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12/03/07
Note: Event Calendar is located at bottom of page
I. General Market Overview
The major U.S. stock market indices bucked the downside trend and staged a remarkable, on average, 3.00% month end rally this past week. Our Middle Eastern friends started the ball rolling by injecting $7.5 billion worth of liquidity in to troubled Citibank. Not wanting to miss out on an opportunity to increase upside market momentum, our Federal Reserve Chairman and Treasury Secretary saw fit to add in a one-two punch. Fed Chairman Bernanke changed his tune once again and intimated at further interest rate reductions in the near future. (Inflation, what Inflation?) Treasury Secretary Paulson chipped in by proposing a possible solution to the impending massive mortgage resets that loom on the horizon. This comes from the same man who has proposed a super-fund for the troubled derivative SIV’s (Special Investment Vehicles). Lack of disclosure sure served the Japanese economy well after the bursting of their property bubble. Didn’t the executives from Enron find themselves behind bars due to their use of Special Investment Vehicles? I guess it’s legal if the proposal is made by Goldman Sachs, oops, I mean the Federal Government. Enough of the sarcasm, the bottom line is the “bailout” of unscrupulous lending practices fueled by the abnormally low interest rates of the Greenspan era has begun. This new wave of Fed liquidity accommodation shall postpone the financial day of reckoning for the next administration.
The key question at hand is how long can lower interest rates support a wobbly stock market? The coming week is critical for the bulls in that the upside momentum must be maintained. If not, we have just witnessed a classic one week “bear market” rally.
The market sector indices within our realm of coverage that have positive technical weekly momentum reside with the Pharmaceutical (PPH-82.65) sector, the Brokerage sector (XBD-211.35), the Internet sector (HHH-61.10), and the Steel sector (SLX-84.75).
We are currently long the Pharmaceutical sector (PPH-82.65) from our purchase on 11-21-07 at a price of 78.90. Our protective sell stop shall remain at 77.79. Our upside target objective is the 83.00-84.00 area. We shall look to take our profit in said price area. Favored individual names within the sector include Merck (MRK-59.36), Johnson & Johnson (JNJ-67.74) and Abbott Laboratories (ABT-57.51). The shares of Wyeth (WYE-49.10) and Eli Lilly (LLY-52.95) have generated new weekly buy signals in the past week. We would continue to avoid the shares of Pfizer (PFE-23.76).
The Brokerage sector (XBD-211.35) is signaling a possible year end rally up to the major resistance area of 240.00. As the year end bonus time quickly approaches it appears time for the shares of Goldman Sachs (GS-226.64), Merrill Lynch (MER-59.94), Lehman (LEH-62.63), Morgan Stanley (MS-52.72) and Bear Stearns (BSC-99.70) to levitate from over sold levels.
The Internet sector (HHH-61.10) is indicating an end to its six week downside correction. HHH component EBay (EBAY-33.53) has now defined the 31.00 price level as strong support. We would look to buy dips in EBAY for a trade up to the 37.00 price area.
Just last week we indicated a sell signal for the Steel sector (SLX-84.75). That very sell signal has been aborted by the price action of the past week. The shares of U.S. Steel (X-97.70), Nucor (NUE-59.21), Arcelor Mittal (MT-73.82) and Steel Dynamics (STLD-50.31) now appear poised to resume their ascension higher.
The IEF-87.10 (I-share 7-10 year Treasury bond) continued to trend higher on the week as the yield on the ten-year treasury decreased from 4.01% to 3.97%. Strangely enough, investor flight to the safety of treasuries did not recede along with the broad market rally of the past week. This lack of decline is one reason to be skeptical of the current market advance. A weekly closing price below 86.50 would seem to confirm that investor fear has abated.
The sector indices under coverage that remain with negative technical implications are the Builders (XHB-18.30), the Semiconductors (SMH-32.32), the Financials (XLF-31.00), and the Oil Service (OIH-176.15), are all indicating continued weakness.
In the Semiconductor (SMH-32.32) space, Intel (INTC-26.08) continues to be the only bright light in an otherwise dreary sector. The 25.00 price level is key weekly closing price support for INTC. 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-19.05) although rallying for the week, remain in a pattern of distribution. While we have stated repeatedly in recent letters that the Builders were deeply oversold, we shall continue to resist the temptation of picking a bottom here. The time will eventually come, now is not that time.
The Financial sector (XLF-31.00) enjoyed a nice bounce after the Federal Reserve intimated forthcoming lower interest rates. The shares of Banc America (BAC-46.13), Wells Fargo (WFC-32.43), and JPMorgan (JPM-45.62), must maintain positive price action in the coming week to confirm a possible change in trend from negative to positive. We would continue to avoid the shares of Citibank (C-33.30) and Washington Mutual (WM-19.50) as both face further price deterioration. We continue to remain bullish on State Street (STT-79.89), with strong price support around the 72.00 price level, STT continues to maintain strong 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-22.87(CBOE Volatility Index) declined from a reading of 25.61 the previous week. While the VIX eased in concert with the rally of the past week, we need to see a weekly close under the 21.24 level to confirm a change of trend from the current state of heightened volatility.
II. GOLD
GLD (streetTracks gold index) – The GLD-(77.32) declined $3.93 or 4.87% for the week. The GLD index is currently up 22.85% year to date. The trading in the GLD over the past three weeks has been erratically violent. Down 5.00%, then up 5.00%, only to be right back down approximately 5.00% this past week. This schizophrenic price behavior should be avoided at this time.
For the time being we shall remain on the sidelines with no position in the GLD until the recent choppy trading atmosphere dissipates and a cleaner technical trend develops. The 77.17 price level is near term weekly technical support with the recent high closing trade of 82.18 being near term weekly price resistance.
III. Energy- (Oil, Oil Service, Nat’l Gas, Coal)
The Large Cap Integrated Oils, rallied on the week but the action was somewhat less than impressive. The Amex Oil Index (XOI-1429.64) must eclipse the 1464 resistance level to resume upside price momentum. Refiner Tesoro Petroleum (TSO-49.18) has broken significant weekly price support after Tracinda Corp. (Kirk Kerkorian- not to be confused with Dr. Kervorkian) withdrew a 16% tender offer. British Petroleum (BP-72.74) and Exxon Mobil (XOM-89.16) warrant attention as both weekly charts are indicating a possible resumption of upside potential. XOM must continue to remain above the key 84.00 support level. The key price support level for BP now resides at 70.00.
The Oil Service (OIH-176.15) remains under distribution pressure but bounced off the 40-week moving average support level of 172.27. The 195.00-196.00 level is major price resistance for the OIH with near term price support around the 170.00 level. Transocean (RIG-137.29) after being added to the S&P 500 a week ago, remains the most attractive chart in the sector. The shares of SLB, BHI, HAL, ESV, and BJS, have yet to technically display an end to their perspective declines.
Natural Gas (XNG-539.56), is entering the fourth week of price correction. We would continue to underweight El Paso (EP-16.08), XTO Energy (XTO-61.82), Encana (ECA-65.25), and Chesapeake Energy (CHK-37.85), as we feel that they currently reside in corrective phases.
The Coal sector was the most impressive performer of the Energy complex in the past week. CONSOL Energy (CNX-59.28) blew through the 56.00 price resistance zone to close at new 52-week highs. Massey Coal (MEE-33.95) also displayed relative strength and closed the week at a new 52-week high. Traders should focus on Arch Coal (ACI-37.86) this week as it is currently lagging its peers in upside performance.
IV. Dow 30 Analysis
Our Weekly Trend Indicator (WTI) measures in at +8, a sharp increase from the previous week reading of -14. The Dow Jones Industrial average advanced 3.07% for the week to 13380.00. The average is currently up 7.70% 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 (148.66) is positive for the year by 5.31%. Small caps issues, as measured by the IWM (IShares Russell 2000 Index Fund- 76.58), advanced 2.02% for the week but still remain in negative territory by 1.39% for 2007.
As listed below, the price action of this past week has generated several weekly “buy’ signals in Dow Jones Industrial components. While we shall respect these newly generated signals we cannot confidently endorse a complete change of trend. The coming week must display some follow through upside momentum to confirm a weekly change in trend. A weekly close for the DIA above 134.20 would be such a confirmation. Any failure to follow through on the upside would signify the phenomena known as a one week, ferocious, bear market rally. The battle lines for the DIA are drawn, with 134.20 being weekly price resistance and the 129.42 level acting as critical weekly price support.
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:
AA, AIG, BA, CAT, DD, DIS, GM, HON, HPQ, INTC, JNJ, JPM, KO, MMM, MO, MRK, PG, WMT, XOM
Dow 30 stocks with negative weekly signals:
AXP, C, GE, HD, IBM, MCD, MSFT, PFE, T, UTX, VZ
· 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, December 3
Economics
10:00 ISM Index: 50.5 cons. 5:00 Auto Sales: 5.2 mln cons. 5:00Truck Sales: 7.1 mln cons.
Earnings
Before:
After: ISLE, PVH, SHRP
Events
Pacific Conferences Measuring PR & Corporate Communications Conference AVCJ-Asian Venture Forum India Gartner Strategy & Technology Conference International Quality & Productivity Center-Future Transformation Conference Global Pacific & Partners-National Oil Companies Worldwide Conference Financial Times FT Global Pharmaceutical & Biotechnology Conference Bear Stearns Real Estate Conference UBS Global Media Conference CCMI Telecom Fundamentals Conference The Bank of New York Cash Management Forum Credit Suisse Fund of Funds Conference Intertech Quantum Dots Conference IBC USA Biopharmaceutical Manufacturing & Development Summit Marcus Evans Market & Product Development in the Retirement Services Conference Marcus Evans Talent Management & Leadership Development Conf. Capital One Southcoast Institutional Energy Conf. Standard & Poors Asset Liability Management Conf. Red Herring Global Conference SRI 2nd Annual Film Finance & Distribution Summit Gov’t Technology Los Angeles Technology Forum Peter Imlay Associates ResourceOne Conference
Tuesday, December 4
Economic
Earnings
Before: CRMT, AZO, LDR, LAYN, SAFM
Events
Worldwide Business Research AutoRussia Briefing CEA Connections Europe NASDAQ 20th Investor Program Global Pacific & Partners National Oil Companies Summit BMO Capital Markets Healthcare Conference Aberdeen Group Manufacturing for the 21st Century Summit Friedland Capital Global Energy & Natural Resources Conference Worldwide Business Research TradeTech Canada Conference SRI 3rd Annual RealShare Northern Virginia Banc of America Consumer Holiday Mall Tour BMO Capital Markets Utility Day CCMI Converged IP Networks Conference Intertech Power Signs Conference BCP Securities Mexico Conference United States Display Consortium Conference 2007 SEMICON Japan 2007 SID International Display Workshops
Wednesday, December 5
Economic
8:30 Productivity-Rev: 5.5% cons. 10:00 Factory Orders: 0.4% cons. 10:00 ISM Services: 55.0 cons. 10:30 Crude Inventories
Earnings
Before: BTH, DSW
Events
Private Equity International European Mid Market Summit Gartner Project & Portfolio Management Europe Conference SRI RealShare Westchester County Standard & Poors Annual Bank Loan & Recovery Ratings Conference The Bank of New York Emerging Payments Forum Intertech-The Future of Wipes Conference ThinkEquity Alternative Energy and Clean Technology Forum Gartner Enterprise Architecture Summit
Thursday,
December 6 Economic
8:30 Initial Claims
Before: ALOG, CMN, CHINA, FLE, GIL, HRB, IDEV, KFY, MDZ, MEI, MOV, PTMK, SMA, TOL, TTC, UTIW
After: AVAV, CHP, CAE, CWST, CMTL, CMOS, CUB, DDMX, ESL, HRLY, KKD, LQDT, NSM, OPTM, RVI, SWHC, SORC, SNPS, PAY
Events
Financial Times Citi FT Financial Education Summit CIBC Communications Software Conf. Windhover Information FDA/CMS Summit Ryan Beck Financial Institutions Investor Conf. Stifel Nicolaus Financial Institutions Conf. Deutsche Bank Healthcare Technology Industry Day NYSSA Water Utility Conference Gov’t Technology Nevada Digital Government Summit
Friday, December 7
8:30 Nonfarm Payrolls: 75k cons. 8:30 Unemployment Rate: 4.8% cons. 8:30 Hourly Earnings: 0.3% cons. 10:00 Michigan Sentiment: 75.5 cons. 3:00 Consumer Credit: $5.0 bln cons.
Earnings
Before: HITK,
KWD
Events
Equities Magazine Winter Discovery Day XV 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. |
