAL DOLLAR AMOUNT INVESTED IN EACH TRADE: 17 trades, net return of + 27.52%
VII. KEY EVENTS IN THE WEEK AHEAD:
Monday, November 26
Economics
Earnings
Before: SKIL
After: CTRN, DCI
Events
SWIFT Regional Conference Indian Venture Capital Journal-Private Equity & Infrastructure Conference Terrapinn- Biopharmaceutical Development and Manufacturing Conference ING 10th Annual EMEA Forum SMi Group Ltd. Nordic and Baltic Defense Transformation 2007 Conference Marcus Evans Collateral Management Conference Worldwide Business Research Defense Logistics Conference IMN Real Estate Mezzanine Loan Forum Marcus Evans Supply Chain Security and Reliability Conference
Tuesday, November 27
Economic
10:00 Consumer Confidence: 91.5 cons.
Earnings
Before: ACM, AEO, JTX, SHMR, SPLS, TLB, TECD, THO
Events
Marine Money Magazine Italian Ship Finance Forum Terrapinn-Climate Invest 2007 Conference WestLB Energy Efficiency Day Lazard Capital Markets 4th Annual Healthcare Conf. CIBC World Markets 3rd Annual Mid & Small Cap “Best Ideas” Conference Wall Street Analysts Forum Friedman Billings Ramsey Investor Conference SIGNAL HILL Education Preview Investor Conf. Nasdaq Israeli Investor Conf. Credit Suisse Japan Corporate Day JPMorgan Cross Asset Class Conference youngStartup Ventures New England Venture Summit 2007 RedChip Resources Small Cap Investor Web Forum Government Technology Wisconsin Digital Summit Credit Suisse 2007 Annual Technology Conference JPMorgan Homebuilding & Building Products Conference Dow Jones Newswires Consumer Technology Innovations Conference Gartner Data Center Conference Private Equity International Strategic Financial Management Conference Investment Company Institute- Directors Conf.
Wednesday, November 28
Economic
8:30 Durable Orders: 0.0% cons. 10:00 Existing Home Sales: 5.0 mln 10:30 Crude Inventories: 1071k prev. 2:00 Fed’s Beige Book
Earnings
Before: ARO, BECN, BWS, CBRL, DLTR, NRGY, IGLD, SCMR
Events
Pacific Conferences Sports Marketing & Sponsorship Conference Informedia India Pvt.- International Conf. Gartner Enterprise Planning & Architecture Strategies Seminar Rabo Securities Investor Conf.-London Private Equity International Emerging Markets Private Equity Forum 12th Annual LAPFF Conference International Quality & Productivity Center – Volatility Trading 2007 Conference EuroFinance International Treasury Management for Companies in Brazil Bear Stearns Commodities & Capital Goods Conf. Credit Suisse Aviation Week Aerospace Conference RBC Capital Real Estate Mini Conference Financial Research Associates JPMorgan Outlook 2008 Conference Institute for International Research- Private Equity Credit Suisse PB/FAS Hedge Fund Conf. Intertech Advanced ID Systems- Commercial Biometrics Conference Fox-Pitt Kelton Conf. IMN Western Non-Traded & Private REIT Industry Symposium Kelsey Group Interactive Local Media 2007 Conf.
Thursday,
November 29 Economic
8:30 GDP Prel: 4.8% cons. 8:30 Chain Deflator: 0.8% cons. 8:30 Initial Claims: 330k prev. 10:00 New Home Sales: 750k cons.
Before: AMWD, STST, BZH, BONT, BF/B, CMRG, CTR, CONN, DLM, DSGX, FLOW, FRED, GMTN, GCO, GRB, HNZ, HSOA, LULU, MESA, NUHC, SBH, SHLD, SFD, SOLF, SMRT,SMA, TTEC, TIF, VIP, WMG, WTSLA, LDR
After: AXCA, BRCD, CPWM, DLIA, DELL, JCG, LTRE, MENT, NINE, OVTI, RSTO, SEAC, UNCA, ZUMZ
Events
Omega International Business Conferencing Credit Suisse Mid Cap Healthcare Conf. Forrester Research Services & Sourcing Forum UBS Global Real Estate Conference CFO.com Conference-1st Annual CFO Global Outlook Symposium SRI Annual Global Shareholder Activism Conf. CanaccordAdams Holiday Clicks Conf. Financial Research Assoc.-2nd Annual Water Finance & Investment Conf. Marcus Evans Convertible Bonds Conference Roth Capital : China comes to Phoenix Conference Strategic Research Institute 2007 Unconventional Gas Resources Financial Research Assoc.- Medicare Revenue Management Summit Equities Magazine- The World Money Show London Conference
Friday, November 30
8:30 Personal Income: 0.4% cons. 8:30 Personal Spending: 0.3% cons. 8:30 Core PCE Inflation: 0.2% cons. 9:45 Chicago PMI: 50.5 cons. 10:00 Construction Spending: -0.2% cons.
Earnings
Before: BIG,
KIRK
Events
SourceMedia Conferences Mortgage Outlook 2008
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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. |
