Welcome
to this week’s edition of the Lewison Letter. As mentioned in my last letter, much of the week’s move was
going to rely on Tuesday’s earnings report from Intel, which turned out to beat
estimates, sending the markets higher until, Friday’s European issues
resurfaced. With Spanish yields
once again rising above 7%, all of Europe sold off, taking the US stock market
down with it. Still, for the week,
the S&P and Dow finished slightly higher and the Nasdaq rallied almost 0.75%. What has to keep you optimistic is that
the markets shrugged of a slew of bearish economic data, and just about
everything else thrown at it, a real sign of a strong market. However, as we saw on Friday, the US
markets will continue to trade on European headlines until anything out there
is resolved.
Looking
ahead to this week, the markets will once again be dominated by corporate
earnings. Monday should be
relatively uneventful, with none of the major Dow components reporting and no
economic data being released. That
will bring us to Tuesday where we’ll get the biggest and most important
earnings report of the quarter, from none other than Apple. As the weeks have gone on, more and
more analysts are expecting Apple to miss based on European weakness and lower
guidance. That just reminds me of the
Four Tops hit song, “The Same Old Song.”
Every quarter, analysts become bearish of Apple’s earnings right before
they report because of European weakness or slower iPhone sales in anticipation
of the next iPhone. And quarter-after-quarter,
Apple’s only surprise is how ridiculously easy that beat their estimates. This quarter will be no different, as
Apple seems to be the only company in the world selling anything these days. Analysts are looking for $11.02/share,
which is way too low, as I expect apple to earn $11.15/share, an increase of 43%
YOY. If you listened to Verizon
and Qualcomm, you’ll know that iPhone & iPad sales should be through the
roof. Now, after what happened
with Chipotle on Thursday night (down almost $100 at point), I will once again
advice not trading Apple before they report after the close. If you own Apple, hold it, if not, buy
on any dips because long-term it’s going much higher. On Wednesday, Dow component Caterpillar will report before
the open, which could sway the direction for the day as CAT is looked at as an
overall barometer of the global economy.
Other than that, we’ll also hear from Dunkin Donuts, which will give you
a read through to Starbucks.
Chevron reports at the end of the week, which sitting at all-time highs,
should continue to go higher. The
bottom line is this, if Apple beats, the market will trend higher the entire
week, shrugging off any negative US economic data. If Apple misses, then look for a broad sell-off, and buy on
dips (mainly caused by Europe headlines).
INDICES
While
the S&P did not hit my target of 1390, it came within 10 points and
completed a confirmed 5th wave up with a bearish engulfing line on
Friday’s sell-off, closing the week at 1362.66, which is the exact 61.8%
Fibonacci retracement. This level
should hold, but if not, we could be in for another 20 points to the downside,
where the next floor I’m looking at is 1344 or the 50% retracement and upward
trend line from the Cramer low to the low on July 12th. With that being said, I am still in the
camp that says we trend higher towards 1400, and remain still bullish until we
get to that level. Again, the
direction of the market will be determined by Apple on Tuesday night, so hold
off on buying until then. As for
the Apple controlled Nasdaq, the levels I am following are 3040 on the upside
and 2865 on the downside. With
Friday’s close at 2925, the index is trading in no-man’s land, so wait to buy
or the sell the Nasdaq components until you get closer to the two levels I
mentioned.
CRUDE OIL
If
you ever wanted to know how powerful an inverted head-and-shoulders formation
can be, take a look at the crude oil market this week which rallied almost 5%,
aided by tension between Iran and Israel, only to sell off 1.37% on Friday with
the broader market on European worries.
As I mentioned last week, my price target for crude oil is $90.37, which
I continue to see as the average price over the month. I’m looking for a high on oil to be
$94.29 and a low of $85.53, the 50% and 23.6% Fibonacci retracements,
respectively. Unfortunately, when
I look at the gasoline contract, I see gas heading much higher, meaning higher
prices at the pump. September
gasoline has traded higher for an entire month now, rallying 11% compared to a
7.5% increase in oil. On Thursday
and Friday, gasoline held previous resistance levels of $2.7896/gallon, which
is now the floor that I’m looking for gas to hold, with a new resistance level
of $3.0274/gallon, a 6% increase from Friday’s close. The best way to play the energy sector is still through
Exxon (XOM), Chevron (CVX), Tesoro (TES), Valero (VLO) and Conoco Phillips
(COP). Additionally, you should
continue to own the pipleline companies like Kinder Morgan (KMP), Linn Energy
(LINE) and Energy Transfer Partners (ETP). But watch for oil and gasoline to hit the key levels I
talked to about and trade against those levels. If gasoline trades above $3/gallon, I would advise taking
some profits off the table and wait for a pullback to buy more.
GRAINS
I
will admit that my price targets on soybeans, corn and wheat were all way too
low, as the entire grain complex has rallied at or near all-time highs. In the last 4 weeks, soybeans are up
21.5%, corn is up 39.7% and wheat has rallied 34.9%. First looking at wheat, the market is setting up the 2nd
highest monthly close all-time. I
really don’t see an end to the grain rally anytime soon, nor do I think this
recent drought is entirely priced in, so I’m calling for $11.00/bushel wheat
over the next month or two. The
corn market is a little different.
There has been so much attention on corn prices the last three months
that I think 90-95% of the corn rally is over. Additionally, if you look at prices over the last 10 years,
corn closed on Friday just 2 cents from all-time highs of $7.9975/bushel. If corn prices fail to go higher, it
will set up a triple top, and the biggest short of the decade. Unfortunately, that being said, I still
cannot recommend getting short the grains and I think corn still has some more
room to the upside. Looking at
soybeans prices, Friday’s move put in a fresh all-time high of $16.91/bushel,
and I don’t it isn’t over yet.
Taking a look at Fibonacci numbers, I’m looking for soybeans to trade up
to $17.71/bushel, completing the 5th wave up from the lows of 2008,
and making soybeans a huge short trade.
There is still plenty of time in the growing season for soybeans, which
is why it has had the smallest rally of the three, and weather forecasts for
the next thirty days are calling for continuously hot temperatures and very
little rainfall, all bullish for bean prices. While I said in the past few weeks, it’s too late to be in
the agriculture sector, that has proven to be wrong and as I’m forecasting,
there is still a lot of room to the upside. What really convinced me is the move that CF Industries (CF)
made this week, putting in new all-time highs of $208.43, and closing above
$200 for the first time ever. But
right now the best way to play the grains is through Mosaic (MOS) and Monsanto
(MON). But keep in mind that while
there is still upside in these names, the grains can turn fast and hard so have
a very short leash to the downside.
When I reported
on Chipotle (CMG) I made it a point to make sure nobody bought before they
reported earnings and hopefully everyone took that advice. As I was once bullish this stock, when
facts change, I change too. Chipotle did beat on net income but revenues and sales were
dramatically lower than estimated and guidance was weak, sighting higher
commodity costs. Unfortunately for
Chipotle, that sounds like a terrible excuse for producing terrible
numbers. Feeder cattle prices are
at multi-year lows and live cattle prices are down 4.7% for the year. So while corn and wheat prices are up,
they are getting relief in meat prices, along with lower energy costs with
natural gas down 33% from this time last year and oil prices down 9% for the
year. So if you think CMG is a buy
now, think again, as I need to see 2 straight quarters of solid growth before I
can get behind this stock again.
Once again,
Tuesday will be the biggest day of the week, with Apple reporting after the
close. Hold off on buying or
selling anything until we hear from Apple. If the stock sells off, I want you to buy as much as you can
because even at its current price of $606, it still remains one of the cheapest
stocks in the market. Pay
attention to the key price levels I mentioned for the S&P and Nasdaq and
buy and sell against those levels.
This is a market that wants to go higher and the only thing keeping it
down are the problems in Europe.
Full
disclosure: I traded out of my long AAPL calls and used that premium to sell
AAPL puts.
Jeff Lewison
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