Earnings and Oil...

By: Mark McMillan | Wed, Jan 17, 2007
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Weekly Trader Alert #87
1/17/2007 9:26:46 AM


Last week was the first week of earnings season. Alcoa kicked off earnings season with a positive report. The coming week has a lot more heavy hitters reporting, so trading should be dominated by reported earnings and, more importantly, forward looking guidance.

Oil has dropped from above $60.00 at the end of 2006 to below $53.00 by Friday and around $51 on Tuesday. Oil hasn't yet dipped below $50.00, but there is now talk about that occurring. With Oil prices dropping, a large contributor to inflation is being mitigated. While this adversely affects the earnings of oil companies, it lowers costs for many/most of other companies, and lowers the costs for consumers to fill up their gas tanks.

At this time, the soft landing scenario seems to be the consensus. Housing and the automotive industry haven't had enough negative effect to offset corporate earnings and now the tailwind of reduced energy costs.

Earnings and more importantly guidance will move the markets. As industry leaders report, this will move industries and sectors. With housing continuing to look soft (contrary to all the pundits that claim the slide is over), the stock market will be continuing to fight against the tide. If you are an optimist, you would thank the weakness in housing and automotive for keeping the Fed at bay, for they would certainly raise rates again to combat inflation if the economy wasn't softening.

The freezing conditions for four nights in California have destroyed 70 - 80% of the citrus crop of peel and eat oranges. This has gone little noticed in the markets where everything is about unseasonable warm weather across much of the country causing oil prices to drop. However, this will actually raise the prices of oranges significantly, as well as cost insurers an estimated $9B in payouts for damaged crops. Oranges will contribute to further gains in inflation from food, which will be the largest factor on inflation as most food prices that we watch have risen markedly in the last year. Just look at how much you now pay for bread, milk, eggs, beef, etc.

To understand more about our view on the markets, we will have to look at the charts.

Market Climate

The market finished with a significant push upward last week, with a bit of weakness in the early part of the week, but then finishing the week quite strong.

Once again, the Index ETFs are showing signs of accumulation by investors. While we believe that the soft landing scenario could continue to unfold, investors should be wary, as the market appears to be ready to react to negative news. We say this because with the significant fall in the price of oil propping up the markets, there has been a less than commensurate move upward. Anything that moves energy prices the economy, etc. will likely see an over reaction as investors head for the exits and take profits.

The U.S. stock market composite chart:

Last week's failed move downward resulted in a bounce off of the 50-day moving average and a climb through the week. However, RSI weakened late in the week as did volume. While the rally was strong, it appears that conviction may be lacking on the part of bulls to push the market higher, without receiving more good news on corporate earnings.

Fundamental Trends

Four of five leaders remain in the top five, with telephone utilities leaving in favor of the metal/glass container industry.

Last week we noted the entry of the transports which appear to be red hot right now. Airlines are raising prices while their fuel costs have dropped with oils fall of nearly 33% since it reached the $75 level.

Telephone Utilities dropped down to thirteenth place which indicates that investors are looking for a bit more risk.

The meat industry continues to hold just below the leaders board. Basic Steel has fallen precipitously, although steel alloys still look strong.

The Industry leaders (ranked 1st-5th out of 190) are:

Leaders 1-12-2007

Leaders 1-07-2007

Leaders 12-29-2006

Machinery (Automation)

Machinery (Automation)

Machinery (Automation)

Transportation (Airlines)

Internet (Network)

Steel (Alloy)

Chemical (Fertilizers)

Transportation (Airlines)

Internet (Network)

Internet (Network)

Utility (Telephone)

Chemical (Fertilizers)

Container (Metal/Glass)

Chemical (Fertilizers)

Petroleum (US Integrated)

The laggards swapped the International Specialty Petroleum industry for the Electrical connectors industry, and shuffled around a bit, but otherwise remain unchanged.

We will continue to monitor the plastics industry for a rebound, as their cost structure has to be coming way down with the fall in oil prices. While the Chemical Fertilizer companies are in the leaders, the Plastics industry is in the laggards and we believe buying opportunities will be presented in plastics. There are two other chemical industries, basic and specialized, that we will also be looking at for trading candidates.

The Industry laggards (ranked 186th-190th out of 190) are:

Laggards 1-12-2007

Laggards 1-07-2007

Laggards 12-29-2006

Energy (Coal/Other)

Electrical (Connectors)

Transportation (Truck)

Petroleum (Intl Specialty)

Chemical (Plastics)

Instruments (Control)

Metal Products (Distributors)

Petroleum (Cdn Expl/Prod)

Electrical (Connectors)

Chemical (Plastics)

Metal Products (Distributors)

Energy (Coal/Other)

Petroleum (Cdn Expl/Prod)

Energy (Coal/Other)

Petroleum (Cdn Expl/Prod)

Trade Recommendations

We are continuing to monitor trade set-ups in industries as they begin to move up or down. We have found nice long opportunities in plastics, but there will be a few more days before our criteria will likely be met for trade entry.

We will be looking at trade set-ups and will issue intraweek alerts as they materialize.

Current Portfolio

We are still in a short trade on the QQQQs. We anticipate a downward/consolidation move to get started shortly.

FDG seems to have found a bottom and continues to pay out a large quarterly dividend amounting to annual gains of 15-20% of its price.

* Initial stop prices are set to cause us to exit our positions if they close below these levels. You will note they are generally kept pretty tightly the opposite side of the trades we initiate. Historic volatility would imply that intraday price action may trade outside of these values, so that condition is insufficient to cause an exit from an existing position. On significant movement beyond our stop prices, we may issue an intraday message to exit the position or to maintain the position. You may chose to implement an absolute stop below these suggested stop values, but that stop should be wide enough to take care of the daily volatility for the stock in question. You can examine the candlesticks for an idea of intraday price fluctuations.

Entry prices are adjusted to account for dividends paid. The stock price was adjusted by your broker, to reflect the dividend taken out. The non-adjusted entry price reflects the actual entry price, without the adjustment for dividend values.

LVPB Concept: The concept is a Light Volume Pull Back, where a stock's price will pull back to a support level on light volume. Obviously, heavy selling is a sign of weakness, and we would not want to buy on a heavy volume pullback. However, we will occasionally place stocks on the LVPB (Light Volume Pullback List) to indicate a "re-entry" buying opportunity, when we have already entered a position. This should be used to add to existing positions, or to enter a position if you missed the initial entry.

LVPB Portfolio Stocks:


We believe the coming week will mark a change in the uptrend. If not beginning a tradable reversal, we believe the markets will consolidate this week. The QQQQs and DIAmonds look set for downward moves, while the jury is still out on the S&P-500.

This coming week begins to see a heavier stream of companies reporting earnings, while the following week will see an even heavier stream of reports. We are particularly concerned over the effects of companies taking down forward guidance. Investors are quite nervous at this time and this could result in a fair amount of profit taking.

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Regards and Good Trading,



Mark McMillan

Author: Mark McMillan

Mark McMillan
Fundamental Trader Alert

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