It’s
time now for this Europe inspired edition of the Lewison Letter. As I’ve been saying for months now,
this market goes up and down solely on the basis of what happens each and every
day out of Europe, and for those who doubted that, hopefully you finally
realized that starting at about 1:30pm CT, when the S&P was at 1313.25 and
oil had hit a 8 month low of $77.28/barrel. At that exact moment I was long the S&P and short crude
oil, and did cover my short, moments seeing the key reversal in both markets. At 1:30pm CT, rumors started
circulating that German Chancellor, Angela Merkel, had cancelled a conference
call with world leaders, leading to speculation that Germany was ready to help
bail out the European Union, rumors which turned out to be very true. Early Friday morning, Germany agreed
that a single supervisor should oversee banks in all 17 nations that use the
euro currency. Additionally,
European leaders agreed to short-term measures to help bail out Spanish and
Italian banks, sending bond yields in those countries sharply lower. These events led to the 9.4% rally in
crude oil, 3% rally in the Nasdaq and send the S&P to its best day of the
year, up 2.5%. Late in the
morning, the markets became very technical driven, which I’ll talk more about
later on. But what really
accelerated these markets late in the morning was massive short covering and
end-of-the-year painting of the tape.
Let
me first talk about the month saving day for the Dow, S&P, and Nasdaq. While all three indices finished in the
red for the 2nd quarter, they all finished the month higher by about
3%. From Thursday’s low, the
S&P rallied almost 50 points in less a little more than two trading days,
right up to the key 61.8% Fibonacci retracement. That 1362 high that the S&P hit at the close yesterday
is the major resistance level that I have been talking about and it acted as
such again. As of this writing the
S&P futures are off about 3 points, again propelling away from that key
ceiling. I expect more selling
pressure to come into play on Monday, keeping the S&P in this trading range
for the foreseeable future. I also
advise against trading this market until after Friday’s non-farm payrolls
report comes out. Nobody is really
expecting any kind of job creation so any slight surprise in this number will
rally the markets. That being
said, any number less than 80,000 jobs would be a major disappointment and will
crush this market.
The
biggest commodity move on Friday was in energy with August crude oil rallying
almost 9.5% ($84.96/barrel), which was the biggest rally in oil since March of
2009 and doesn’t spell good things for summer driving. Right around 11:50pm CT, oil really
took off, blowing through a three month downtrend line and then finally the
resistance level I mentioned last week of $81.53, right up to within $0.30 of
the 23.6% Fibonacci retracement of $85.61, which now acts as the new ceiling
for crude. If you’re in the same
camp as me and think that Friday was a lot of short covering, then use that
level to sell oil against, which I plan on doing this week. As of this writing oil is already
selling off sharply, down $1.17/barrel or 1.37%. Until oil closes above $85.61, I would continue to stare
clear of oil refiners and explorers, but instead continue to own the oil
transports such as Linn Energy (LINN), Duke Energy (DUK), Energy Transfer
Partners (ETP) or PPL Corporation (PPL).
All of those stocks pay hefty dividends and aren’t subject to price
risk. If you’re unsure on when to
play the oil sector, wait until after Thursday’s crude inventory report at
9:30am CT, as I expect supplies to remain near record highs, sending prices
lower.
Turning
to the CBOT mothership, the grains, soybeans, corn and wheat continued to rise
sharply all week long, with soybeans at the highest level they have traded at
for the November contract in years, sitting at $14.285/bushel. Corn and wheat are trading at their
highest levels since early March and August, respectively, with corn closing at
$6.34/bushel and wheat trading for $7.585/bushel. While I think that grain prices will continue a little
higher, if you’re agriculture stocks, I recommend taking profits and waiting
for a pullback. One thing I’ve learned
trading grains, when an upward movement breaks down, it breaks down very hard
and very quickly. I see soybeans
topping out at $14.565/ bushel, corn topping out at $6.55/bushel and wheat
having a ceiling at $805.50/bushel, all levels you should look to trade
against. If you’re a savvy
investor, you can reverse your longs and short stocks like CF Industries (which
will give you the biggest bang for your buck), Potash, Monsanto and Mosaic. Right now, corn is currently trading up
$0.185 cents, but made a high of $6.65 before selling off. Keep these high levels in mind because
any sight of rain, and these markets will tank.
The
last thing I want to cover is the ever-important gold market. On Friday, gold rallied more than $50,
to close above $1600/ounce for the first time in 10 days. However, like the oil market, I believe
most of this move is short covering, where I see gold to sell off again this
week. It’s already down
$12.70/ounce or 0.80% tonight and should continue to drop and challenge the
recent lows of $1550/ounce. I
still expect the US Dollar to trade up to $83.50, pushing gold prices even
lower.
All-in-all,
Friday was a great day if you were long, but this week, we will be back to
reality and it will be just like nothing every happened. Copper will continue to drop, oil will
pull back sharply and gold will continue it’s slippery slide back towards
$1500. I continue to reiterate
that these markets are completely controlled by actions in Europe and the only
thing that matters out of the US data will be Friday’s unemployment
numbers. For a couple quick trade
recommendations, I still like stocks like Starbucks (SBUX), which recently put
in a triple bottom and Apple (AAPL) which will continue to put up monster
quarters for years to come. If you
want to put on a position this week, I recommend waiting until we get Friday’s
jobs report. There will be light
volumes all week long because of the July 4th holiday.
Full
disclosure: I am currently short S&P puts and will be initiating a short
crude oil play against $85.61.
Jeff Lewison
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