Tech Talk for Thursday July 10th 2008

 

Brutal trading day yesterday! Financial service stocks on both sides of the border were the focus. Interesting observation: Dennis Gartman noted on Fast Money that he was a buyer of U.S. bank stocks yesterday. He will be right if and when U.S. equity markets snap back. Markets are substantially oversold. Bullish Advisors have reached a multi-year low. Guessing when the market is bottoming can be bad for your financial health. Be careful out there, but be alert for a short term snap back trade.

 

Pre-opening Comments for Thursday July 10th

 

9:10 AM EDT: U.S. equity index futures are mixed in overnight trading. Dow Jones Industrial Average futures are down 9 points. Strength in retail sales stocks are being offset by more concerns about Fannie Mae and Freddie Mac.

 

Wal-mart and Costco reported notable sales increases. Consensus for Wal-mart was an increase of 3.8%. Actual was an increase of 5.8%. Retail sales are responding to the economic stimulus package in the U.S..

 

Wal-mart currently has a positive technical profile. The stock is in an intermediate uptrend and trades above its 50 to 200 day moving average. It will test short term resistance at $59.95 and its eight year high at $60.38 at the opening today.

Chart courtesy of StockCharts.com                    www.stockcharts.com

 

U.S. equity index futures were helped slightly at 8:30 AM by a better than expected weekly initial jobless claims. Claims fell 58,000 to 346,000 last week.

 

Concerns about Fannie Mae and Freddie Mac were raised again this morning when a Federal Reserve official noted that the two companies essentially are insolvent. Both stocks are down about 8% in pre-opening trade.

 

Dow Chemical is down slightly in pre-opening trade this morning on news that it has made a cash offer to purchase Rohm & Haas valued for over $15 billion. The deal is valued at $78 per share and represents a 75% premium over Rohm & Haas’ closing price. Analysts suggested this morning that Dow may be overpaying. 

 

Dow currently has a mixed technical profile. Intermediate trend is neutral. The stock trades below its 50 and 200 day moving average. Short term momentum indicators are oversold and trying to bottom.

 

 

Chart courtesy of StockCharts.com                    www.stockcharts.com

 

Investors will focus on statements by Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke when they speak before a Congressional committee this morning at 10:00 AM. They are expected to review their outlook on interest rates and the U.S. economy. 

 

Technical Action Yesterday

 

Technical action by S&P 500 stocks remains bearish. Three S&P 500 stocks broke resistance and eight stocks broke support yesterday.

 

S&P 500 stocks breaking resistance

 

Stock                           Symbol            Previous          New

                                                            Trend              Trend

Constellation Brands     STZ                 Up                   Up

DTE Energy                 DTE                 Up                   Up

Philip Morris                 PM                  Neutral             Up

 

S&P 500 stocks breaking support

 

Stock                           Symbol            Previous          New

                                                            Trend              Trend

Applied Materials         AMAT             Neutral             Down

Cisco                           CSCO             Down               Down

Exxon Mobil                 XOM               Neutral             Down

Intel                              INTC               Up                   Neutral

Intuit                             INTU               Up                   Neutral

Murphy Oil                   MUR               Up                   Neutral

National City                NCC                Down               Down

Wendy’s                      WEN               Up                   Down

 

Technical action by TSX Composite stocks also remains bearish. No TSX stocks broke resistance and four stocks broke support.

 

TSX stocks breaking support

 

Stock                           Symbol            Previous          New

                                                            Trend              Trend

Home Capital               HCG                Up                   Down

Pason Systems             PSI                  Up                   Neutral

ProEx Energy               PXE                 Up                   Neutral

TSX Group                  X                     Neutral             Down

 

Pre-opening Comments for Wednesday July 9th

(Charts have been updated to yesterday’s close)

 

9:15 AM EDT: U.S. equity indices are slightly higher before the opening. Dow Jones Industrial Average futures are up 39 points. U.S. equity markets are responding partially to slightly better than consensus second quarter earnings released after the close yesterday. Alcoa reported $0.66 per share versus $0.81 per share last year. Consensus (whisper number) just prior to release of results was $0.64 per share.

 

Update comment: Strength did not last long. Concerns about Fannie Mae and Freddie Mac returned after their lending rates rose. Alcoa opened higher, but negative guidance quickly triggered selling. Not a good start for the second quarter earnings report season!

Chart courtesy of StockCharts.com                         www.stockcharts.com

 

The U.S. Dollar is under pressure this morning following comments by the European Central Bank that inflation pressures in Europe continue to rise. Weakness in the U.S. Dollar has triggered strength in commodities priced in U.S. Dollars. Crude oil added $1.78 U.S. per barrel in overnight trade. Silver is higher.

 

Update comment: Weakness in the U.S. Dollar boosted gold and silver prices.

 

Intuit is expected to open lower this morning. The company announced plans to lay off 7% of its staff. Goldman Sachs added the stock to its “Conviction Sell” list. On the charts, Intuit currently has a negative technical profile. Long term trend is down. The stock trades below its 50 and 200 day moving averages. Short term momentum indicators (RSI, MACD) have rolled over and are trending down.

Chart courtesy of StockCharts.com                       www.stockcharts.com

 

Cisco is moving lower after Cisco’s CEO, John Chambers noted that a significant recovery is unlikely until 2009. On the charts, Cisco currently has a negative technical profile. Intermediate trend is neutral. The stock trades below its 50 and 200 day moving averages. Cisco is testing support set in February at $21.77. A break of support on early weakness this morning could cause the stock to resume an intermediate downtrend. 

Chart courtesy of StockCharts.com                         www.stockcharts.com

 

Update comment: The stock subsequently broke support to reach a two year low.

 

Tech Talk comments on the FP Trading Desk site

(Available yesterday at http://www.financialpost.com/trading_desk/index.html )

 

FP Trading Desk headline reads, “Suncor presents very compelling buying opportunity”. Following is a link to the report: http://network.nationalpost.com/np/blogs/tradingdesk/archive/2008/07/09/suncor-presents-very-compelling-buying-opportunity.aspx

 

Suncor currently has a positive technical profile despite its recent 20% decline during the past seven weeks. Intermediate trend is up. The stock is trying to bounce from its 200 day moving average at $53.94. Relative strength Index (RSI) and Stochastics are short term oversold and trying to recover. MACD is short term oversold, but continues to trend lower.

Chart courtesy of StockCharts.com                   www.stockcharts.com

 

FP Trading Desk headline reads, “Nova Chemicals set to fall further on Citigroup downgrade”. Following is a link to the report: http://network.nationalpost.com/np/blogs/tradingdesk/archive/2008/07/09/nova-chemicals-set-to-fall-further-on-citigroup-downgrade.aspx

 

Nova Chemical currently has a negative technical profile. Short, intermediate and long term trend is down. The stock recently broke support to reach a six year low. The stock remains below its 50 and 200 day moving averages. Strength relative to the TSX Composite Index remains negative. Short term momentum indicators are substantially oversold and trying to recover. Short term strength could provide another opportunity to liquidate positions.

Chart courtesy of StockCharts.com                     www.stockcharts.com

 

Investor sentiment has reached an extremely bearish level. Bullish Advisors fell this week to a multi-year low of 27%. History shows that extreme readings like this are followed by a significant intermediate upside move by U.S. equity markets when the Bullish Advisors indictor starts to recover.

 

ETF News

 

Barclays has launched three global theme based ETFs in the U.S.:

·        iShares S&P Global Timber and Forestry Index Fund

·        iShares S&P Global Clean Energy Index Fund

·        iShares S&P Global Nuclear Energy Index Fund

 


Tech Talk is particularly interested in the Timber and Forestry Index Fund. This sector has a distinct period of seasonal strength (End of October to end of April).

 

S&P Global Timber & Forestry Index Fund

 

ETF Symbol: WOOD

MER: 0.48%

 

Top ten holdings

 

 Security                                 Weight (%)

Plum Creek Timber                  10.79

Rayonier                                     9.97

Sino-Forest                                7.45

Weyerhaueser                            7.16

OJI Paper                                  4.61

Potlatch                                      4.49

Arucruz Celulose ADR               4.26

West Fraser Timber                    4.09

Votorantim Celulose ADR          4.08

Svenska Cellulosa                       4.08

 

S&P Global Clean Energy Index Fund

 

ETF Symbol: ICLN

MER: 0.48%

 

Top ten holdings

 

Security                                  Weight (%)

 

Vestas Wind Systems               8.18

First Solar                                6.89

Gamesa Technologica               6.67

Cemig SA   ADR                     5.90

CIA Paranaense                       5.27

Archer Daniels Midland            4.77

Covanta Holdings                     4.59

Iberdrola SA                            4.37

MEMC Electronic Materials     4.25

Solarworld                               4.04

 

Top Sectors

 

Sector                                     Weight (%)

Industrials                                 56.89

Utilities                                     23.22

Information Technology            11.38

Consumer Staples                       8.00

Energy                                        0.41

Short term securities                   0.11

 

S&P Global Nuclear Energy Index Fund

 

Symbol: NUCL

MER: 0.48%

 

Top ten holdings

 

Stock                                       Weight (%)

McDermott International           9.16

Areva                                       8.69

E.ON AG                                7.45

Cameco                                   7.26

Exelon                                      7.17

Electricite De France                5.79

Energy Resources of Aust.        4.72

Tokyo Electric Power               4.52

Kansai Electric Power              4.52

PPL Group                               4.50

 

Top Sectors

 

Sector                                     Weight(%)

Utilities                                     54.39

Energy                                      25.78

Industrial                                  19.06

Financials                                   0.62

Short term securities                   0.02

 

Interesting Charts

 

Spot uranium prices continue to recover. The uranium sector has been the best performing sector during the past three weeks. Look for continuing strength as the year progress.

 

July 7, 2008
Spot: US$60.00/lb (+1.00)

Chart courtesy of www.uxc.com 

 

U.S. healthcare and biotech were the only major sectors to record a gain in U.S. equity markets yesterday. Brooke Thackray’s 2007 Investor Calendar noted that the Biotech sector has a period of seasonal strength from June 23rd to September 13th.  The trade was profitable in 12 of the past 14 periods. Average return per period was 14.5%. History is repeating itself.

Chart courtesy of StockCharts.com                        www.stockcharts.com

 

THE CASTLEMOORE “FOCUS” PORTFOLIO

 

What does CastleMoore think typical Canadian investors should be invested in NOW?

 

Focus Investor - Moderate Risk

 

Cash Equivalents:

 

100.0%

US 20 yr + Bonds (unhedged)

 

   0.0%

                                  Canadian:

Energy Sector

Gold Sector

Broad Market

 

   
      0.0%

      0.0%

      0.0% 

  

   0.0%

non-Canadian:

 

 0.0%

United States   

 

Technology Sector

S&P 100 Large Cap

S&P 500 Hedged to $C

                    

         

                                       Global 


Emerging Markets
Latin America
Pending      

 

 

       0.0%

       0.0%

       0.0%  

    


   

     0.0%
     0.0%
     0.0%

 

 0.0%

 

 

 

 

 

 

  0.0%

Precious Metals: Gold Bullion

 

   0.0%

TOTAL

 

100%



We accept cash only…

 

…as a viable alternative to the cash + risky asset paradigm favoured by most asset managers. What we are doing is taking a pause for thought, considering how best to deploy these reserves. One possibility would be return to the gold market, either the bullion, the producers, or both.

 

Incidentally, it is commonly thought that the producers lead the bullion in terms of trend formation. Here is the result of a back-of-the-envelope calculation testing the correlations of the XGDs (ETF of producers) vs. IGT (ETF of bullion):

 

monthly returns:

       0.78

IGT 3 mos XGD:

      (0.25)

IGT 3 mos XGD 3 month out:

      (0.43)

IGT 3 mos 6 mos out

       0.33

 

 

XGD 3 mos IGT

       0.08

XGD 3 mos IGT 3 mos out

      (0.16)

XGD 3 mos IGT 6 mos out

      (0.21)

 

 

The key number is the top one. It states that almost 80% of the variability in returns of the XGD is explained by the variability of the return of the IGT. These numbers have the advantage and disadvantage of going back to late September 2005, when the IGT commenced trading. The disadvantage, of course, is limited number of observations. The advantage is that the observations are more current, on average, and thus are better able to capture more recent changes in the nature of the relationship. We tend to favour more recent data over their older counterparts.

 

Chart 1

 

Chart 1 shows that over time the moves are 80% (if not higher) correlated.

 

 

Chart 2 shows an example of the other 20%.

 

Gold stocks (XGD) making some type of upwards move should not be considered a leading indicator in and of itself of bullion (IGT).  They are coincidental (80% in fact).  Stocks can make a false move, but if stocks move bullion must accompany it for there to be merit in the investment.  In short, you can’t have one without the other. The value of gold equities as a lead indicator alone is marginal.  Stocks earlier movements should raise one’s radar.

 

Go to http://www.castlemoore.com/mobile  to read this commentary on your handheld or smartphone. Feedback welcomed

 

To request our bi-monthly newsletter, learn more about our model portfolios or access an audio file of our investment philosophy, “Modern Financial Fiascos”, click on the link http://www.formdesk.com/castlemoore/register . We are also accepting interest for seminar attendance as well

 

CastleMoore Inc. uses a proprietary Risk/Reward Matrix that places clients within one of 12 discretionary portfolios based on risk tolerance, investment objectives, income, net worth and past investing experience.  For more information on our discipline and methodology please contact us.

 

CastleMoore Inc.

  Buy, Hold…and Know When to Sell

 

www.castlemoore.com

 

Disclosure: Mr. Vialoux does not own securities mentioned in this report.

Disclaimer: Comments and opinions offered in this report are for information only. They should not be considered as advice to purchase or to sell mentioned securities. Data offered in this report is believed to be accurate, but is not guaranteed.