EquityLetter.com

tag:blogger.com,1999:blog-1707695742631930453Mon, 17 Nov 2008 01:01:44 +0000EquityLetter.comhttp://www.equityletter.com/noreply@blogger.com (Aaron)Blogger48125tag:blogger.com,1999:blog-1707695742631930453.post-2040566388628561475Mon, 17 Nov 2008 01:01:00 +00002008-11-16T17:01:44.449-08:00equityletter.com 11/17/08<div id=cover-sheet>Thank you in advance for all comments and criticisms.....equityletter.com <hr> </div> <div class=Section1>                                    <o:p> </o:p>  <st1:date Month="11" Day="17" Year="2008">11/17/08</st1:date><o:p></o:p> <o:p> </o:p> <o:p> </o:p>      Note:  Event Calendar is located at bottom of page<o:p></o:p>        <o:p></o:p> <![if !supportLists]>I.                  <![endif]>General Market Commentary<o:p></o:p> <o:p> </o:p> It was another volatile week on Wall Street featuring the now all too frequent, exaggerated price swings that leave many market watchers dizzy each and every day.  When all was said and done, the week ended on a very sour note.  The Dow Jones Industrial average declined 5.00% for the week, the S&P 500 fell 7.71%, and the small-cap Russell 2000 was lower by 9.84%.  The week started with the announcement of a stimulus package from <st1:country-region><st1:place>China</st1:place></st1:country-region> to the tune of $586.00 billion designed to bolster a slowing economy.  Markets seemed pleased with the plan, for about a day, then the cold reality of a planet in economic peril regained center stage.  The politicians in <st1:State><st1:place>Washington</st1:place></st1:State> continue to negotiate as to what should be done to save a <st1:country-region><st1:place>U.S.</st1:place></st1:country-region> domestic auto industry, which to no surprise, is on the brink of extinction.  Treasury Secretary Paulson (of Goldman Sachs fame) decided to do an about face in regards to the Troubled Assets Relief Program (T.A.R.P.).  Mr. Paulson prudently decided that it probably was not in the best interest of the <st1:country-region><st1:place>U.S.</st1:place></st1:country-region> taxpayer to purchase worthless mortgage assets and proposed that the TARP funds be used to continue to provide liquidity to troubled banking institutions.  The TARP program should be renamed MEABRN, Make Everyone A Bank Right Now.  Wall Street analysts, seemingly forever behind the curve, have finally begun to reduce earnings estimates across a broad swath of industries.  I guess profit warnings from technology giants Intel and Cisco, and a slew of Retailers (note guidance from electronics retailer BestBuy last week) heightened the attentive resolve of the always late to the party analyst community.  The hedge fund community prepared for their own sort of judgment day.  After five consecutive months of negative returns, hedge funds are bracing for a host of redemptions from angry investors whom mistakenly expected “professionals” to outperform in any market environment.<o:p></o:p> <o:p> </o:p> After viewing the technicals of the marketplace over the weekend, it is apparent that the very few glimmers of potential positive market action witnessed just a week ago, have been negated by the price action of the past week.  Unfortunately at this time there is only one fundamental event that would reverse our bearishness and that would be the reversal of the mark to market accounting requirement by the Federal Accounting Standards Board (FASB).<o:p></o:p> <o:p> </o:p> <o:p> </o:p> Sector analysis below will provide information as to where to best allocate funds at this time.  <o:p></o:p> <o:p> </o:p> Please frequent <a href="http://www.equityletter.com/">http://www.equityletter.com/</a> and <a href="http://stkinfo.com/">http://stkinfo.com/</a>.<o:p></o:p> <o:p> </o:p> <o:p> </o:p> <![if !supportLists]>II.               <![endif]>Sector Analysis<o:p></o:p>                                              <o:p></o:p> The IEF-89.84 (I-share 7-10 year Treasury bond) advanced 1.35% for the week as the yield on the 10- year treasury decreased from 3.78% to 3.75%.  For comparative reference the yield on the 10- year Treasury began the 2008 trading year at 4.03%.  The IEF is entering week four of “buy” mode with the weekly closing price support level remaining at 87.29.  The IEF benefits when the stock market suffers as fearful investors flee equities for the safety of Treasury bonds.  We remain of the opinion that eventually the cold reality of rising interest rates will trump the fear trade but fully understand that we have not yet reached that turning point.  Continue to buy the dips approaching our weekly price support level.<o:p></o:p> <o:p> </o:p> <![if !supportLists]>A.     <![endif]>Financials<o:p></o:p> <o:p> </o:p>           The Financial Select Sector Index (XLF-12.73) finished the trading week with a 10.48% decline.  Year to date the XLF is currently down 56.00%.  The XLF is now in week seven of a “sell” signal with the weekly closing price resistance at 14.70.  In our prior letter we flashed a fresh weekly “buy” signal for MetLife (MET-28.14), the price action of the past week has aborted said “buy” signal.  When we look at the top ten individual components of the XLF we see continued selling pressure as nine out of the ten components reside in weekly “sell” mode.  We would continue to sell price rallies in J.P. Morgan (JPM-34.47), Bank America (BAC-16.42), Wells Fargo (WFC-28.73), Citibank (C-9.52), U.S. Bancorp (USB-26.30), Goldman Sachs (GS-66.73), Morgan Stanley (MS-12.03), American Express (AXP-19.99) and CME Group (CME-209.03).  The only positive weekly chart out of the top ten XLF components is Bank of <st1:State><st1:place>New York</st1:place></st1:State> (BK-30.24), which is entering week three of a “buy” signal with the weekly closing price support level at 27.32.  The overall trend remains a negative one for the XLF and a majority of the top ten individual components, continue to sell rallies.<o:p></o:p> <o:p> </o:p>           B.  Builders<o:p></o:p> <o:p> </o:p>  The Homebuilder exchange traded fund (XHB-11.04) declined 13.41% leaving the year-to-date return at a negative 42.95%.   The XHB is entering week seven of a “sell” signal with the weekly closing price resistance lowered to the 13.17 level.   Any weekly closing price above 13.17 will indicate a potential reversal of trend from negative to positive.  What appeared to be potential constructive action the past two weeks in Centex (CTX-8.98), Toll Brothers (TOL-17.42) and KB Homes (KBH-12.01) has proven to be a head fake.  The poor price action of the past week has thrust all three names back in to weekly “sell” mode.  XHB components that continue to remain in weekly “sell” mode include Pulte Homes (PHM-9.08), Lennar (LEN-6.30), and Ryland Group (RYL-14.43).   The dominant trend remains a negative one with consolidation through merger activity the only possible savior to this troubled sector.  Continue to sell rallies until the emergence of merger activity arises.<o:p></o:p> <o:p> </o:p> C.  Semiconductors<o:p></o:p> <o:p> </o:p> The Semiconductor group (SMH-17.10) declined 9.16% for the week.   Year to date the SMH performance is a negative 47.32%.  Our two week “buy” signal proved inaccurate as a profit warning from semiconductor giant Intel (INTC-13.32) sent the sector as a whole in to a selling spiral.  The SMH is back in “sell” mode with the weekly closing price resistance at 19.17.  Fresh weekly “sell” signals have also been generated in SMH component <st1:State><st1:place>Texas</st1:place></st1:State> Instruments (TXN-16.11), SanDisk (SNDK-7.15), and Analog Devices (ADI-19.29).  SMH components that have been and continue to remain in weekly “sell” mode include Intel (INTC-13.32), Applied Materials (AMAT-10.23), Micron Technology (MU-2.75), and Novellus (NVLS-12.18).  As a rule, as goes Intel, so goes the SMH, the profit warning from INTC spells further weakness ahead for the Semi’s.<o:p></o:p> <o:p> </o:p> <![if !supportLists]>D.   <![endif]>Retailers<o:p></o:p> <o:p> </o:p>           The Retail sector (RTH-68.41) finished the trading week with a 6.91% decline bringing the year-to-date return to a negative 26.72%.  The RTH is entering week three of a “buy” signal with our weekly closing price support at 66.16.   Any weekly closing price below 66.16 will negate our current “buy” signal for the RTH.  We have abandoned our view of a potential relief rally in the RTH up to the 87.00 area of “breakdown” price resistance.  We view the RTH as in a trading range defined as 80.00 on the upside and 66.00 on the downside.  The downside appears extremely vulnerable at this point in time.  Our buy signal in BestBuy (BBY-22.06) proved to be a poor call as the electronics retailer plunged 14.00% after a profit warning.  BBY now joins the majority of RTH components in weekly “sell” mode. We remain negative on RTH components WalMart (WMT-52.71), Home Depot (HD-20.54), Walgreen’s (WAG-23.43), and Sears Holding’s (SHLD-38.27).  There are only two retailers under our coverage which reside in weekly “buy” mode, Kohl’s (KSS-29.09) and Target (TGT-33.03).  Take note that RTH components HD and TGT report quarterly earnings in the coming week.  We don’t expect good news on either front.  Although the RTH is in “buy” mode we view the signal as highly suspect as the most influential component, WMT, does not concur with the signal, continue to sell any extended price rallies in the retail space.<o:p></o:p> <o:p> </o:p> <o:p> </o:p> <![if !supportLists]>E.    <![endif]>Steels<o:p></o:p> <o:p> </o:p> The Steel sector (SLX-27.39) finished the week with a 10.84% decline bringing the current year to date return to a negative 67.79%.  The SLX is now entering week twenty-three of a “sell” signal.    Our weekly closing price resistance for the SLX is now at 33.40.  Any weekly closing price above 33.40 will signal an end to one of the most stunning price declines of the 2008 trading year.  The SLX price peaked in mid-May at 83.56.  Our “buy” signal in Steel Dynamics (STLD-8.12) has been aborted; we would liquidate any long positions in STLD.  SLX components that remain on the “unfavorable “list include <st1:country-region><st1:place>U.S.</st1:place></st1:country-region> Steel (X-29.75) and Mittal Steel (MT-21.31).  Nucor (NUE-32.73) continues to act relatively well in an overwhelmingly ugly sector.<o:p></o:p> <o:p> </o:p> <![if !supportLists]>F.    <![endif]>Pharmaceuticals and Healthcare<o:p></o:p> <o:p> </o:p>           The Pharmaceutical group (PPH-58.15) declined 1.27% last week bringing the year to date return to a negative 26.57%.   We are now entering week twelve of a “sell” signal for the PPH with our closing price resistance remaining at 65.19.  The key underlying components of the PPH all currently rest in what we categorize as “sell” mode.  These components include Pfizer (PFE-16.28), Merck (MRK-27.33), Wyeth (WYE-34.14), Johnson & Johnson (JNJ-60.05), Abbott Lab’s (ABT-55.06), and Eli Lilly (LLY-32.06).   This sector is supposed to be defensive in nature and provide shelter in an uncertain environment.  This has not proven to be the case this year.  Week twelve of corrective mode, continue to use rallies to reduce long exposure. <o:p></o:p> <o:p> </o:p> Take note that the VIX (66.31) increased 6.33% from a reading of 56.10 the prior week.  We are now entering week eleven of a “buy” signal for the VIX.   The weekly closing price support for the VIX remains at 50.91.  Any weekly closing price below 50.91 will signal time for a respite from the extreme volatility of the past several weeks.  To date the VIX continues to show no indication of relief from the violent, volatile price action of the past two months.<o:p></o:p> <o:p> </o:p> <![if !supportLists]>III.           <![endif]>Gold<o:p></o:p> <o:p> </o:p> GLD (streetTracks gold index) – The GLD (73.30) advanced 1.10% on the week.  The current year to date return for the GLD is now a negative 11.10%.  We are now entering week five of a weekly “sell” signal for the GLD.  Our weekly price closing price resistance for the GLD shall remain at 78.56.  Five weeks ago we stated that it was time to switch gears and look to short rallies in the GLD, this opinion remains unchanged.   Use any price strength approaching stated resistance levels as an opportunity to reduce long exposure and or initiate short positions in the GLD.  We continue to see the potential for a decline to the 62.00-65.00 area for the GLD.<o:p></o:p> <o:p> </o:p> <o:p> </o:p> <![if !supportLists]>IV.            <![endif]>Energy- (Oil, Oil Service, Nat’l Gas, Coal)<o:p></o:p> <o:p> </o:p> The Large-Cap Integrated Oil space (XOI-912.18) closed out the trading week with a 3.56% decline.  Year to date the XOI is currently showing a negative return by 41.52%.  The XOI is entering week seven of a “sell” signal with the weekly closing price resistance remaining at the 1060.00 level.  The attempt by British Petroleum (BP-43.90) to buck the overall negative trend has failed as the price action of the past week has thrust BP back in to weekly “sell” mode.   XOI components that currently remain in “sell” mode include Chevron Texaco (CVX-72.68), Conoco Phillips (COP-47.39), and Exxon Mobil (XOM-73.68).  The weekly trend remains a negative one, look to initiate short positions at overhead resistance zones.<o:p></o:p> <o:p> </o:p> The Oil Service Index (OIH-85.25) declined 9.40% this past trading week.  The year to date return for the OIH now stands at a negative 54.90%.   It is now week twenty of “sell” mode for the OIH.  Our weekly closing price resistance for the OIH remains at 101.85.  Readers should take note that the OIH closed at 211.25 on the week of our original “sell” signal.  OIH components that remain in weekly “sell” mode include Schlumberger (SLB-48.76), Halliburton (HAL-18.11), Baker Hughes (BHI-30.94), Transocean (RIG-70.89), Ensco (ESV-32.37), and B.J. Services (BJS-10.93).  Our view for a near term relief rally in the OIH has failed to materialize.  Use any extended price strength as an opportunity to reduce long exposure.<o:p></o:p>  <o:p></o:p> Natural Gas (UNG-27.23) declined 6.27% this past week.  Year-to-date the UNG is currently showing a negative return of 24.88%.  The UNG is entering week seven of a “sell” signal with our closing weekly price resistance level remaining at 29.75.  Equities in the Natural Gas arena continue to reflect weekly technical characteristics of distribution and therefore should continue to be avoided. <o:p></o:p> <o:p> </o:p> The Coal Sector (KOL-14.56) declined by 9.06% this past week.  It is now week eleven of a “sell” signal for the KOL with the weekly closing price resistance remaining at 18.95.  Any weekly closing price above the 18.95 price level will indicate a change of weekly trend from negative to positive for the KOL.  Similar to the other sub-sectors in the energy arena the KOL has been decimated by the forced liquidation of over-leveraged hedge funds.  While we would love to declare an end to the carnage we have yet to witness the price action that would enable such a declaration.<o:p></o:p> <o:p> </o:p> <o:p> </o:p> <![if !supportLists]>V.               <![endif]>Dow 30 Analysis<o:p></o:p> <o:p> </o:p> Our Weekly Trend Indicator (WTI) measures in at -26, unchanged from the previous week reading of -26.  The Dow Jones Industrial average declined 4.99% for the week to 8497.31 and is currently showing a negative return for 2008 by 35.94%.  <o:p></o:p> <o:p> </o:p> The S&P 500, as measured by the SPY (86.62), declined 7.71% for the week and is currently 40.76% to the downside year to date.   Small caps issues, as measured by the IWM (IShares Russell 2000 Index Fund- 50.62), declined 9.84% for the week, leaving the index 39.88% to the downside year to date.<o:p></o:p> <o:p> </o:p>           The DIA (84.22) closed out the week with a 6.56% decline and is entering week eleven of a weekly “sell” signal.  Our weekly closing price resistance level remains at 101.50.  Any weekly closing price above the 101.50 resistance level will indicate a change of trend for the wounded DIA.  The DIA closed at the lower end of what we perceive to be a developing trading range.  The trading range shall be defined as 100.00 on the upside and 80.00 on the low end.  Any failure for the DIA to hold above the 80.00 support level will indicate further weakness down to the next level of price support, the 74.00 area.  Our opinion remains the same; use any price rallies that approach our weekly price resistance level as an opportunity to reduce long exposure and or to initiate short positions.<o:p></o:p> <o:p> </o:p> Fresh weekly buy signals generated:<o:p></o:p> <o:p> </o:p> Fresh negative weekly signals generated: NONE<o:p></o:p> <o:p> </o:p> Readers should take note that Dow Jones Industrial component HD is scheduled to report quarterly earnings this week. <o:p></o:p> <o:p> </o:p> Dow 30 stocks with positive weekly signals:<o:p></o:p> <o:p> </o:p> MMM, UTX<o:p></o:p>                   <o:p></o:p> Dow 30 stocks with negative weekly signals:  <o:p></o:p>        <o:p></o:p> AA, AXP, BA, BAC, C, CAT, CVX, DD, DIS, GE, GM, HD, HPQ, IBM, INTC, JNJ, JPM, KFT, KO, MCD, MRK, MSFT, PFE, PG, T, VZ, WMT, XOM <o:p></o:p>                <o:p></o:p> <o:p> </o:p> <![if !supportLists]>·        <![endif]>Underline names have changed from previous week*<o:p></o:p> <o:p> </o:p>                               <o:p></o:p> For access to Equity Letter individual trading positions and ideas contact <st1:PersonName>Richard Reilly</st1:PersonName> at <a href="mailto:rreilly123@comcast.net">rreilly123@comcast.net</a><o:p></o:p> <o:p> </o:p> <o:p> </o:p> VI.    KEY EVENTS IN THE WEEK AHEAD:<o:p></o:p> <o:p> </o:p> Monday, November 17<o:p></o:p> <o:p> </o:p> <o:p> </o:p> Economic<o:p></o:p> <o:p> </o:p> <st1:time Minute="30" Hour="8">08:30</st1:time> <st1:place><st1:PlaceName>N.Y.</st1:PlaceName> <st1:PlaceName>Empire</st1:PlaceName> <st1:PlaceType>State</st1:PlaceType></st1:place> Index (Nov.): -26.0 cons.<o:p></o:p> <st1:time Minute="15" Hour="9">09:15</st1:time> Capacity Utilization (Oct.): 76.6% cons.<o:p></o:p> <st1:time Minute="15" Hour="9">09:15</st1:time> Industrial Production (Oct.): -0.1% cons.<o:p></o:p> <o:p> </o:p> Earnings<o:p></o:p> <o:p> </o:p> Before: COV, LOW, NSSC, ORBK, RTLX, TGT<o:p></o:p> <o:p> </o:p> After: CNTF, CTRP, IMCL, JMBA, KONG, NVTL, SGK, NCTY, XFML<o:p></o:p> <o:p> </o:p> Events<o:p></o:p> <o:p> </o:p> STEC <st1:State><st1:place>New York</st1:place></st1:State> Analyst Day<o:p></o:p> RAI Analyst Meeting<o:p></o:p> EVBN, TMA, EMCI, SFE, WPC, RSO at Wall Street Analyst Forum<o:p></o:p> RX, JNJ, BIIB at Cambridge Healthtech Institute Strategic Resource Management & Portfolio Management Conf.<o:p></o:p> WMS, MGAM, GCA, WYNN, MGM, LVS, IGT at Deutsche Bank Securities and Goldman Sachs Gaming Investment Forum<o:p></o:p> IART to Host Analyst Forum<o:p></o:p> ADBE Q&A Meeting<o:p></o:p> BBX to Host Investor Luncheon Meeting in <st1:place><st1:City>San Francisco</st1:City>, <st1:State>California</st1:State></st1:place><o:p></o:p> EK at Intertech Image Sensors Conf.<o:p></o:p> <o:p> </o:p> <o:p> </o:p> Tuesday, November 18<o:p></o:p> <o:p> </o:p> <o:p> </o:p> Economic<o:p></o:p> <o:p> </o:p> <st1:time Hour="8" Minute="30">08:30</st1:time> PPI (Oct.): -1.5% cons.<o:p></o:p> <st1:time Hour="8" Minute="30">08:30</st1:time> Core PPI (Oct.): 0.2% cons.<o:p></o:p> <st1:time Hour="9" Minute="0">09:00</st1:time> Net Foreign Purchases (Sep.): $14.0B prior<o:p></o:p>  <o:p></o:p> Earnings<o:p></o:p> <o:p> </o:p> Before: ARM, CMED, DHT, GIGM, HD, MDT,MWRK, SOL, SKS<o:p></o:p> <o:p> </o:p> After: DY, JBX, LZB, PSUN, PVH<o:p></o:p> <o:p> </o:p> Events<o:p></o:p> <o:p> </o:p> XIDE Investor Day<o:p></o:p> SXL Analyst Meeting<o:p></o:p> CF Investor Day<o:p></o:p> PDE Analyst Day<o:p></o:p> OCR Analyst/Investor Day<o:p></o:p> ESS Investor/Analyst Day<o:p></o:p> ALGT Institutional Investor Day<o:p></o:p> Bank of <st1:country-region><st1:place>America</st1:place></st1:country-region> Securities <st1:City><st1:place>San Francisco</st1:place></st1:City> Health Care Mini Conf.<o:p></o:p> BEXP, MGG, MMP, OKE, TXCO at <st1:City><st1:place>Houston</st1:place></st1:City> Financial Energy Forum<o:p></o:p> Credit Suisse Group Insurance Conf.<o:p></o:p> DORM, GM, MDS, MPAA, ORLY at BB&T Capital Markets Automotive Aftermarket Breakfast Panel Conf.<o:p></o:p> EVVV at CanaccordAdams Cardiovascular "Fireside Chat" Conf.<o:p></o:p> FLEX Annual Analyst and Investor Meeting<o:p></o:p> MSFT at BAI Retail Delivery Conference & Expo<o:p></o:p> TPLM, BNK, BQI, TGA, BZP, GTE at CanaccordAdams Global Energy Conf.<o:p></o:p> CNQR, ACAP, NETL, CTCT, PRA at Oppenheimer & Co. Mid & Small Cap Best Ideas Conf.<o:p></o:p> ANCI, R, ELGX, HRZ, ESE, MEND at Stephens Fall Investment Conf.<o:p></o:p> HNT Annual Investor Conf.<o:p></o:p> SXCI Analyst and Institutional Investor Event<o:p></o:p> CREE, PROJ, EPIC, GLW, SY, TLAB at UBS Global Technology & Services Conf.<o:p></o:p> LSCC, BITS, PCCC, TXCC, OXBO at Wall Street Analyst Forum<o:p></o:p> CLFC, STL, OZRK, NPBC, BPOP, FULT at B. Riley & Company Bank Conf.<o:p></o:p> UNP, GWR, CSX, CNI, CP, NSC, CHRW at Citi Transportation Conf.<o:p></o:p>&l