7/15/12
Welcome
to this week’s edition of the Lewison Letter. It was another wild week on Wall Street with the S&P and
Dow settling higher but the Nasdaq got hammered all week long to close down 1%,
despite a 1.60% rally on Friday.
For the coming week, I’m expecting it to continue to be rocky, as we
will get earnings from just about every major financial company out there. Friday, JPMorgan and Wells Fargo both
reported stronger than expected quarters, citing strong mortgage numbers. JPM was also aided by only losing $5.8B
on their careless trading instead of the recently reported $9B. With JPM and Wells being two of the
powerhouse banks in the country, I’m not expecting similar results from the
likes of Citibank or Bank of America, both reporting early in the week. Later in the week, we will get results
from Morgan Stanley, Goldamn Sachs and US Bancorp, all of which I think beat
estimates and rally the markets on higher investment income. Throughout the week, we will get
reports from many Dow components like Johnson & Johnson, Intel, Coca-cola,
Verizon, and General Electric.
While all are important, I don’t think any of them will move the market,
except for Intel. That’s the
report you need to pay attention to.
The reason that the tech-heavy Nasdaq got clobbered all week long was
due to chipmakers lowering guidance and outlook for the year so much that Apple
even got hit for almost a 3% loss.
Expectations are so low for Intel that I think they beat, but I am
concerned about their guidance going forward. If they are more optimistic than competitor AMD was last
week, then look for a rally in tech and therefore a rally in Apple. In addition to the many earnings
reports coming out, Monday will also feature retail sales numbers, business
inventories and Empire manufacturing.
On Tuesday, we’ll get the June CPI number and Wednesday will feature
crude oil inventories and the Fed Beige Book at 1:00pm CT. All of this added up, along with hot
& cold Europe, spells out another illogical market for the week. But as the old saying goes; the markets
will remain illogical longer than you can remain solvent.
INDICES
Despite
the S&P closing lower for 5 straight sessions before Friday, the market
closed higher for the week, aided by “as expected” GDP from China on Thursday
night and better than expected earnings from financial bellwethers, JPMorgan
and Wells Fargo. Contrary to
almost every analyst on Wall Street, I’m going to say that we tread higher for
the time being. Looking at the
charts, the S&P held the 50-day moving average during the sell-offs on
Tuesday, Wednesday and Thursday, only to rally 22 points on Friday, putting in
a bullish engulfing line that engulfs the entire 4 previous days of price
action, a very bullish indicator.
Additionally, since putting in the Cramer bottom back in early June, the
S&P is building a 5th wave up (Elliot Wave theory-see previous
letters for explanation), putting in a series of higher highs and higher lows,
another very bullish indicator.
Thursday’s price action also gave you a perfect low to trade against, as
the S&P traded all the way down to the 38.2% Fibonacci retracement of 1326,
before rallying 30 straight points to Friday’s close of 1356.75. My price target that I’m looking for on
the S&P is 1395, which would not only complete the 5th wave up,
but also hit the uptrend line connecting the highs from May 29th and
June 19th. Until we
drop below 1326, I will remain bullish until 1395, where I think you can get
short or take profits. One stock
that I picked up this past week is Home Depot (HD), which eventhough it rallied
on Friday, is still a great stock and has a low risk entry. Currently trading at $52.09, HD put in
an upside gap on June 6th and 7th ($50.60-$50.91). Since then, HD has tried three times to
fill that gap, failing all three times, representing a very strong floor. You should be a buyer of Home Depot
against that level and let it ride, as I see a strong quarter coming up,
coinciding with a slight rebound in the housing market.
While
the Nasdaq was hammered all week long, despite a couple rallies from Apple
earlier in the week, I am still staying bullish until it breaks key levels that
I’m looking at. Last week’s low on
the Nasdaq was put in on Thursday at 2837.75, only to rally about 71 points
higher to close Friday at 2908.47.
If you use the same time frame as the S&P, the Nasdaq is also
building a 5th wave up from the Cramer low, with defined trend lines
connecting the higher highs and higher lows. Using Thursday low to trade against, I will stay bullish
until the Nasdaq falls through 2837, and will remain bullish until it hits my
target of 3016, the upper end of the uptrend line connecting the same highs as
the S&P, and also filling the downside gap made on May 4th. I of course cannot talk about the
Nasdaq without mentioning Apple. I
am still long deep in the money calls and remain bullish the stock against
$582, which is the 78.6% Fibonacci retracement from the 52-week high to the
low, and also is the exact price for the short term uptrend line connecting the
Cramer low to the low on May 28th. If you are not in Apple yet, hold off until they report
earnings a week from Tuesday so that you aren’t trading before a big
announcement. If the stock sells
off, it’s very easy; you buy above $582, and sell or hold off below that
level.
CRUDE OIL
This
past week was kind of an uneventful week in the oil markets. The only even of any significance came in
the middle of the week, when the US increased sanctions against Iran, sending
oil prices higher for the week, up $3/barrel. Iran sanctions are not going to ease anytime soon, and while
I don’t think that these sanctions are as big a deal as many people are making
them out to be (mainly because the Saudis have already told us they will cover
any Iranian shortfall), it will still be bullish for crude prices, as I
continue to see oil trade up to the 38.2% Fibonacci retracement of
$90.53/barrel, a 4% upside from Friday’s close of $87.07. Over the last 45 days, crude oil has
built a very strong inverted head-and-shoulders formation, with the top of the
shoulder trend line coming into play at $84.16. That’s the level I would trade energy stocks and oil
against. Remain bullish north of
that price and bearish below that price.
The absolute best way to play energy right now is through the energy
transport (pipeline) companies. My
favorite in this space is one that has unfortunately rallied hard over the last
couple weeks, Kinder Morgan Energy Partners (KMP). This company is a master limited partnership that operates
as a pipeline transport and energy storage company. Their pipelines deliver diesel and jet fuel along with LNG
(liquid natural gas) over 8,400 miles.
They yield a nearly 6% dividend with solid growth and great
management. I also like Energy
Transfer Partners (ETP), which yields 7.90%, and Linn Energy (LINE) yielding 7.30%. If you prefer to play energy through
the major oil companies, my favorites in this space is Exxon Mobil (XOM),
Chevron (CVX) and Phillips 66 (PSX), yielding 2.70%, 3.40%, 2.30%,
respectively.
GOLD
This
week was a key week for the gold market, not because it actually acted as a
safe haven, which it isn’t, but because on a technical basis, gold solidified
its low base at $1,550/troy ounce.
Since rallying out of the hole on June 1, gold been treading the line of
$1,550 for almost a month and a half now, having never closed below that
level. In fact, the last time gold
closed below $1,550 was back on May 16.
If you want further evidence that $1,550 is a perfect level to trade
against, gold has only closed below that level three times in the last 52 weeks,
only to rally out within a day or two.
Translating that into GLD (the gold ETF, which is the largest commodity
ETF in the world), gold should be bought against the $150/share level. With gold having traded up to $154.14
on Friday, you have a very low risk entry point with a high reward. Solidifying the gold trade is a similar
setup in Silver where the metal has held the $26/ounce level 4 times in the
last 52 weeks, only to rally each time.
These two metals trade hand-in-hand and with both holding key technical
levels, it’s time to buy. My price
target for gold is $1676/ounce or in GLD terms, $167/share, giving you a 9%
upside with only downside risk of 2.50% (assuming you use the $150/share price
as your stop loss).
US Treasuries
134’305…that
number represents the all-time high in the 10-year US Treasury contract. That also represents the end of the
treasury market as we know it.
With the contract closing at 134’200 on Friday, up 2.5 points despite
the major rally in the stock market, you’re probably thinking I’m an idiot and
have no idea what I’m talking about.
However, while that may be true, let me tell you why I think I’m right
and one of the only people out there saying this. First of all, while the stock market sold off Monday-Thursday,
the treasury market rallied a grand total of 6.5 points during that time
period, and failed to match or make a new high. The high for the contract was put in on June 1, just a day
before the Cramer low in the stock market. Since then, the stock market has rallied out of the hole and
the treasuries have only sold off 12 points, but what’s important is that
yields on 10-year treasuries have fallen and stabilized below 1.50% for a few
days now. Almost every utility,
energy, consumer staple and tech company that pays a dividend offers a higher
yield and more growth than treasuries do.
That’s my biggest reason why I think we have found a top in
treasuries. Even Apple, the
largest growth company in the world,
offers a higher yield than US Treasuries.
There comes a point where the safety and security of US Treasuries just
isn’t worth it, and I think rates below 1.50% for an investment that has little
growth left, is a bad place to put your money. I am also under the belief that the treasury market has
priced in any additional QE that the Fed might do, which means they won’t rally
on any news of more easing. If you
want an incredibly low risk trade with a potentially high reward, then you
should be a buyer of the Proshares Ultrashort Lehman 20year Treasury
(TBT). It’s currently trading at
$14.79/share and I think you can use $14.50 as a stop loss, risking just 2%,
which could turn into a massive gain when I’m right.
Despite the
crazy market action that we have seen over the last few months, there is still
a lot of value out there, and it’s all about picking the right stocks at the
right time. For the time being,
stay out of tech stocks until Apple reports on June 24. Many stocks like Walmart, Colgate,
Petsmart, Home Depot (which I recently acquired) and Disney are all sitting at
or near all-time highs and should continue to be bought until the market says otherwise. Lastly, keep in mind that high dividend
paying energy stocks are a great place to park your money and earn a high
dividend while getting some good growth.
Full
disclosure: I am currently short S&P puts, long AAPL, SBUX, NKE and HD
through long-dated, deep-in-the-money calls.
Jeff Lewison
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