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Friday - April 29, 2005

The Fed Two-Step

This chart shows the Fed Funds rate and the 10-year T-Note Yield (TNX). The black line shows the reversals in TNX and the red line shows the Fed Funds reversals. Notice that the 10-year T-Note Yield reverses before the Fed Funds rate. In other words, the Fed usually follows the bond market. There are periods of uncertainty, but the bigger trends usually play out. Most recently, the trend for TNX has turned flat, but the Fed Funds rate continues to rise. I don’t think that TNX has established a downtrend yet and this would take a move below 3.95% (~40 on the chart). Such a move would provide a clear indication that that recent rate hikes are coming to an end – soon.

By Arthur B. Hill - Fri 29-Apr-05 at 12:31PM in Economy
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Breadth Gets Worse

For an idea of just how pervasive selling pressure has been, the Nasdaq AD Line is nearing its Mar-03 low. Even though the Nasdaq reached a new reaction high in January, the AD Line didn’t even come close to its prior high and techs have led the market lower this year.

Weakness is spreading. The NYSE AD Line broke below a long trendline extending up from the Mar-03 low as sellers broaden their campaign. Blame it on what you will, but techs are seriously weak and the broader market is starting to follow.

By Arthur B. Hill - Fri 29-Apr-05 at 12:29PM in Breadth
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Thursday - April 28, 2005

Inflation? My......

There sure is a lot of talk about inflation these days. However, gold and bonds can’t be bothered. If inflation were around the corner, I would expect bonds to fall (rates to rise) and gold to rise. However, the opposite appears to be happening: gold is falling and bonds are rising (rates falling). Could it be that the economy is weaker than previously thought? Recent economic data seems to suggest this. Durable goods orders were weak, GDP was less than expected, consumer confidence is waning and the leading indicators are slipping. The message from the bond market is that the Fed will soon END its tightening phase. Remember, the Fed follows the bond market, not the other way around.

By Arthur B. Hill - Thu 28-Apr-05 at 04:12PM in Economy
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Consumer Sentiment Wanes

The Conference Board (click here) reports negative data on three fronts. First, the help wanted index declined two points. Second, U.S. consumer confidence dropped over 5 points. Third, the U.S. Leading Index declined in March.

Consumer spending drives 2/3 of GDP and a drop in spending is right behind a drop in confidence. It appears that high energy prices are starting to have an effect. Oil has been above $40 since mid July and above $50 for over 2 months. Even though U.S. spend less on energy than 30 years ago, a sustained period of high prices is certainly not positive.

By Arthur B. Hill - Thu 28-Apr-05 at 04:01PM in Economy
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Wednesday - April 27, 2005

Euro Sabotage

Bloomberg (click here) columnist Mark Gilbert reports that the bond vigilantes are circling the wagons on the prospects that France will reject the European constitution in a referendum. In a poll by L’ Express magazine, 58% of respondents were against the EU constitution. The EU constitution requires the approval of all 25 EU member states and France represents the one of the most important members. Without France there could be no European Union.

My interest is not so much in the EU or the constitution, but rather the affect on the US Dollar and hence gold. Perhaps the Euro would rally in the face of a French rejection. After all, this would slow the whole process down and stall new entries that might further dilute the Euro. However, I really don’t see how a NO vote could be taken as Euro positive because a NO vote is a vote for chaos and uncertainty. The Euro has been riding high, but I think a French NO vote would derail the currency. This would bolster the US Dollar Index and weaken gold.

On the US Dollar Index chart, it is clear that a move above 86 would be hugely positive and this level bears watching by the gold bugs.

By Arthur B. Hill - Wed 27-Apr-05 at 07:50AM in US Dollar
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Tuesday - April 26, 2005

Cable Versus Telecom

The Motley Fool (click here) likes SBC Communications. An investing article on 25-April highlighted the latest earnings report and stated that SBC was part of the Motley Fool Stock Advisor portfolio. The strengths for SBC reside in the big brand, the broadband rollout and the juicy dividend.

However, investors and traders seem to see something else. Namely, that SBC lost 500,000 access lines last quarter and still has the AT&T merger to digest. In contrast, Time Warner and Comcast have been adding thousands of new customers each quarter for voice-over-internet telephony. This is not a healthy trend and the cable companies are still getting the better of the old bells.

But we don’t need the numbers to tell us who is winning. The price charts show the winners all too clear. SBC and Verizon are trading near their 52-week lows and in clear downtrends.

In contrast, Comcast is trending higher and trading near rising trendline support.

Time Warner is not as strong, but remains well above its August low and is finding support near the February low.

By Arthur B. Hill - Tue 26-Apr-05 at 08:29AM in Industries
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Monday - April 25, 2005

Buffet and Pier 1

Warren Buffet is certainly a legendary investor, but his approach requires patience and sometimes being wrong for extended periods.

In an SEC filing dated 30-Jun, Berkshire Hathaway disclosed that it had purchased 8 million shares of Pier 1 Imports (PIR), the home furnishing retailer. In contrast to alcoholic beverages (BUD), soft drinks (KO) and consumer products (PG), this is a cyclical business prone to economic fluctuations.

My wife and I like Pier 1 stores and can always find something to buy. However, that does not change the cyclical nature of the business. Should the economy and broader market tank, PIR will go down with the ship. In contrast, non-cyclical businesses like alcoholic beverages, soft drinks and consumer goods will hold up much better.

Looking at the price chart, the stock is bad shape for a cyclical. The blue line shows when the SEC filing hit the press and the stock spiked higher. However, a bad quarter hit the stock in August and it moved to a new 52-week low. There was a rebound with the broader market and the stock stalled in the first quarter of 2005. With another bad quarter, the stock gapped down, broke support and is close to its 52-week low. More importantly, the stock is underperforming the broader market and shows poor relative strength. As long as this gap remains unfilled (18), sellers are clearly in control and I would avoid this stock, even if I could buy it cheaper than Buffet.

By Arthur B. Hill - Mon 25-Apr-05 at 11:01AM in Stocks
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Buffet Likes BUD

The word is out: Buffet likes Budweiser - or at least the parent company’s stock. Berkshire Hathaway reported in a press release that the company has acquired a “significant stake” in Anheuser-Busch. News sent the stock soaring and the Buffet-ologists scrambling.

The purchase makes a lot of sense and fits with the themes echoed in Procter & Gamble, Gillette and Coca-Cola. These companies are not that exciting, but they do generate large amounts of free cash flow, have well established consumer brands, wide moats and strong balance sheets.

Judging from the price chart, it is likely that investors can buy BUD at the same price or less than Buffet’s average. The stock declined from 55 to 45 over the last 9-10 months and my guess is that Buffet’s average is around 50. Also notice that the stock got a good bounce off support at 45. This level acted as resistance in 2001 and then turned into support with tests in Jan-02, Jul-02, Mar-03 and Apr-05. BUD doesn’t move a lot as the stock traded between 43.65 and 55 for over three years. As such, it makes sense to buy near support and not at resistance.

Keep in mind that this is a long-term position. Don’t expect this stock to double within a year. It is possible, but highly unlikely. Buffets looks upon this investment as he does all of his investments: as if he is buying the whole company or the whole business. Therefore, his time horizon is likely to be many years.

By Arthur B. Hill - Mon 25-Apr-05 at 11:00AM in Stocks
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Friday - April 22, 2005

Remember the VIX?

Remember the VIX? Analysts went on for months about how the low VIX indicated complacency and that this was a bearish sign. The VIX represents the implied volatility for a basket of OEX puts and calls. The higher the implied volatility, the more the risk and the higher the option price. Low volatility may indeed indicate complacency, but this could also be interpreted as confidence. Problems arise when confidence becomes over confidence. The downtrend in the VIX has been slow and deliberate. This suggest quiet confidence, not over confidence.

The VIX has trended lower since Oct-02, which just happens to coincide with the bottom in the Nasdaq and S&P 100. We should not expect a surge in selling pressure as long as VIX is trending lower and confidence is slowly growing.

There are early signs of a trend change, but nothing has been confirmed. VIX broke above the upper trendline of the long falling price channel last week, but moved back below this week. The move also broke above the January high. We saw a similar move in Mar-04 and this ultimately failed. For the trend to change and to expect a sustainable surge in the urge to sell, I would look for VIX to move above key resistance at 20. When this happens, the 2 1/2 year downtrend will be unequivocally broken and change will be afoot. And not a moment sooner.

By Arthur B. Hill - Fri 22-Apr-05 at 03:06PM in Sentiment
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Show Me The....

Another week has passed and yet another one of those reversal-type days appeared. There has been one reversal day of sorts in each of the last four weeks. However, there was no follow through and stocks moved lower soon afterwards.

This week we had the pleasure of two “reversal” days. There was a gap up and strong move on Tuesday. This was followed by a sharp decline on Wednesday and then a strong move on Thursday. Volume was respectable and breadth was strong, but it is still not enough to call for a medium-term trend change.

As this SPY chart clearly shows, the stock remains in a clear downtrend and the current bounce simply affirms support around 114. At the very least, a break above the upper channel trendline is required to signal a trend change and we have yet to see any follow through to Thursday’s BIG advance.

By Arthur B. Hill - Fri 22-Apr-05 at 02:52PM in Indices
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The Microsoft Key

For clues on the Nasdaq, I am turning to none other than Microsoft (MSFT). In addition, MSFT will play a big part in the success or failure of the Software HOLDRS (SWH).

On the price chart, the stock retraced 62% of the Mar-Dec advance with a decline to around 24. This is normal for a retracement and support is reinforces by the Aug-Sep lows. More importantly, the stock is starting to attract upside volume (green carets) and shows good relative strength. While the Nasdaq moved to new lows in early April, MSFT held above its late March lows. The stock advanced sharply on above average volume on Thursday. This was a catalyst type move and further strength above 25.5 would confirm. A move below the late March low (23.8) would be bearish.

By Arthur B. Hill - Fri 22-Apr-05 at 02:43PM in Stocks
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Thursday - April 21, 2005

Inflation is Real

There should come as little surprise that there are inflationary pressures present in the market. First, the CRB Index broke a 20-year downtrend with a breakout at the end of 2003. The index has now advanced almost 80% since November 2002 and is trading at levels not seen since 1980!

If memory serves me correctly, a gentleman by the name of Paul Volcker headed up the Fed and the inflation was public enemy number one at the time. The 10-year T-Note Yield was over 15% in September 1981 and stocks were not happy campers.

The outlook for stocks changed with the August 1982 low (101) and the bull run until 2000. This bull run was coincided with falling interest rates and falling commodity prices. The 10-year T-Note Yield has yet to break out of its long-term (20-year) downtrend, but a move towards 5% looks increasingly likely and this could take the wind out of stocks, which have been rising since October 2002 (769). The real killer would be a combination of rising inflation and slow growth (stagflation).

By Arthur B. Hill - Thu 21-Apr-05 at 10:28AM in Economy
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Wednesday - April 20, 2005

Siebel Activity

Siebel Systems (SEBL) has a lot of cash and a lot of volume. There are rumors swirling of a LBO similar to the one seen with Sunguard Data Systems or that perhaps Oracle or SAP may be interested. These are just that: rumors. I am not here to confirm, deny or promote such rumors, but have noticed some unusual volume in the stock. In addition, a few options analysts have noted “unusual” activity in the SEBL options.

This first chart shows that SEBL has traded the highest monthly volume since 2002. This is just 20-April and there are seven trading days remaining. At this rate, SEBL is on course to trade the highest monthly volume ever this month.

This second chart provides the technical outlook. The stock gapped above resistance in October and this resistance area turned into support. The decline over the last few months retraced around 62% of the Aug-Dec advance and formed a falling price channel (blue trendlines). After a weak earnings report and gap down in early April, but stock immediately recovered and firmed. This is quite positive and further strength above the early April high (9.66) would be quite bullish.

By Arthur B. Hill - Wed 20-Apr-05 at 11:05AM in Stocks
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Tuesday - April 19, 2005

Battle of the Blubber

Barron’s (click here) covers the HealthCare sector this week and singles out some of the diet stocks (Weight Watchers WTW, eDiets DIET and Nutrisystems NSI). The article sites media reports that assert the following:

- 37% of Americans over 60 will be obese by 2010
- 71 million people are on some kind of diet program
- The weight loss market will grow from $46.3 billion in 2004 to $61 billion in 2008.

Those are some amazing numbers and point to years of demand to battle the blubber.

The chart for WTW shows a decline back to broken resistance just above 40. A key tenant of technical analysis is that broken resistance turns into support. Also notice that the Feb-Apr decline looks like a falling wedge that retraced 50-62% of the Aug-Jan advance. The stock broke trendline resistance on Monday, but volume was not that impressive. Before becoming enamored with this stock, I would like to see higher upside volume and a break above the 31-Mar high at 43.

By Arthur B. Hill - Tue 19-Apr-05 at 07:32AM in Stocks
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TXN Earnings & Chart

Texas Instruments (TXN) reported earnings Monday after the close and the stock advanced after the announcement. Earnings were up and revenues were flat. While an increase in earnings is certainly positive, I am always skeptical when top line (revenue) growth is sluggish or non-existent. You can only cut cost and improve efficiencies for so long. At some point, revenues need to grow for earnings to improve. The stock was up after hours because of the CEO’s upbeat statements: high inventories are coming to an end and the environment is improving.

But what about the chart? TXN still shows good relative strength in 2005. While the Nasdaq and S&P 500 moved to new 2005 lows last week, TXN held above its late January low. Notice that the stock formed an island reversal at the January low. TXN firmed after Friday’s gap and is slated for a gap up today (Tuesday). Should this gap hold, another island reversal would form and a move above 24.5 would break the trendline extending down from early March.

By Arthur B. Hill - Tue 19-Apr-05 at 07:16AM in Stocks
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Monday - April 18, 2005

Insider Buying at RSTO

Barron’s Online (click here) reports a big insider purchase at Restoration Hardware (RSTO). This is a turnaround play in the home furnishings business. In the SEC filing, Glenn Krevlin, a director, bought over 500,000 shares on behalf of some private funds.

And the chart doesn’t look half bad either. The stock failed to partake in the Aug-Dec market advance, but held up quite well in January. Perhaps those purchases put a floor on the stock. The stock formed a triangle over the last 5-6 months and broke resistance with good volume in April. This is one of the few stocks trading at a new high for 2005 and shows good relative strength. There is a ton of support around 5 and risk in new positions would be on a move below the Sep-Oct lows (4.82).

By Arthur B. Hill - Mon 18-Apr-05 at 03:17PM in Stocks
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Dow Theory Signal

It is official: the second Dow Theory signal in as many months. Both Averages moved to higher highs (closing) in March for a Dow Theory bullish confirmation. This bull signal was soon countered when both Averages moved to lower lows (closing) for a Dow Theory bearish confirmation. Volume was high on both declines and this bearish signal should be respected until proven otherwise.

By Arthur B. Hill - Mon 18-Apr-05 at 02:57PM in Indices
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Friday - April 15, 2005

Long Bond Fims

After a reversal in February (red oval) and decline below 90, the iShares ~20-year T-Bond Fund (TLT) found support and caught a bid over the last 3-4 weeks. Prior declines have been sharp and unrelenting (Mar-May 2004 and Jun-Aug 2003). This one is different and could have ramifications for stocks.

TLT broke trendline support in March and firmed in the prior trading range (87-90). The 3-4 week pattern could evolve into a rising flag or wedge, but this would not be confirmed as bearish unless TLT breaks below 88. I find the sudden strength extraordinary, especially when the whole world knows that the Fed is going to raise interest rates. Perhaps the economy will slow enough to prevent a rate rise and keep the Fed on hold. The charts of key cyclical groups suggest an economic slow down in the cards and the bond market usually leads the Fed. If the economy does slow and inflation remains in check, the Fed will stop raising rates and the bond market will firm.

By Arthur B. Hill - Fri 15-Apr-05 at 03:17PM in Bonds
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Nasdaq AD Line

How bad is it in tech land? Just ask the Nasdaq AD Line. The S&P 500 and Nasdaq 100 AD Lines have largely mirrored the underlying indices over the last two years. However, the Nasdaq AD Line formed a large negative divergence and moved below its 2004 low this week. Whereas SPX represents 500 large-cap stocks and NDX represents 100 large-cap tech stocks, the Nasdaq represents over 3000 stocks. This includes the good, the bad, the ugly, the small, the medium and the large. Most of these stocks are small or medium size tech companies and relative weakness in this AD Line shows little or no appetite for the riskier or high-beta names.

By Arthur B. Hill - Fri 15-Apr-05 at 03:12PM in Breadth
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Nasdaq Target

The current pattern at work in the Nasdaq looks quite similar to prior patterns for the S&P 500 and Dow Transports. Both of these indices had extended advances, failed to hold a breakout to new highs, broke trendline support and then continued to support from the prior low (1163 and 3454). In fact, the S&P 500 and the Dow Transports continued lower on Friday and broke below their prior lows. The patterns looks like large double tops and the support breaks are quite bearish.

By Arthur B. Hill - Fri 15-Apr-05 at 03:07PM in Indices
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Thursday - April 14, 2005

TIVO Breaks Through

Tivo (TIVO) seemed like a has-been just a few weeks ago. However, news of a deal with Comcast (CMCSA) brought the stock back to life. Not because of just one deal, but because of the prospects for other deals. TIVO already has a great brand and cable’s entry into the DVR market threatened to derail sales. Now that TIVO has signed one deal, the prospects for other deals and sales have increased dramatically. These deals are likely to provide a catalyst for TIVO in the future.

TIVO is also looking into generating revenues with targeted advertising. TIVO knows what you watch and Google knows what you surf. Google has been extremely successful with targeted adverts and TIVO can do the same based on user patterns. The big question is: how will TIVO show the ads without drawing the wrath of its users?

By Arthur B. Hill - Thu 14-Apr-05 at 10:32AM in Stocks
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IMAX in Asia

On April 8, IMAX reported that the company signed a deal to open another theater in China and will have 23 theaters operating there by 2008. IMAX has inked contracts for 12 new theaters in the last 8 months as it expands across Asia. On April 13, the company reported a deal to open 4 theaters in Korea.

My view: Polar Express was a big hit for IMAX and the big screen theater has no real competition. There is only one IMAX and this makes it a unique offering. The stock has a forward PE of 21, a PEG of .92, a $360 million market cap and $160 million in debt. Revenues are growing in double digits and this Asian expansion should create a steady income stream. It is a great concept for which there is little, if any, competition at the moment.

By Arthur B. Hill - Thu 14-Apr-05 at 10:06AM in Stocks
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Wednesday - April 13, 2005

Growth in VoIP Telephony

AP reports that internet telephoning and conferencing is catching on in the corporate world. Boeing engineers use it for projects, Lehman Brothers uses it for voicemail, counties use it to distribute missing persons bulletins and NFL Film workers use it as they travel from stadium to stadium. The growth is big and Cisco (CSCO) looks to be one of the big winners. Cisco already has 20,000 IP telephone customers worldwide and shipped 550,000 handsets in the fourth quarter alone.

By Arthur B. Hill - Wed 13-Apr-05 at 10:35AM in Technology
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Morbid Investing

Barron’s Online (click here) profiles funeral home operator Stewart Enterprises this week. The story goes on to tout reduced debt, a reinstated dividend, good cash flow, stable business and the upscale customer base. However, the biggest problem here is that true growth will not come until the baby boomers start needing their services, which is still many years away. Therefore, the stock could continue to sink.

Looking at the chart, there is a clear downtrend and falling price channel. The stock formed a hammer on high volume, but remains below the lower trendline and prior high. Also notice that there have been a number of high volume up days during this decline (black carets). But the downtrend is the real problem and it would take a move above key resistance at 6.5 to pique my interest in this company.

By Arthur B. Hill - Wed 13-Apr-05 at 09:06AM in Stocks
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Notable Charts

Today’s list of notable charts includes:
-Affiliated Computer Serv (ACS) with a high volume break.
-Cubist Pharm (CBST) bounces off key retracement.
-Midway Games (MWY) with narrowing Bollinger Bands.
-Schwab (SCH) forges classic correction.
-SW Airlines (LUV) forges an engulfing on high volume.
-Strayer Education (STRA) breaks flag consolidation.

By Arthur B. Hill - Wed 13-Apr-05 at 08:19AM in Charts
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Tuesday - April 12, 2005

Gold Gets Boring

Both stocks and gold have traded in a tight range over the last two weeks. The Nasdaq has been caught between 2022 and 1968, while the Gold ETF has been caught between 43 and 42.20. There is a potentially bullish setup in gold and further strength would trigger a short-term bull signal.

After the February-March surge, GLD broke rising wedge support and declined to around 42.5. The move retraced 62% of the prior advance and this is normal for a correction. The two week range confirms support and a catalyst is required to confirm a reversal. Look for a move above 43 to get the gold bulls moving again.

By Arthur B. Hill - Tue 12-Apr-05 at 06:56AM in Gold
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Dark Clouds Over Russia

The Wall Street Journal reports that Russia is demanding back taxes worth around $790 from Joint Venture run by British Petroleum. This is clearly not good news for foreign investment in Russian oil and represents another step backward for business in Russia. There are a number of Russian ADRs traded in the US, but news like this does not exactly bolster confidence. Some Russian ADRs include: MTL, MBT, ROS, TNT, VIP and WBD.

By Arthur B. Hill - Tue 12-Apr-05 at 06:22AM in International
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Monday - April 11, 2005

A Raging Bull

Dan Luskin on the MSN Strategy Lab (click here) sees a major bottom ahead for stocks. Luskin suggests that valuations are good, sentiment is overtly bearish and all the technicals are falling into place. While I am not so sure about the first two, I can say that the technicals are indeed falling into place. However, the overall trend for NDX remains down and we have yet to see a catalyst to signal a trend reversal. The current setup in NDX is a classic and has been detailed in the weekly report for subscribers. In addition, I have outlined the changes needed that would turn an oversold bounce into a sustainable advance.

It should also be noted that Luskin’s Strategy Lab counterpart, stock picker extraordinaire Jon Markman, also sees a rally on the horizon. Markman notes relative strength in the internet stocks and the oversold nature of the market. Well, oversold is not a reason to be bullish and the other Nasdaq groups failed to bounce with the internet stocks. This is still a bottom picking exercise fraught with risk. As ma always said, “bottom picking is a nasty habit”. I am waiting for some proof before sticking my neck out.

By Arthur B. Hill - Mon 11-Apr-05 at 10:14AM in General
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Notable Charts

Today’s list of notable charts includes:
-Taiwan Semiconductor (TSM) firming at trendline support
-PacificNet (PACT) finding support with another high volume bounce
-Watson Pharma (WPI) trying to reversal one gap and follow through on the other
-Rite Aid (RAD) gets another high volume bounce in the support zone
-General Electric (GE) consolidates just above key support

By Arthur B. Hill - Mon 11-Apr-05 at 09:31AM in Charts
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Friday - April 08, 2005

Help, I need somebody!

The Semiconductor HOLDRS (SMH) is holding up relatively well in 2005, but the other tech groups remain down in the dumps (gray oval). The Internet HOLDRS (HHH) managed a bounce the last two weeks (red line), but more is required to boost the Nasdaq. With only one group showing good relative strength in 2005, the Nasdaq is caught in a tug-o-war and trading will remain choppy until at least two of these four groups align (bullish or bearish). With three of the four relatively weak, I consider current industry group action to be more bearish than bullish.

By Arthur B. Hill - Fri 08-Apr-05 at 11:01AM in Industries
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Zigging and a zagging

This is the NDX 30 minute chart from 24-Jan to 17-Feb. It is more affectionately known as the “range from hell” and the same type of scenario appears to be underway now. There are filled gaps, higher highs and higher lows within a rising price channel. Each higher high was soon followed by a reversal as the index labored higher for over a month. The lesson here: buying resistance breakouts is not a good idea within a rising price channel. It is better to buy near support and sell near resistance.

By Arthur B. Hill - Fri 08-Apr-05 at 08:55AM in Indices
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Thursday - April 07, 2005

Where's the beef?

A week ago I opened the weekly report with a note on the big advance last Wednesday (30-Mar). On the heels of the employment report, stocks opened strong the following Friday, but soon peaked and declined the rest of the day. Despite this failure, stocks picked right back up on Monday and most major indices closed above last week’s high yesterday. What a comeback!

But there were two problems. Volume was not impressive and price action was tentative. The NYSE Composite managed four small gains and volume on the last three was just average. The Nasdaq gained three of the last four days, but volume was below average. The low volume and tentative nature of the advance shows uncertainty. While Wall Street loves to climb a wall of worry, I would rather see stocks climb with either stronger volume or stronger advances.

By Arthur B. Hill - Thu 07-Apr-05 at 06:33PM in Indices
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Advisor Sentiment

Mark Hulbert of CBS MarketWatch reports there is “no rah-rah for this rally”. The Hulbert Stock Newsletter Sentiment Index finished at –4.1% on Thursday and the letters are “net short the stock market”. Hulbert goes on to say that the –4.1% reading alone is not a big deal. What is a big deal is the fact that it moved from –1% to –4.1% when the market rallied over the last four days. Bullish sentiment usually rises on market advances and this decline shows skepticism. The chart from VTOReport.com shows that bullish sentiment peaked at the end of December and declined the last 3 months.

By Arthur B. Hill - Thu 07-Apr-05 at 03:48PM in Sentiment
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Wednesday - April 06, 2005

Chinese Wireless

Michael Brush of MSN (click here) talks with John Buckingham of the Prudent Speculator TechValue Report. The article lists 12 stocks to buy in an inflation scare. While I really don’t see the connection between some of these and inflation, it was interesting to see Buckingham pick Nokia (NOK) and Asia Info Holdings (ASIA).

Asia Info Holdings (ASIA) is a software and networking company based in China that should benefit from the wireless build-out. The stock is currently trading around $5 and has $3.25 in cash. I would think that this cash will soon be deployed – at least it better be! On the chart, ASIA has been trading much like the Nasdaq: down Jan-Jul 2004, up Aug-Dec 2004 and down Jan-Feb 2005. The Jan-Feb decline formed a falling wedge and the stock broke above resistance with a pretty good move in March. This advance goes counter to Nasdaq weakness in March and shows good relative strength. Hmm…. The stock met resistance from the prior support break (5.4) and needs to clear this level for a serious run above 6.

By Arthur B. Hill - Wed 06-Apr-05 at 09:30AM in Stocks
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Value in Pharma

Chet Currier of Bloomberg (click here) notes that pharmaceutical stocks now feature in a number of value and income driven mutual funds. I did a quick scan and turned up the following: Merck yields 4.6%, Bristol Meyers Squibb yields 4.4% and Glaxo SmithKline yields 3.9%. It is one of the few areas investors can find a decent yield and modest long-term growth.

By Arthur B. Hill - Wed 06-Apr-05 at 08:58AM in Sectors
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Tuesday - April 05, 2005

3M Powers the Dow

The Dow is a price weighted average of 30 stocks. As such, the stocks with the highest prices carry the most weight. The highest priced components are JNJ (69), MMM (84.45), IBM (89.6), CAT (90.41) and UTX (99.81). The lowest priced components are HPQ (21.57), INTC (23.13), SBC (24.20), MSFT (24.44) and PFE (26.95). I doubt if Dow Jones & Co would have added MSFT and INTC to the average had they known these two tech components would end up so low!

The focus today is on MMM, which is the fourth most influential component of the Dow. As a big multinational, MMM benefited from a weak Dollar over the last few years and more than doubled from Sep-01 to Jun-04. The stock continues to hold up well in 2005, but formed a rising wedge over the last six months. These are potentially bearish patterns, but should be respected as bullish while the higher lows holds. The stock recently broke below the lower trendline and further weakness below key support at 83 would turn the medium-term trend bearish. Also notice that the Accumulation Distribution Line formed a large negative divergence and this indicator points to a bearish reversal in the stock price.

By Arthur B. Hill - Tue 05-Apr-05 at 04:26PM in Stocks
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Semiconductor Support

Applied Materials (AMAT) is a key player in the semiconductor group and the broader market. The stock is part of the S&P 500, Nasdaq 100, Semiconductor HOLDRS (SMH) and Amex Semiconductor Index ($SOX). This $26 billion semiconductor equipment has relatively little debt ($500 million) and almost $4 per share in cash.

On the price chart, the stock has been range bound since July with support around 15 and resistance around 18.5. That’s a pretty tight range. As long as the stock remains range bound, the best option looks to play the swings within this range (magenta trendlines). The current swing is down and nearing support. This makes it too late for shorts and the next play would be long on a move above the upper trendline and late March high (16.80).

By Arthur B. Hill - Tue 05-Apr-05 at 02:57PM in Stocks
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Alaska Flying High

Alaska Airline Group (ALK) is an anomaly in the airline industry. While most airline stocks were grounded January and continued to drift lower, ALK held relatively strong and consolidated over the last few months. This is even more surprising when one considers the recent rise in oil prices and weakness in the Consumer Discretionary sector. Like the Consumer Discretionary sector, the airline industry is quite cyclical and vulnerable to economic fluctuations.

The pattern at work looks like a symmetrical triangle, which is typical for consolidations. The upper and lower trendlines are converging and the direction of the break will provide the next signal. A move above 30.5 would set up a challenge to the January high, while a move below 28 would target a move towards the Sep-Oct consolidation (23-24)

By Arthur B. Hill - Tue 05-Apr-05 at 02:34PM in Stocks
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Monday - April 04, 2005

As Wal-Mart Goes.....

A picture paints a thousand words. The same could be said for a chart and the recent support break in Wal-mart (WMT) bodes ill for the stock, the retail group, the Consumer Discretionary sector, the S&P 500 and the economy. While I do not expect Wal-Mart to go out of business, the message is clear. Tough times are ahead for this company. Perhaps the market is saturated with super stores, perhaps negative media is taking its toll or perhaps there are simply more (stock) sellers than buyers. Also notice that the stock has been underperforming the S&P 500 for several months and the price relative (WMT/SPX ratio) moved to a new low at least a month ahead of the stock.

By Arthur B. Hill - Mon 04-Apr-05 at 02:56PM in Stocks
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Dollar, Fed and Oil

In SmartMoney, Dan Luskin responds to the Goldman Sachs report that raised the oil target range to $55-105. Luskin implies that high oil prices are a result of inflation and not any real increase in demand or a decrease in supply. His main argument is that inflation led to a falling Dollar and the weak Dollar is the reason for high oil prices. Luskin’s prediction is that the rise in oil prices will cease now that the Fed has started to fight inflation. With the Fed fighting inflation, interest rates will rise, money will become tight, the US Dollar will rise, oil will fall and other commodities will come under pressure.

My view: I think Luskin’s arguments for strength in the US Dollar Index are robust, but am not convinced when it comes to oil. Oil is priced in Dollars. Therefore, the cost of oil rises when the US Dollar falls. As these charts show, there is a clear correlation between the price of oil and the US Dollar Index over the last three years. However, I would prefer to focus on oil for oil the US Dollar Index for the US Dollar Index. In other words, the price chart for oil should provide the answers needed. The price remains in a strong uptrend and the upper trendline of the rising price channel extends to $105 at the end of 2006.

By Arthur B. Hill - Mon 04-Apr-05 at 02:52PM in US Dollar
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Limited Oil

Barron’s interviewed Art Smith over the weekend. Smith notes that ExxonMobil (XOM) is not spending money to build reserves and does not think high oil prices are here to stay. On the other hand, ChevronTexaco (CVX) thinks reserves have peaked and there is no new supply coming into the market. He thinks XOM is not a great value, but TOT represents value and has a 3.3% dividend. The search for supply will increase and oil service stocks stand to benefit as capacity utilization rates reach 100%.

My view: Oil has been above $40 since July (eight months). It really doesn’t matter if oil is $55 or $45, both are relatively high and imply some sort of supply/demand imbalance. The chart shows a clear rising price channel that extends back to September 2003. I really don’t see oil falling below $44 and believe that demand is outstripping supply as long as this rising price channel holds.

By Arthur B. Hill - Mon 04-Apr-05 at 02:50PM in Oil
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Hedge Fund Mania

Gregg Greenberg of the TheStreet.com offers investors a way to play “the hedge fund craze”. Greenberg reports that there are around 8000 Hedge Funds now. He goes on to discuss different strategies, legal issues and fees. Lee Schultheis of Alpha Hedged Strategies points out that “a run-up in hedged investing like we are seeing now just leads to lackluster returns because too many people are piling into the same space, thereby squeezing out the returns”.

My view: 8000 Hedge Funds! That’s more than the total number of NYSE and Nasdaq stocks combined! The title alone should be enough to scare investors. Once something becomes of craze, investors risk buying at the top and subpar returns. Once an opening is spotted, money moves very fast and the opening slowly closes.

By Arthur B. Hill - Mon 04-Apr-05 at 02:41PM in General
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