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12/10/07
Note: Event Calendar is located at bottom of page
I. General Market Overview
Are the clouds of the credit crisis beginning to lift? A two week 5.50% rally in the major U.S. stock indices may be suggesting such a thought. The proposed political solution of freezing adjustable mortgage rates for a five year period seems to have stemmed the hemorrhaging of housing and financial sectors awash in red ink. We view the current proposal to avoid massive interest rate resets as a “band-aid” solution. This proposal is an emblematic bureaucratic response, as once again it shall only serve to delay the inevitable to a future administration. Let’s see, five years, seems to put one presidential election and almost one full new presidential administration in the clear. Is it not amusing how that works out? While the financial hemorrhaging has temporarily subsided, causing many a short seller to run for cover, how far will these actions carry the current market advance? With a Federal Reserve rate cut widely anticipated in the coming week, will the “don’t fight the Fed” mantra continue to carry the markets northward? What is different this time? What is different is that these injections of liquidity will be accompanied with much stricter lending standards. The over leveraged, easy credit era is not about to re-ignite therefore bringing in to question the future earnings growth of the financial and housing sectors. When the band-aid comes off will the wound be completely healed?
We are currently long the Pharmaceutical sector (PPH-82.96) from our purchase on 11-21-07 at a price of 78.90. Our protective sell stop shall be raised to 80.79 in order to protect profitability. Our upside target objective is the 83.00-84.00 area. We shall look to take our profit in said price area. Pfizer (PFE-24.40) is now indicating that it is ready to join MRK, JNJ, WYE, ABT, and LLY in their trek northward.
The Brokerage sector (XBD-213.52) 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-217.89), Merrill Lynch (MER-61.42), Lehman (LEH-63.47), Morgan Stanley (MS-51.69) and Bear Stearns (BSC-100.94) to levitate from over sold levels. Take note that Lehman is due to report quarterly earnings in the coming week.
The Internet sector (HHH-61.40) continues to act well with key price support now existing at the 57.00 price level. HHH component EBay (EBAY-33.73) 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.
The Steel sector (SLX-88.60) charged ahead once again now seems destined to go considerably higher. The shares of U.S. Steel (X-103.64), Nucor (NUE-61.98), Arcelor Mittal (MT-73.93) and Steel Dynamics (STLD-55.38) all appear technically attractive at this time.
The IEF-86.36 (I-share 7-10 year Treasury bond) finally gave up some ground as the yield on the 10 year Treasury rose from 3.97% to 4.12% on the week. The weekly sell signal generated this week in the IEF is indicating that risk aversion is beginning to subside. This may indicate that the Santa Claus rally is for real.
In the Semiconductor (SMH-33.42) space, a new weekly buy signal has been generated. We would look to buy weakness in the SMH with a near term price objective around the 36.50 price area. Individual names in the sector that appear technically attractive at this time include Intel (INTC-27.73), Texas Instruments (TXN-32.48), Micron (MU-9.03), and SanDisk (SNDK-38.65). Look to buy price dips in the fore mentioned companies.
The Builders (XHB-20.49) have been in sell mode for the past twenty-six weeks. Last week, a weekly buy signal was triggered for the XHB. We could be looking at a potential year end short squeeze appreciation for the group. We shall look to initiate a long position upon price dips in the XHB. We see price support for the XHB at the 18.00 level, with the potential for price appreciation to the 28.00 area. Any weekly closing price below 18.00 would cause us to abort are “buy” signal in the XHB.
The Financial sector (XLF-31.20), holding above the 30.00 weekly support level has the potential to appreciate in value to the 34.00 area. The shares of Banc America (BAC-45.37), Wells Fargo (WFC-31.71), and JPMorgan (JPM-46.08) appear most attractive at this time. We would continue to avoid the shares of Citibank (C-34.31) and Washington Mutual (WM-19.03) as both face further price deterioration. We continue to remain bullish on State Street (STT-79.68), with strong price support around the 72.00 price level, STT continues to maintain strong upside momentum.
Take note that the VIX-20.85(CBOE Volatility Index) declined from a reading of 22.87 the previous week. The VIX continued to ease as market fears in regard to the “credit crisis” have begun to dissipate somewhat. With a Federal Reserve meeting on the horizon, this favorable mood could change quite abruptly. For now we see technical support for the VIX in the 16.00-18.00 area. A weekly close above the 24.60 level would throw caution in to the wind once again.
II. GOLD
GLD (streetTracks gold index) – The GLD-(78.60) advanced $1.28 or 1.65% for the week. The GLD index is currently up 24.50% year to date. The choppy, range contained trading persisted last week for the GLD. We see near term weekly price resistance at 82.17 with support at the 77.00 level.
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 emerges.
III. Energy- (Oil, Oil Service, Nat’l Gas, Coal)
The Large Cap Integrated Oils rallied on the week, building upside momentum as the price of crude oil continued to retreat from all time highs. The XOI (1478.82) now appears poised to assault the 1522 double top area. Exxon Mobil (XOM-91.50), Chevron Texaco (CVX-90.96), Conoco Philips (COP-83.30) and British Petroleum (BP-75.41) appear to have regained their upside sparkle. The current under performing outliers in the space are refiners Tesoro (TSO-48.14) and Valero (VLO-66.52).
The Oil Service (OIH-182.75) is beginning to display signs of conclusion to the eight week price correction. While a weekly close above the 187.35 level would confirm this for the OIH index, the underlying components appear to have already have already shifted. While Transocean (RIG-135.07) remains the cream of the crop, Schlumberger (SLB-97.19), Haliburton (HAL-37.55), and Baker Hughes (BHI-83.45) are all signaling weekly trend reversals from negative to positive. It now appears time to buy dips in these three names. ENSCO (ESV-55.57) and BJ Services (24.85) remain the laggards of this sector.
Natural Gas (XNG-564.15), has reversed a four week decline and now appears ready for an assault at new high levels. XTO Energy (XTO-64.80) is the high beta play in the sector. The 60.00 price level is now critical weekly price support for XTO.
The Coal sector continues to be the most impressive performer in the Energy complex. CONSOL Energy (CNX-63.61) remained on the upswing and closed the week at new 52-week highs. Massey Coal (MEE-35.63) also continues to display relative strength and now appears poised to test the 40.00 area. Traders should focus on Arch Coal (ACI-40.16) as it is currently lagging its peers in upside performance.
IV. Dow 30 Analysis
Our Weekly Trend Indicator (WTI) measures in at +22, an increase from the previous week reading of +8. The Dow Jones Industrial average advanced 1.66% for the week to 13625.58, building on the prior week’s gains for a two week return of 5.32%. The average is currently up 9.54% 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 (150.91) is positive for the year by 6.82%. Small caps issues, as measured by the IWM (IShares Russell 2000 Index Fund- 78.36), advanced 2.32% for the week and are now in the green for 2007 by a meager 0.93%.
After a six week 8.30% slide, over the span of two short weeks the DIA has had an impressive 5.32% bounce as near term momentum has shifted to the bullish side. In order to maintain the near term upside momentum the DIA must hold above the 136.36 price level on a weekly closing basis. Until this support level is violated, the DIA is in “buy the dip” mode. With 87% of the Dow Jones components now being in what we categorize as “weekly buy mode”, we appear destined to see a test of the significant over head price resistance zone, 2.70% above current levels, around the 140.00 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:
AA, AIG, BA, CAT, DD, DIS, GM, HD, HON, HPQ, IBM, INTC, JNJ, JPM, KO, MCD, MMM, MO, MRK, MSFT, PFE, PG, UTX, VZ, WMT, XOM
Dow 30 stocks with negative weekly signals:
AXP, C, GE, T
· Underline names have changed from previous week*
V. OPEN POSITIONS
PPH 11/21/07 Long@ 78.90 / sell stop 80.79
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 10
Economics
10:00 Pending Home Sales
Earnings
Before: IPSU, UWN, MTN
After: DMND, FCEL, HRB, NCS, SAI
Events
Comprehensive Weekly Event List Available at
http://www.minyanville.com/articles/index/a/15140
Tuesday, December 11
Economic
10:00 Wholesale Inventories: 0.5% 2:15 FOMC Policy Statement
Earnings
Before: BKRS, KR, MGAM
Wednesday, December 12
Economic
8:30 Export Prices ex-ag: 0.5% prior 8:30 Import Prices ex-oil: 0.5% prior 8:30 Trade Balance: -$57.0 bln cons. 10:30 Crude Inventories: 7913 k prior 2:00 Treasury Budget: -$75.0 bln cons.
Earnings
Before: ADCT, CKR, CPII, MATK, NOVL
Thursday,
December 13 Economic
8:30 Retail Sales: 0.5% cons. 8:30 Retail Sales ex-auto: 0.6% cons 8:30 PPI: 0.2% cons. 8:30 Core PPI: 0.2% cons. 8:30 Initial Claims: 338 k prior 10:00 Business Inventories: 0.3% cons.
Before: AHCI, CHINA, CIEN, COST, HSOA, JOSB, LEH, MESA, SMA, TTEC, ASFI, PNY
After: CAO, LEAP, ZQK, RSTO, RVI, UNCA, PAY
Friday, December 14
8:30 CPI: 0.6% cons. 8:30 Core CPI: 0.2% cons. 9:15 Industrial Production: 0.1% cons. 9:15 Capacity Utilization: 81.7% cons.
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Earnings
Before: RTK
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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. |
