Tech Talk for Friday July 4th 2008

 

The focus next week is on second quarter reports. Analysts continue to reduce estimates for big cap companies on both sides of the border (Exception: energy companies). Second quarter results will be less than exciting. Of greater importance, many companies likely will give negative guidance for the third quarter and remainder of the year. Previous guidance has been optimistic. Look for analysts to reduce estimates and lower targets.

 

Pre-opening Comments for Friday July 4th

 

9:00 AM EDT: Trading on the Toronto Exchange will be quieter than usual today. U.S. equity markets are closed for Independence Day.

 

European equity markets are down significantly this morning following comments by Goldman Sachs about European banks. Goldman reduced its target prices on 40 European banks and predicted that European banks will need to raise another $90 billion capital in order to offset sub-prime and other credit related losses.

 

The TSX Composite Index is expected to open lower this morning following overnight weakness in the price of crude oil. Pre-opening indications show that major Canadian oil stocks such as Encana and Suncor will open lower. The TSX Energy Index already has fallen more than 10% from its high set six weeks ago. On the charts, the Index ($SPTEN 431.61) recently completed a double top pattern with a technical target of 390.

Chart courtesy of StockCharts.com                   www.stockcharts.com

 

Kinross and Agnico Eagle are expected to open lower after UBS downgraded its recommendation on both stocks to neutral. Both stocks have moved strongly higher during the past three weeks and are attractive purchase candidates on weakness.

 

Technical Action Yesterday

 

Technical action by S&P 500 stocks remains bearish. No S&P 500 stocks broke resistance and seventeen stocks broke support yesterday. Notable on the list of stocks breaking support were oil service stocks.

 

S&P 500 stocks breaking support

 

Stock                           Symbol            Previous          New

                                                            Trend              Trend

Air Products                 APD                Up                   Neutral

AT&T                          T                      Neutral             Down

Cameron Int’l               CAM               Up                   Neutral

EOG Resources           EOG                Up                   Down

Fluor                            FLR                 Up                   Neutral

Intel                              INTC               Up                   Neutral

Microchip Tech            MCHP             Up                   Neutral

Nvidia                          NVDA             Up                   Down

Praxair                         PX                   Up                   Neutral

Precision Castparts       PCP                 Neutral             Down

Robert Half                  RHI                  Down               Down

Rowan Companies       RDC                Up                   Neutral

Ryder Systems             R                      Up                   Down

Snap On Tools             SNA                Up                   Neutral

Terex                           TEX                 Neutral             Down

Transocean                   RIG                  Up                   Down

Williams                       WMB              Up                   Neutral

 

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

 

 

 

 

 

 

TSX Composite stocks breaking support

 

Stock                           Symbol            Previous          New

                                                            Trend              Trend

Fortis                           FTS                 Up                   Down

Harry Winston Dia        HW                  Up                   Down

Inmet                            IMN                Neutral             Down

Niko Resources            NKO               Up                   Neutral

Nova                            NVA                Up                   Neutral

Sherritt                         S                      Up                   Neutral

Telus                            T                      Neutral             Down

 

Pre-opening comments for Thursday July 3rd

 

9:10 AM EDT: U.S. equity index futures are higher following release of economic news released this morning. Dow Jones Industrial Average futures are up 64 points in pre-opening trade. Fears of a bad employment report were relieved. The June U.S. employment report released at 8:30 AM was in line with expectations. Consensus for non-farm payrolls was a 60,000 decline. Actual was a 62,000 decline. Consensus for the unemployment rate was 5.4%. Actual was 5.5%.

 

The U.S. Dollar rallied following release of the employment report. Commodities priced in U.S. Dollars including gold, silver and copper moved lower. Relative Strength Index and Stochastics indicate that Silver currently is short term overbought. Silver has a positive technical profile. Weakness to support at $16.25 and its 200 day moving average is possible without damaging its technical profile.

Chart courtesy of StockCharts.com                          www.stockcharts.com

 

European equity indices moved lower overnight following news that the European Central Bank has raised its overnight lending rate to major banks from 4.0% to 4.25%. Higher interest rates will dampen inflation expectations, but also raise costs for borrowers.

 

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, “S&P forecasts still too high: BMO”. Following is a link to the report: http://network.nationalpost.com/np/blogs/tradingdesk/archive/2008/07/03/s-amp-p-forecasts-still-too-high-bmo-say.aspx

 

Analysts continue to lower earnings estimates for big cap U.S. companies. Consensus for S&P 500 earnings is a decline of 10.2% on a year over year basis in the second quarter, but a 5.8% gain for the year. Most of the decline in the second quarter is coming from the financial services sector, but weakness has spread recently to other sectors including industrial and consumer discretionary sectors. Consensus estimates are even higher for Dow Jones Industrial Average companies. Consensus is for an average (median) gain of 9.8% in the second quarter and 8.5% in the third quarter. Clearly, these estimates are high. Look for many companies to offer negative guidance when second quarter earnings reports are released. Analysts will reduce estimates and target prices shortly thereafter.

 

Earnings prospects for major Canadian companies also are less than encouraging. Consensus estimates for Canada’s top 60 companies are calling for a year-over-year average (median) gain in the second quarter of only 3.0%. Consensus estimates call for an average (median) gain in the third quarter of 15.8%. Clearly, third quarter estimates are too high. Look for many of Canada’s top 60 companies to offer negative guidance when second quarter earnings are released.

 

 

 

THE CASTLEMOORE “CLASS” PORTFOLIO

 

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

 

Class Investor - Moderate Risk

Cash Equivalents:

 

100.0%

Canadian Equity Index:
Canadian Long-term bonds
Gold Bullion

 

 0.0%
 0.0%
 0.0%

Non-Canadian Indices:

 

 0.0%

United States (hedged)

United States (unhedged)
US Treasury Bonds

Foreign Equities

 0.0%

 0.0%
 0.0%

 0.0%

 

TOTAL

 

100%

 

Last time we visited this portfolio we commented on the fact that we were being relatively inactive until the situation called for more action. Since then, the situation has. And yes, what you see in the table above is correct. We are once again in a fully divested mode, at least for the moment.

The TSX started the second half of what has been a strong year to date by selling off sharply, with strong first half performers being particularly hard hit. This makes us believe that the market is vastly overbought, and that portfolio managers were waiting until after the end of the quarter to take profits, thus ensuring that quarter end statements would still list stocks with impressive gains.

We further note that the TSX essentially is made from three similarly weighted components: energy, financials, and the rest (industrials, base metals, technology). Financials have shown no signs of sustained recovery from its year-long vicissitudes, energy has been carrying the market but is clearly in overbought territory, and the industrial sector is sensitive to a US recession, not to mention a Canadian economy which, barring revision, actually contracted in Q1. Even the technology sector was roiled by powerhouse Research in Motion, whose Motion was downward following its failure to exceed lofty earnings expectations for the last quarter. . We expect to spend much of the next several days in deep contemplation and discussion as to how and if to deploy our ample cash position.

Speaking of Research in Motion, you can now do research in motion by reading this commentary on your Blackberry or any other WAP-enabled device. Go to http://www.castlemoore.com/mobile. Feedback welcomed.

If you like to receive our “hot of the press” bi-monthly newsletter, know 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

 

 

 

 

Weekly Bullish Percent Indices for U.S. Sectors

 

All bullish percent indices moved lower last week. All traded below their 15 day moving average. Three indices rolled over for the first time from above the 50% level. Another four indices fell to an intermediate oversold level (for a total of six indices). Although all indices continued to trend lower and/ or are oversold, none have yet to show intermediate technical signs of bottoming.

 

Sector                         Index               Above/Below                          Comment

                                    Change           15 day Moving Average

Info Technology            Lower              Below                                      Downtrend

Transportation              Lower              Below                                      Oversold

Financial Services         Lower              Below                                      Oversold

Telecommunications      Lower              Below                                      Rolling over

Consumer Staples         Lower              Below                                      Oversold

Basic Materials             Lower              Below                                      Oversold

Consumer Discretion    Lower              Below                                      Oversold

Industrials                     Lower              Below                                      Oversold

Health Care                  Lower              Below                                      Rolling over

Energy                          Lower              Below                                      Downtrend

Utilities                         Lower              Below                                      Rolling over

 

                                    Bolded items are changes from last week

                                    All Charts courtesy of StockCharts.com

 

Tech Talk’s column in Saturday’s Financial Post

(Available in hard copy or at www.nationalpost.com by paid subscription)

 

The column focuses on gold and gold stocks.

 

Website Conversion

 Over the next two months, Tech Talk is converting to another server with a higher quality service. For a sneak preview, click on http://www.timingthemarket.ca/techtalk/ 

 

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.