EQUITIES
Welcome to this
week’s edition of the renowned Lewison Letter. While we saw a shortened week of trading and very light
volume to go with it (Friday’s volume was the lowest of the year),
nevertheless, this week’s US economic data didn’t fail to disappoint. Earlier in the week, the ISM (Institute
of Supply Management) said the manufacturing sector contracted in June for the
first time since July 2009. Consumer
confidence continues to decline and retail sales were down. We found all of that out before the big
bomb dropped Friday morning. As I
predicted in last week’s letter, I expected a whopping total of 80,000 new jobs
in June, which was exactly the number the US Department of Labor put out and was
the sole reason for the Dow dropping 124 points and the Nasdaq falling 39
points (more on this later).
Needless to say, Friday’s bludgeoning left many investors selling out of
stocks and buying up US Treasuries, as the yield on the 10-year note fell to a
one-month low of 1.536%, approaching all-time lows of 1.437% hit in early
June. While the jobs picture is
still an embarrassment and the situation in Europe is still a disaster, with
Spanish bond yields pushing towards 7% again, I’m going to play the role of the
contrarian and tell you that the move to safety is still the wrong move and
that there are plenty of ways to successfully trade/play this market.
While
the Nasdaq’s beating of a 39 point drop was bad, it could have been a whole lot
worse, which is why I think it’s still safe to be in equities, but in the right equities at the right time. I have said many times in previous letters, that there are
really 4 equity markets and that was very evident this past week; Dow, S&P,
Nasdaq and Apple. Following the
markets as close as I do, it’s easy to see the impact that Apple has on the
Nasdaq, being the single reason the Nasdaq finished positive for the week,
while the Dow and S&P did not, despite being the weakest on Friday. Had this jobs number come out the
previous week instead of a few days ago, the Nasdaq would have been down 70
points because Apple would have been down $20. But June 29 was a very important day for the Nasdaq because
it marked the highest close in Apple since May 2nd. Since then, Apple has rallied almost
4%, carrying the Nasdaq higher, including only being down about 0.50% on
Friday, greatly outperforming all three indices. I’ve said many times that where Apple goes, so goes the
stock market. The key level I was
looking at on Apple was for it to break through the resistance at $585. It blew through that level on July 2nd
and has gone straight up since.
That’s what gives me confidence that this market will hold key levels
and that being in equities is the right place to be. Now, that doesn’t mean that you should be all in on stocks
on Monday. I do see a continuation
of Friday’s sell-off in the early part of the week, but then I think we rally
based on prospects that the Fed will act to keep rates low and boost the
economy. I reiterate that you
should only buy on pullbacks, so be patient.
It’s
important to note that the S&P traded down to a key technical level on
Friday and held that level well.
The level I’m talking about is the 50% Fibonacci retracement from
April’s high to the Cramer low on June 1 (This was the day that Cramer became
the most bearish I’ve seen in years, the day that I advised people start
getting long again). The 50% level
is at 1344.50, and the S&P traded down to a low of 1348 on Friday before
rallying 6 points into the close.
That will be the first key level to keep your eye on. If we hold that level on Monday, then I
see a rally out of there the rest of the week. If we fall through that level, I am looking at the 38.2%
retracement at 1326 to be the new floor.
I continue to recommend stocks that look cheap, have great balance
sheets and good long-term growth prospects. I recently established new positions in Apple, Starbucks and
Nike, all of which I think are at great levels to get in on. I prefer to play these stocks with
long-dated deep in the money call options, limiting your risk and allowing you
to control a lot more shares for a lot less money. Other stocks I like are Whole Foods, Petsmart, and Macys.
GRAINS
Despite
all the talk about the economy and jobs and Apple, there are a lot of other
markets that are creating great opportunities, most notably in the grains. I will admit that the moves in corn,
soybeans and wheat have surprised even me, and blew right through my price
targets. Soybeans and wheat are at
multi-year highs, while corn is pushing 52-week highs. All three grains are up sharply Sunday
night as more hot weather and no rainfall continues to destroy US crops. While I see more upside for the grains,
this is not a sector I want to be long because when the prices start dropping,
they are going to drop hard and fast, in limit moves. My new price targets are as follows: Soybeans should hit
$16.54/bushel, corn should hit $7.55/bushel and wheat should hit
$9.00/bushel. That still leaves
some room to the upside in stocks like Mosaic, Potash and Monsanto. However, my favorite in the sector is
actual the one I think you can be short and be short with success, and that’s
CF Industries. This is a
Deerfield, IL company that is one of the leaders in manufacturing and
distributing fertilizer products.
If you look at a chart of this stock, it put in a perfect double top at
$203, with bearish moves on both of those days. I think if this stock gets back anywhere near that level,
you short it, stopping yourself out at $205.20.
OIL
Now
on to my favorite market of them oil; West Texas Intermediate Light Sweet Crude
Oil. This was a wild week for
crude oil, starting the week as low as $82.10/barrel, trading as high as $88.98/barrel,
only to close up $0.26 for the week at $84.46. In technical terms, this weekly move is called a doji line,
where the open and close are about equal, signaling a volatile price movement
is eminent. Last week I mentioned
that I want to be short crude oil against $85.61, which I was, but got stopped
out with a loss as prices rose due to supply fears on the Iranians shutting
down the Straight of Hormuz and testing out missile launches that could hit
Israel. Thursday’s inventory
report showed an oversupply, sending prices lower, only to be hit even harder
on Friday from the weakness in US job creation, lowering demand. While oil is a supply & demand
story, it’s also trading on technicals, as it looks to be building an inverted
head-and-shoulders at the bottom of a 5th wave down and 52-week lows
(which also happens to be a double bottom). While I am still looking to be a seller against $85.61, I
would be a buyer against the floor of $80.86/barrel, which was the June 20 low
and the bottom of the shoulder line.
I see oil trading in that $5 range for a week or two before breaking out
to the upside of $90.53.
Unfortunately that means higher prices at the pump for consumers. Names I like in the space continue to
be the pipeline companies like PPL Corporation (PPL), Linn Energy (LINN),
Energy Transfer Partners (ETP), and the big oil that pays a nice dividend like
Exxon (XOM) and Conoco Phillips (COP).
This
coming week will kick off earnings season with Alcoa reporting tomorrow,
followed by many of the financials.
With almost every analyst lowering their expectations due to the
suffering global economy, I think that we’ll see more beats and raises than
misses. I’m looking for 75% of the
S&P companies to beat earnings estimates this quarter, which only bodes
well for equities. With that being
said, Europe will continue to dominate the headlines and where Europe goes, we
go. Keep an eye on Spanish and
Italian bond yields because if they continue to trend towards 7%, then the
markets will continue to sell off.
Full
disclosure: I am long Nasdaq, short S&P puts, long AAPL, SBUX and NKE
calls.
Jeff Lewison
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