Tech Talk for Monday July 14th 2008

 

Close, but no cigar! North American equity markets are substantially oversold due to growing negative investor sentiment. Markets are setting up for a recovery, but significant technical signs of a bottom have yet to appear. Preferred strategy is to wait until significant technical signs of a recovery become available knowing fully well that initial part of the recovery will not be realized. Exceptions exist most notably in the Gold and Uranium sectors where technical signs of a recovery already are apparent.

 

Pre-opening Comments for Monday July 14th

 

9:15 AM EDT: White House and Federal Reserve efforts to remove credit concerns about Fannie Mae and Freddie Mac are boosting U.S. equity index futures this morning. Dow Jones Industrial Average futures are up 125 points. Fannie Mae and Freddie Mac are leading the advance with gains of more than 20%. Other financial service stocks also  are moving higher.

 

Two efforts were made to stabilize Fannie Mae and Freddie Mac over the weekend: The Federal Reserve’s Board of Governors voted to open its emergency discount window to Fannie and Freddie. In addition, Treasury Secretary Hank Paulson announced that he will seek Congressional authorization to buy stock in the two companies and to increase the government’s credit line.

 

Tentative congressional support for Paulson’s efforts was given by Senator Chris Dodd this morning. More discussion will occur tomorrow when Ben Bernanke makes his semi- annual Humphrey Hawkins presentation to Congressional finance committees.

 

News on Fannie Mae and Freddie Mac removes one of two major short term concerns about U.S. equity markets. The second concern is second quarter results. They will start to flow in volume by late this week. Second quarter consensus earnings for S&P 500 companies is a decline of 11.5% on a year over year basis. However, consensus earnings estimates continue to move lower prior to news. Merrill Lynch noted over the weekend that earnings during the quarter now are expected to decline by 17% with most of the additional decline coming from the financial service sector. Major financial service companies (e.g. Wells Fargo, JP Morgan, Citigroup) are scheduled to release results later this week. Investors are looking forward to moving past second quarter results.

 

The news on Fannie Mae and Freddie potentially could be a “watershed” event when intermediate lows for U.S. equity indices are reached. U.S. equity markets are substantially oversold and looking for a reason to rebound.

 

News about at takeover of Anheuser Busch by InBev also could help equity markets this morning. Anheuser Busch has agreed to be purchased by InBev in a friendly deal valued at $70 U.S. per share. Both stocks are higher in pre-opening trade.

 

Bombardier made an important announcement prior to start of the Farnborough Air Show. It plans to build its C series jet, a larger more fuel efficient jet than its current series of passenger jets. Bombardier also announced 30 orders and 30 options for its new jet. Bombardier has a positive technical profile. Intermediate trend is up. The stock trades above its 50 and 200 day moving average. Strength relative to the TSX Composite Index is positive. The stock recently returned to the top of previous trading range at $6.90 and is moving higher.

Chart courtesy of StockCharts.com                           www.stockcharts.com

 

Consolidation in the Canadian energy sector continues. This morning, Shell offered to purchase Duvernay at $83.00 cash in a friendly deal worth $5.9 billion.

 

 

Outlook this week

 

Inflation and comments by Federal Reserve chairman Ben Bernanke become economic focuses this week.

 

Indicator                     Period Release Date Time    Consensus      Previous

Producer Prices            June     July 15             8:30     1.4%                1.4%

        Core PPI              June     July 15             8:30     0.3%                0.2%

Retail sales                   June     July 15             8:30     0.4%                1.0%

        Ex autos               June     July 15             8:30     1.2%                1.2%

Empire State Index       July      July 15             8:30     -7.5                  -8.7

Inventories                    May     July 15             10:00   0.5%                0.5%

Bernanke’s speech                   July 15             10:00

Consumer Prices          June     July 16             8:30     0.8%                0.6%

        Core CPI             June     July 16             8:30     0.2%                0.2%

Industrial production     June     July 16             9:15     0.3%                -0.2%

Housing starts               June     July 17             8:30     959,000           975,000

Bank of Canada rate                 July 17             9:00     Unchanged      3.00%

Philly Fed                     July      July 17             10:00   -17.0                -17.1

                                    Source: www.marketwatch.com

 

Earnings focus this week is on second quarter results from key technology and financial service companies

 

Company                    Quarter                       Consensus                  Previous

 

Monday July 14th

Genentech                    2                                  $0.86                           $0.78

PetroCanada                2                                    2.51 Cdn.                     1.63 Cdn.

 

Tuesday July 15th

CSX                            2                                    0.90                             0.71

Intel                              2                                    0.17                             0.11

Johnson & Johnson       2                                    1.12                             1.05

State Street                  2                                    1.36                             1.07

 

Wednesday July 16th

Abbot Labs                  2                                    0.79                             0.69

EBay                            2                                    0.41                             0.34

Shoppers Drug             2                                    0.59 Cdn.                     0.52 Cdn.

Wells Fargo                  2                                    0.51                             0.67

Yum Brands                 2                                    0.42                             0.39

 

 

Thursday July 17th

Coca Cola                    2                                    0.96                             0.85

Google                         2                                    4.73                             3.56

IBM                             2                                    1.81                             1.50

JP Morgan                   2                                    0.49                             1.20

Merrill Lynch                2                                  (1.91)                            2.10

Microsoft                     4                                    0.47                             0.39

Nucor                          2                                    1.78                             1.14

United Technologies     2                                   1.30                             1.16

 

Friday July 18th

Citigroup                      2                                  (0.58)                            1.24

Schlumberger               2                                    1.12                             1.02

 

Sources: www.cnbc.com for U.S. estimates, www.globeinvestor.com for Canadian estimates

 

Trends

 

The Up/Down ratio for S&P 500 stocks fell again last week. The ratio dropped from 0.56 to (114/304) = 0.38. Eleven S&P 500 stocks broke resistance last week (including Hercules and FPL on Friday) and 73 stocks broke support (including another 16 stocks on Friday). The ratio has reached the intermediate oversold level, but has yet to show technical signs of bottoming.

 

Bullish Percent Index for S&P 500 stocks fell again last week. The Index slipped from 36.65% to 27.00% and remains below its 15 day moving average. The Index has reached an intermediate oversold level, but has yet to show technical signs of bottoming.

 

 

 

 

 

 

 

 

Chart courtesy of StockCharts.com                                 www.stockcharts.com

 

The Up/Down ratio for TSX Composite stocks also fell again last week. It dropped from 0.86 to (61/101=) 0.60. One TSX stocks broke resistance last week and 26 stocks broke support (including another eight stocks on Friday). The ratio is intermediate oversold, but has yet to show technical signs of bottoming.

 

Bullish Percent Index for TSX Composite stocks dropped again last week. It fell from 36.65% to 34.26% and remains below its 15 day moving average. Intermediate trend remains down, but has yet to show technical signs of bottoming.

Chart courtesy of StockCharts.com                     www.stockcharts.com

 

 

 

 

 

 

 

The S&P 500 Index fall another 1.85% last week, the sixth consecutive week of declines. The Index remains below its 50 and 200 day moving averages. Short term momentum indicators (RSI, MACD and Stochastics) are substantially oversold, but are showing early technical signs of trying to bottom. More evidence of a bottom is needed.

Chart courtesy of StockCharts.com                     www.stockcharts.com

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent of S&P 500 stocks trading above their 50 day moving average improved last week from 13.43% to 14.83%. Intermediate trend remains down. The Index is substantially oversold and is showing early technical signs of bottoming. More evidence is needed to confirm a bottom.  

Chart courtesy of StockCharts.com                    www.stockcharts.com

 

Percent of S&P 500 stocks trading above their 200 day moving average improved from 24.25% to 26.05% last week. Intermediate trend remains down. The Index is substantially oversold and is showing early technical signs of bottoming. More evidence of a bottoming is needed.

 

Chart courtesy of StockCharts.com                        www.stockcharts.com

 

 

 

 

 

 

The Dow Jones Industrial Average fell another 1.67% last week. The Average remains below its 50 and 200 day moving averages. Next support is at its July 2006 low at 10,634.82. Short term momentum indicators (RSI, MACD and Stochastics) are substantially oversold, but showing early technical signs of bottoming. More technical evidence of a bottom is needed. The Average continues to underperform the S&P 500 Index.

Chart courtesy of StockCharts.com                         www.stockcharts.com

 

 

 

Bullish Percent Index for Dow Jones Industrial Average stocks eased from 23.33% to 16.67% last week. The Index remains below its 15 day moving average. Intermediate trend remains down. The Index is substantially oversold (i.e. near a record low), but has yet to show technical signs of recovery.

Chart courtesy of StockCharts.com                        www.stockcharts.com

 

Bullish Percent Index for NASDAQ Composite Index fell again last week from 28.43% to 25.98% and remains below its 15 day moving average. Intermediate trend is down. The Index already is oversold, but has yet to show technical signs of bottoming.

Charts courtesy of StockCharts.com                 www.stockcharts.com

 

 

 

 

 

 

 

 

The NASDAQ Composite Index slipped another 0.28% last week. The Index trades below its 50 and 200 day moving average and is testing support at 2,155.42. Short term momentum indicators (RSI, MACD and Stochastics) are oversold and showing early signs of trying to bottom. Strength relative to the S&P 500 Index remains positive.

Chart courtesy of StockCharts.com                   www.stockcharts.com

 

 

 

 

 

 

The Russell 2000 Index improved 1.38% last week. The Index remains below its 50 and 200 day moving average and managed to remain above support at 643.28. Short term momentum indicators (RSI, MACD and Stochastics) are oversold and showing early signs of bottoming. However, more technical evidence of bottoming is needed. Strength relative to the S&P 500 Index remains positive.

Chart courtesy of StockCharts.com                   www.stockcharts.com

 

 

 

 

 

The Dow Jones Transportation Average improved 2.09% last week. The Average remains below its 50 and 200 day moving averages. Short term momentum indicators (RSI, MACD and Stochastics) are oversold and showing early technical signs of bottoming. However, additional evidence is needed. Strength relative to the S&P 500 Index remains positive.

Chart courtesy of StockCharts.com                       www.stockcharts.com

 

 

 

 

 

The TSX Composite Index lost 2.15% last week. The Index remains below its 50 and 200 day moving average. The Index lost almost 50% of its gain from mid January to mid May, a typical correction. Short term momentum indicators (RSI, MACD and Stochastics) are oversold, but have yet to show technical signs of bottoming. Strength relative to the S&P 500 Index remains positive.

Chart courtesy of StockCharts.com               www.stockcharts.com

 

 

 

 

 

Percent of TSX stocks trading above their 50 day moving average fell from 28.09% to 17.24% last week. Intermediate trend remains down. Percent already is oversold (i.e. approaching a record low) and is showing early signs of trying to bottom. More technical evidence of a bottom is needed.

Chart courtesy of StockCharts.com                                  www.stockcharts.com

 

Percent of TSX Composite stocks trading above their 200 day moving average slipped from 39.57% to 35.78% last week.

Chart courtesy of StockCharts.com                             www.stockcharts.com

 

 

 

 

 

 

 

 

 

The Australia All Ordinaries Index gave up 1.98% last week. Intermediate trend remains down and the Index remains below its 50 and 200 day moving averages. Short term momentum indicators (RSI, MACD and Stochastics) are oversold and showing early signs of bottoming. Strength relative to the S&P 500 Index is slightly better than neutral.

Chart courtesy of StockCharts.com                 www.stockcharts.com

 

 

 

 

 

 

The Nikkei Average gave up 1.50% last week. The Average remains below its 50 and 200 day moving average. Short term momentum indicators are oversold, but have yet to show technical signs of bottoming. Strength relative to the S&P 500 Index remains positive.

Chart courtesy of StockCharts.com                        www.stockcharts.com

 

 

 

 

 

 

The Shanghai Index added 6.99% last week. Support may be forming to 2566.52. Intermediate trend is down. The Index remains below its 50 and 200 day moving averages. Strength relative to the S&P 500 Index is turning positive. Short term momentum indicators (RSI, MACD and Stochastics) have bottomed at oversold levels and are trending higher.

Chart courtesy of StockCharts.com                       www.stockcharts.com

 

European equity indices weakened last week. The London FT Index broke support at 5,338 on Friday and gave up 2.79 %, the Frankfurt DAX Index lost 1.90 % and the Paris CAC Index fell 3.88 %.

The U.S. Dollar fell 0.78 last week. Most of the loss occurred on Friday due to concerns about the impact of a potential failure by Fannie Mae and Freddie Mac. Intermediate trend remains down. Resistance exists at 74.31. Short term momentum indicators are overbought and trending lower. 

Chart courtesy of StockCharts.com                                 www.stockcharts.com

 

Conversely, the Euro added 2.42 last week is testing resistance at 160.20. Strength can be attributed partially to ECB chairman Trichet’s comments that inflationary pressures remain a concern in Europe. Short term momentum indicators continue to recover from an oversold level.

Chart courtesy of StockCharts.com                     www.stockcharts.com

The Canadian Dollar remains stuck in an eight month trading range between 96.69 and 102.99. Short term momentum indicators are neutral.

Chart courtesy of StockCharts.com                            www.stockcharts.com

The CRB Index remains in an intermediate uptrend. Short term momentum indicators remain overbought.

Chart courtesy of StockCharts.com                      www.stockcharts.com

 

 

 

 

 

Crude oil touched a record high on Friday. Short term momentum indicators are overbought.

 

Chart courtesy of StockCharts.com                         www.stockcharts.com

 

Natural gas remains in an intermediate uptrend. Short term momentum indictors are overbought and showing early technical signs of peaking.

Chart courtesy of StockCharts.com                       www.stockcharts.com

 

 

 

 

Gold’s technical profile continues to improve. Gold broke resistance at $956.20 on Friday. Next resistance is its all time high at 1,033.90 U.S. per ounce. Gold stocks are responding to higher gold prices. Short term momentum indicators continue to trend higher.

Chart courtesy of StockCharts.com                      www.stockcharts.com

 

Technicals for silver also continue to improve. Silver broke resistance at $18.77 on Friday. Short term momentum indicators continue to trend higher. 

Chart courtesy of StockCharts.com                     www.stockcharts.com

 

 

 

 

Copper backed off from its all time high. Intermediate trend remain up. Copper remains above its 50 and 200 day moving average.

Chart courtesy of StockCharts.com                    www.stockcharts.com

 

Aluminum continued to move to all time highs last week following news that Chinese production will decline 5-10% in order to conserve power.

Chart courtesy of StockCharts.com                        www.stockcharts.com

 

The following chart may surprise you. Lumber prices have been in an intermediate uptrend during the past four months and are testing resistance at $257.50 per m/bdf. Strength in lumber prices has not been reflected in lumber stocks. Indeed, many stocks in the sector on both sides of the border (Canfor, Weyerhaueser) are testing multi-year lows. Most likely reason for strength in lumber prices is weakness in the U.S..Dollar.

Chart courtesy of StockCharts.com                    www.stockcharts.com

 

The yield on U.S. 10 year treasuries eased 0.03% last week. Yield clearly is capped at 4.32%. Short term momentum indicators continue to move lower from overbought levels.

 

Chart courtesy of StockCharts.com                          www.stockcharts.com

 

Other Factors

 

Short term technical indicators for U.S. and Canadian equity indices and most sectors are substantially oversold (Exceptions are indicators for precious metal and uranium sectors). Early technical signs of a bottom have appeared, but could be caused by the way the momentum indicators are calculated rather than a genuine change in momentum. More time is needed to confirm validity of the signals.

 

Intermediate indicators (Up/Down ratio, Bullish Percent indices) also are substantially oversold but have yet to show technical signs of bottoming.

 

The VIX Indicator (also known as the Fear Index) spiked on Friday.  It has not reached the panic stage yet (i.e. 35% or higher) but is coming close.

 

Chart courtesy of StockCharts.com                   www.stockcharts.com

 

Indymac’s failure on Friday likely will have an impact on equity markets early this week. Indymac was taken over by the Federal Deposit Insurance Corp (FDIC) on Friday. The bank has been in trouble due to mortgage failures in California, its primary market. However, a revelation by Senator Chuck Schumer at the end of June sealed the fate of the bank. Schumer revealed that Indymac was one of 90 U.S. banks that were on the FDIC’s watch list. Indymac quickly experience a run on its deposits. Over one billion dollars were removed within a few days. The FDIC is expected to cover losses estimated at $6-$8 billion. The question now is “What about the other 89 banks”?

 

Added to credit concern is the continuing saga on Fannie Mae and Freddie Mac. Both initially fell sharply on Friday, recovered on rumors that the Federal Reserve was willing to arrange financial backing and subsequently fell when the Federal Reserve denied the rumors. After the close, the companies and several political figures claimed that adequate capital and liquidity is available. Ben Bernanke will be on the “hot seat” on this one on Tuesday when he appears before the Congressional Finance Committee.

 

Added to credit concerns are second quarter earnings reports by Wells Fargo, JP Morgan and Citigroup to be released later this week.  Investors are bracing for a series of “difficult” reports.

Offsetting “difficult” second quarter results from the financial service sector this week could be a series of impressive reports by major companies in the technology sector including Intel, EBay, Google, IBM and Microsoft.

 

Responses to quarterly reports will be watched closely to see if bearish investor sentiment is able to change. Bullish Advisors fell to 27% last week, the lowest level in over a decade. Second quarter estimates have been coming down. Third quarter estimates are too high and many companies are expected to reduce guidance. How will the market respond?

 

Geopolitical events continue to influence equity markets. Last week, it was Iran, Israel and Nigeria. This week it will be ?

 

Funds available for potential equity investment continue to grow on the sidelines. When investor sentiment turns positive, gains likely will be fast and significant.

 

Canadian investors will watch for news from the Bank of Canada on Thursday morning. Consensus is that the overnight lending rate to Canada’s major banks will remain the same.

 

The Bottom Line

 

Close, but no cigar! North American equity markets are substantially oversold due to growing negative investor sentiment. Markets are setting up for a significant recovery, but significant technical signs of a bottom have yet to appear. Preferred strategy is to wait until significant technical signs of a recovery become available knowing fully well that initial part of the recovery will not be realized. Exceptions exist most notably in the Gold and Uranium sectors where technical signs of a recovery already are apparent.

 

Tech Talk’s Weekly Column in the Financial Post

(Published on Saturday July 12th in the National Post. The original report is available by paid subscription at www.nationalpost.com)

 

 

An Update on the Uranium Sector

 

This column on February 23rd offered favourable comments on uranium stocks and Exchange Traded Funds. Many events have occurred since then that have influenced share prices: some good and some not so good. Now is a good time for a review.

 

Long term demand for uranium to power nuclear power plants around the world continues to grow. More plants are being built in China, Japan, Russia and Europe. In Canada, construction of two power plants is planned in Ontario and construction of nuclear power plants in Alberta has reached the discussion stage. In the U.S., Presidential candidate McCain has proposed construction of additional nuclear power plants as a central part of his energy expansion program. Nuclear power has become an increasingly popular choice because it does not create greenhouse gas emissions. Leaders of the G8 nations vowed last week to reduce greenhouse gases by 50%. Expansion of nuclear power facilities is a logical choice to achieve their goal.

 

Supply of uranium also is growing thanks to rising uranium prices during the past two years. The spot price of “yellow cake” obtained from uranium mines increased from $40 U.S. per lb in early 2006 to a peak in a classic bubble pattern on the charts at $137 U.S. per lb. Prices on long term contracts for yellow cake also rose, but did not reach “bubble” prices. They peaked near $95 U.S. per lb. The price of uranium hexafluoride, processed yellow cake used as fuel in nuclear power plants also advanced in line with prices for long term contracts.

 

In July, 2007, Cameco announced an “Ooops” at it Port Hope, Ontario uranium hexafluoride processing facility. The company discovered leakage in its plant. The plant was immediately shut down and a clean up plan was announced. Subsequently, the leak was found to be more extensive than originally thought. Time and cost of the clean up increased. According to Cameco’s first quarter 2008 report, “We continue to project UF6 production to resume at our Port Hope UF6 plant in the third quarter of 2008 at the earliest. CNSC staff approval is required to fully restart the plant”. This facility is the largest producer of nuclear fuel in the world. It processes approximately 40% of the world’s yellow cake.

 

Closure of the Port Hope facility had a significant impact on spot yellow cake prices. During the past year, long term contracts for yellow cake slipped from $90 U.S. per lb to $80 U.S. per lb. and uranium hexafluoride prices remained relatively stable near $11.50 U.S. per kbU in Europe and $10 U.S. per kbU in North America. However, the spot price of yellow cake virtually collapsed from $95 U.S. per lb. in December 2007 to $55 U.S. per lb in June. Weakness makes sense. Uranium miners were able to produce yellow cake, but were unable to sell readily on the spot market because yellow cake could not be processed into uranium hexafluoride. Meanwhile, uranium producers had salaries to pay, exploration programs to finance and other costs to cover. Selling by producers into the spot market had the expected effect.

 

Now, a glimmer of hope has appeared and spot yellow cake prices have responded. The hope is that the Port Hope facility will resume production soon and spot yellow cake prices will return to their historic level just above long term contract prices. Spot prices already have recovered during the past three weeks from $55 U.S. per lb. to $60 U.S. per lb. Uranium mining stocks have responded by advancing nicely during the past three weeks despite a significant downturn by Canadian and U.S. equity markets.

 

Uranium equity prices have improving technical profiles. Most uranium producer stocks in the sector including Cameco (Symbol: CCO), Denison Mines (Symbol: DML) and Uranium One (Symbol: UUU) have moved sideways to slightly higher during the past five months and have positive strength relative to the TSX Composite Index. Recent strength in the spot price of yellow cake has boosted their short term momentum indicators. In addition, on balance volume data shows that these stocks are being accumulated.

 

The easiest way to invest in the sector is by owning an Exchange Traded Funds that focuses on the mining, storage, processing and use of uranium. Two Exchange Traded Funds currently are available: Market Vectors Nuclear Energy Exchange Traded Fund (Symbol: NLR) was launched last September. iShares on the S&P Global Nuclear Energy Index (Symbol: NUCL) was launched this week.

 

Chart courtesy of StockCharts.com                     www.stockcharts.com

 

Tech Talk Note

 

Tech Talk is heading for Vancouver this week. The Tech Talk report appears in its usual format today. Thereafter until August 25th Tech Talk reports will appear each business day in a modified format that will include previous Tech Talk columns published in the Financial Post, previous comments by Adrienne “Trader’s Coach” Toghraie, brief market comments from the webmaster and occasional comments (when thought important) from Tech Talk.

 

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.