Calm Before Jackson Hole

8/26/12

                  Welcome to this week’s edition of the Lewison Letter.  After stocks hit a new 5-year high early in the week, Wednesday and Thursday led to some profit taking, with the S&P dropping 20 points from its highs, only to rebound on Friday to close just about 1% below the those same highs.  Much of last week was determined by the minutes from the last Fed meeting and Bernanke’s remarks made on Friday, giving the market a nice boost.  I expect another relatively flat market throughout the week until Bernanke and ECB President, Mario Draghi speak at Jackson Hole, Wyoming at the end of the week. 

INDICES

                  While all three indices were lower last week, the trend is still higher and that’s where they should continue to go.  The Nasdaq will be getting a nice boost on Monday with Apple winning their patent infringement lawsuit against rival, Samsung, late Friday afternoon.  A US jury found Samsung guilty of infringing on 6 of the 7 patents Apple sued for, awarding Apple $1.05B, and rallying the stock $11 after the close, to new all-time highs.  As of this writing, the stock futures are already indicating a nice open Monday morning.

                  The important level to watch for the week is 1400 on the S&P, which seems to be very strong support for the market.  On Friday, the S&P traded to a low of 1398.50, only to rally out of the hole and close at 1411.  As mentioned in last week’s letter, while I expect the market will hold the 1400 level, if it does drop below, we have another 11 S&P points to the downside, where 1389 comes into play as the 78.6% Fibonacci level. 

                  I continue to reiterate that I like companies which have little to no European exposure and have already reported strong quarters.  Wait for pullbacks in these stocks and ride the wave higher.  Stick with stocks that I mentioned in previous letters, along with Macy’s, Petsmart, Phizer, Merck, etc…

Metals

                  I hope you were able to take advantage of the rally in gold and silver last week, with both breaking out sharply  Gold did exactly as I expected it to do, trading right up to the 38.2% Fibonacci retracement of $1676.60/ounce, closing at its highest level since March 5^th.  Likewise, silver broke out to close at its highest level since early April.  I would be looking for another $2-3/ounce in silver and about $50/ounce in gold before pulling back.  Any pullback in the gold or silver should be bought against $1618.30 and $28.11, respectively. 

                  The other metal market that had a nice rally despite the stock market trading lower was Copper.  The industrial metal rallied 2% to close at its highest level in over a month.  Most importantly, copper broke through a key resistance level on Wednesday, closing above $3.4635/pound for the first time since mid-July.  Wednesday, Thursday and Friday all closed above that key 38.2% Fibonacci level, putting in a new floor and a great level to trade against.  While I previously recommended playing copper through homebuilders such as Pulte Group (PHM) and Toll Brothers (TOL), both have skyrocketed to new multi-year highs, so I suggest waiting for a pullback.  While I previously did not like Freeport MacMoran, one of the world’s largest copper and gold miners, the stock has a nice base at $31, which is a good level to trade against.  

                  Without a lot happening in the markets this week, that wraps up this week’s edition on the Lewison Letter.  Again, only buy on pullbacks and be cautious until the meeting at Jackson Hole at the end of the week.  A lot of expectations are that Bernanke will be announcing another round of easing, and if he fails to do so, I expect the stock market to pull back sharply. 

Full disclosure: I am currently in all cash.

Jeff Lewison 

Never Be Short A Quiet Market

8/19/12

                  Welcome back to this week’s edition of the Lewison Letter.  For the second week in a row, things were pretty calm in Europe and Wall Street leading to the sixth straight week of gains for the broader markets.  Without any big economic reports coming out next week, it should be another quiet one on Wall Street

INDICES

Looking at the S&P, Friday’s close of 1418.16 is the 2^nd highest daily close since early 2008 and the highest weekly close since that same time frame.  The S&P has closed higher for six straight weeks and 9 of the last 11.  Last time we saw a streak like this, started in January of last year.  There are a lot of factors involved in why these markets are heading higher.  The lack of any news at all coming out of Europe in the last two weeks, to go along with overall better-than-expected economic data out of the US, is giving investors more reason to buy into the stock market.  There is also a big Fed stimulus premium built into the market, which could be a disaster if Bernanke and company decide next month not to continue their further easing.  But, what has really driven this market higher is the same thing that led the market lower earlier this year…technology.  For evidence, look no further than what has led the Nasdaq higher over the last couple months, tech giants, Google and Apple.  Apple closed Friday at new all-time highs and Google closed at its highest level since January 2008.  Along with those two stocks, many of the chipmakers are trading at or near multi-year highs.  

With stocks trading this high, I am hearing more bearish sentiment than bullish, which is to be expected.  I am in the camp that believes the trend is your friend and the markets will head higher.  Equities have had every opportunity to trade lower, but every pullback has proven to be a great opportunity to buy, and that will continue.  On August 7^th, the S&P rallied through what was previous resistance of 1400, and the broader index has closed above that level every single day since.  You now have a perfect level to trade against, and until the market closes below 1400 three times, continue to use that level as your resistance to buy against.  Any drop below that level, and the S&P should hold 1390, the 78.6% Fibonacci. 

I again urge you to stick with the companies that have reported strong quarters and have minimal European exposure, with the lone exception being Apple.  If Apple pulls back to anywhere near $625/share, you have to buy it.  Home improvement store, Home Depot, reported a very strong beat and raise last week, sending the stock to new all-time highs.  That is the single best way to play the housing recovery.  Companies like TJX, Macys, Altria, Disney, drug companies like Phizer, Merk and Abbott Labs, and homebuilders like Toll Brothers and Pulte Groups will give you a great opportunity to make money. 

ENERGY

                  Over the last couple months, the energy markets have traded exactly as they should based on the technical formations.  First, looking at crude oil prices, you may have noticed the steady rise off the low of $78.16/barrel back on June 28^th.  Since then, oil has rallied $18.38 or 24%.  When looking at the daily formation of oil prices dating back to the beginning of June, oil built an inverted head-and-shoulders pattern from June 1-July 12, and broke to the upside, sending oil prices higher for 5 out of the last 7 weeks, including the last three weeks in a row.  The previous resistance in oil was at $94.41, which is the 50% Fibonacci retracement from the 52-week high to low.  On Wednesday, oil closed above that level for the first time since May 14^th, and has closed higher the last two trading days.  The trend in oil continues to head higher with the next level or resistance coming into play at $98.24, which is the 61.8% Fibonacci retracement, a level it hasn’t traded at since May 10^th.  Although we’re coming to the end of the summer driving season, the July US unemployment picture is giving the markets hopes of higher demand, driving up prices.  I continue to see oil prices rally another couple dollars but should sell off at $98.24.  That would be a level to sell against, with a floor put in at the $90.57 level, 38.2% retracement.  The best way to play oil continues to be through the leaders like Exxon Mobil, Chevron, & Conoco Phillips, all trading at or near multi-year highs and offering very strong and safe dividends.  But as I mentioned earlier in the letter, only buy on pullbacks, using the oil floor as your level to trade against. 

                  As previously mentioned, gasoline and oil prices, which usually trade together, have been spread out, and gasoline should rise to $3.02 on the September contract.  Gasoline traded up to $3.09, before selling off closer to the $3.00/gallon level.  On the October contract (front month), gasoline prices closed on Friday at $2.87/gallon, holding the 78.6% Fibonacci retracement of $2.8616.  Since making a new two-year low in mid June, gasoline has traded higher 7 of the last 8 weeks and should continue to do so.  Nothing on the chart indicates otherwise, and there is a definite upward trend in the market.  I see no reason that gasoline prices do not challenge the multi-year highs of $3.0402/gallon.  Looking at a trendline connecting the 52-week low of $2.2056 to the low put in on July 25^th, the floor in gasoline comes in around $2.70, giving you a nice level to trade against.  The best way to play gasoline prices is through the same refiners I have been mentioning for many weeks such as Valero & Tesoro.  I will mention that Tesoro has rallied 90% since May 8^th, so do not chase that stock.  Let it pullback about 10% before you get long.

                 

Metals 

                  Gold and silver prices have quietly been holding steady above key technical levels for some time now, and is giving investors a great opportunity to buy into both of these metals.  Over the last month, gold has closed below $1600/troy ounce just once, indicating a good floor is in place.  As I mentioned in previous letters, gold, often viewed as a safe heaven, is not a safe heaven.  If that was the case, it would trading roughly in-line with US Treasuries and prices would be much higher right now, based on a lot of uncertainty in the marketplace (i.e. Presidential election, “fiscal cliff,” Europe, unemployment, etc…).  Gold is really only trading on technicals and looks ready to break out.  The big question is whether it breaks up or down and that’s what I’m here to help you with.  Gold has been a very quite market over the last three months, and you never want to be short a quite market.  Since putting in a low of $1547.60 on June 28^th, gold has put in a series of higher highs and higher lows, indicating a bullish formation.  I’m looking for a breakout above $1627, where it should then trade up to $1675, which is the next resistance level and 38.2% retracement from the 52-week low to high.  The best way to play gold is through the ETF known as the GLD.  I want you to buy it on Monday, with Friday’s close of $156.72, and stop yourself out at $150/share. 

                  While I like gold much more than silver, you cannot overlook the fact that silver has now closed higher for four weeks in a row.  Last time this happened was earlier in the year and led to an 11% gain three weeks later.  I see a similar move, with silver having bottomed out at $25.34.  It had every chance in the world to trade lower, but failed to do so and like gold, should be ready to break out to the upside.  Silver is giving you a low risk opportunity here that I want investors to take advantage of for a TRADE ONLY.  On Monday, I want you to buy the Silver ETF, SLV, 15 minutes after the open, (remember I advise waiting at least 15 minutes to let the market settle in) and hold the position for three weeks, with a stop loss at $25, again a level it has not traded at since October 15, 2010.  It’s a low risk trade with a chance to make a nice profit in three weeks.     

Despite the stock market trading near multi-year highs, there are still many opportunities in this market.  It’s important not to chase stocks, but to wait for your price before pulling the trigger.  Remember that financial markets can turn on a dime and any bad news out of Europe should send stocks lower, giving you a great chance to buy.  Stick with the names I’ve been recommending and good luck, investors.

Full disclosure:  I am currently long AAPL

Jeff Lewison  

                       

Thank You Jobs

8/5/12

                  Welcome back to this week’s edition of the Lewison Letter.  Once again, the markets didn’t fail to disappoint in the excitement category.  The S&P fell almost 30 points between Monday and Thursday, only to be bailed out by a surprisingly strong non-farm payroll number on Friday, finishing the week positive by about 5 points.  While the payroll number increased 163,000, the unemployment rate still ticked up 1 basis point to 8.3%.  Although the 160,000 jobs was much higher than anyone expected, for the economy to really grow and for the US to shrink the unemployment rate, we really need to create roughly 300,000 jobs each month, so don’t get so excited about a measly 160,000 (although much better than last month’s embarrassment that was revised down to 60,000).  While Friday’s sharp rally put in a 3-month high, I remain cautiously optimistic because the “leaders” in Europe continue to show they have absolutely no clue how to run an economy and gasoline prices continue to rise. 

INDICES

                  A few weeks ago, I mentioned that S&P would hit a high of 1395 and with today’s high of 1394.16, I’ll say that’s close enough and gives you a good level to trade against.  I am still bullish the market, but Friday’s price action in the stock market was overblown and I expect a sell-off to come next week.  Before I get into the technicals of the S&P, the big problem that I see right now is everything we hear out of Europe is bad.  Spanish and Italian bonds continue to yield over 7%, and Mario Draghi can’t run the ECB the way Bernanke can run the US Central Bank.  Additionally, too many companies are reporting lower than expected revenues, weak guidance and slowing sales, and remember, we don’t care where stocks have been, we care where they are going. 

                  With that being said, I still say we trend higher, but it’s going to take a lot for the S&P to hit new 52-week highs.  As most of you know or can guess, I care a lot more about what the charts say than any what the fundamentals are.  The S&P is trading perfectly with what the technicals say.  Friday’s high came right up to a downward trendline from the 52-week high of 1422 on April 2^nd and the high of 1415 on May 1^st.  As I mentioned earlier, this is a level I want to be short against until the market can prove it can rally higher.  I need to see three closes above 1395 to be convinced the S&P can really go higher.  For now, I still see the market trading in a technical range with the high of 1395 and the low of 1350, which not only is a downward trendline connecting the June 4^th and July 12^th lows, but is also the 50% retracement from the 52-week high to the June 4^th low.  The reason I continue to use the June 4^th low as a key day is not only because the ultimate “Bull,” Jim Cramer turned bearish for the first time in months, but also because that represents the market low from the 52-week high, 5^th wave down and daily doji line indicating a volatile price move is coming.  Since then the markets have put in a series of higher highs and higher lows. 

                  The best way to trade this market is to use these technical levels to buy and sell equities.  I cannot recommend buying stocks at these levels, but instead, wait for a pullback closer to 1350 level.  In these markets, you need to really be patient and wait for your price.  Do not chase stocks.  If you miss one, then find one of the other thousands of stocks out there to buy at the right price.  Also, focus on buying stocks that have already reported a strong quarter and have little to no European exposure, with the exception of Apple, of course (which is already trading above levels it traded before reporting a missed quarter).  I like stocks like Macys, Home Depot, Boeing, TJX Companies, Toll Brothers, etc…

GRAINS    

                  The grains picture is starting to become clearer now and the rallies are starting to slow down.  First, taking a look at soybeans, July 23^rd marked the all-time high of $16.915/bushel.  That day happened to be a very important day technically for soybeans as it put in an outside reversal day in which it opened higher, rallied to put in a new all-time high, only to sell off sharply ($0.70/bushel or daily limit) and close at or near the low of the day, building a bearish engulfing line.  How powerful is that technical formation?  Well, since that day, soybeans haven’t traded to within $0.25 of the highs and as of this writing are down $0.39 at $15.90/bushel, a full dollar off the highs.  Right now I’m looking for soybeans to trade within a defined range of $15.00-$16.75/bushel, with the first level of support coming in at $15.64.  That’s not only the 78.6% Fibonacci retracement from the 52-week low to high, but also a level it hasn’t closed below since July 13^th.  On July 24-27^th, soybeans traded below that level only to close higher each day.  If they break below the Fibonacci level, then $15.00/bushel is the next support.

                  Corn is acting a little different as it made a new high of $8.205/bushel on July 31^st.  However, it’s interesting to note that on that day, much like the soybeans, corn rallied to put in a new high, only to close lower on the day, down $0.07/bushel or almost 1%.  I continue to see corn prices stay up and trade between $7.63-$8.20 in the near term.  Corn growing season is quickly nearing an end but temperatures have been cooling and rain has been falling a little more than earlier in the summer, which should be enough to save some of the crop. 

                  Wheat is trading almost the same as how the soybeans are trading, putting in the exact same outside reversal day on July23rd, with a new multi-year high, only to close sharply lower forming a bearish engulfing line.  The crop has yet to challenge that high and I don’t think it ever will.  But, similar to soybeans and corn, I see wheat trading in a tight range of $8.68-$9.47/bushel. 

                  With grain prices staying high for the foreseeable future, be very cautious in buying stocks that are levered heavily to commodity costs.  Stick with companies that can raise prices and not lose sales, with a stellar management team and clean balance sheet.  Stick with McDonalds, Yum Brands, and Panera Bread, all of which have already reported good earnings.  Avoid stocks that can’t handle the commodity heat like Chipotle, Buffalo Wild Wings and Tyson Foods.  As for the agriculture stocks, I still think you’re too late to the party, but if you have to be in anything, buy CF Industries and Monsanto on pullbacks and stay away from Potash and Mosaic. 

COPPER

                  While I haven’t talked much about copper, it’s a very important commodity to keep an eye on, as it is often seen as an overall barometer of the global economic health.  What you will usually see is a higher stock market, correlates to higher copper prices.  However, what you’re seeing right now is that while the stock market has been heading higher for the last three weeks, copper prices have been declining, sitting at $3.361/pound.  That is coinciding with a slowing, yet fast growing Chinese economy and of course the disaster that is Europe.  But it also indicates that the market doesn’t believe the US Economy is getting better anytime soon.  The housing market may have bottomed, but it isn’t heading up anytime soon.  Additionally, if you look at the weekly chart of copper, it has built a massive head-and-shoulders over the last three years and is sitting right now a key technical level of $3.284/pound.  What makes that level so important is that it is not just the 23.6% Fibonacci retracement, but also the shoulder line of the head-and-shoulder.  If copper prices break through that level, they should be headed for 52-week lows of $2.994/pound.  I do continue to see copper prices hold that key level and trade within a range of $3.284-$3.60/pound. 

                  Many analysts think the best way to play copper is through Freeport MacMoran (FCX), which is the largest copper producer in the world.  I am against that investment strategy since the stock trades so closely with copper prices.  If you like a good dividend but little growth, then by all means, buy it.  My way of playing copper is through the homebuilders since copper is used in every single building.  Look to move into stocks like Toll Brothers (TOL) and Putlegroup (PHM).  Toll Brothers reports earnings at the end of the month and Pultegroup already reported better than expected income and revenues.  Neither pays a dividend but both are trading at or near multi-year highs.  My advice is to split it up your total investment in this group and put 60% in Toll Brothers and 40% in Pultegroup.

                  I want to reiterate how important it is to be patient and not chase a stock.  Use trendlines, Fibonacci levels, and moving averages to enter and exit stocks.  If you look closely at the markets, you’ll see that technicals are far more important than the fundamentals.  Many stocks and markets trade almost perfectly with key technical levels, even when you think you will never see a particular price again.  If that happens to be the case, then you missed it, and look for another opportunity.  Apple is a perfect example of not only waiting patiently but also trading with technicals.  When Apple traded above $600/share in early July, it looked like it would just take off.  An earnings miss later, dropped the stock back down to the $78.6% Fibonacci level, which held for three straight days, and now the stock is up about 8% in the last week.  Those who were patient and waited for a sell-off were rewarded with a real nice quick gain, and those who weren’t patient, are flat or under water. 

                  Full disclosure: I currently hold no open positions

Jeff Lewison     

Solazyme

8/2/12

                  I was recently asked to look into a company called Solazyme.  This company engages in the production of renewable oil with a major focus on chemicals and fuels, nutrition and skin and personal care markets.  This biotechnology company essentially offers a way to cost effectively create oils that are useful in food products and alternative fuels.  They recently engaged in a joint venture with Roquette Freres (French starch company) to start building a new 50,000 metric ton/year facility dedicated entirely to food production.   

                  This is a very small company with a market cap of just $832M and when I first looked at the balance sheet and FY11 earnings report, I thought this was a terrible stock.  Solazyme reported yearly revenues of just $39M, with a majority of it coming from their skin care department.  Additionally, the company has no P/E to speak of because earnings losses accelerated from $16.4M to $54M (70% drop YOY).  Additionally, Solazyme has negative cash flow and negative margins.  The only positive on their balance sheet is they have almost $220M in cash to just $17.55M in debt, good for $3.62/share in cash, accounting for 27% of the stock price. 

                  After digging a little deeper into what this company does and where they are headed, I think there are some good prospects in the future.  First, in looking at their joint venture project with Roquette Freres, Solazyme is finally starting to make a name for itself in the food industry with a product called Altein.  This is a whole food product with the consistency of flour that is vegan, gluten-free, non-allergenic and sustainably grown.  This protein can be used in many things from beverages to ice cream and can be used to replace animal feed while costing less, which is a huge advantage in times of rising grain prices. However, all of that being said, much progress has yet to be made.  Their Phase 1 facility just finished being built and samples are starting to be distributed to clients.  The big piece to the puzzle, their Phase II facility won’t be completed until late 2013, but once operational, the company expects revenues from that plant alone could be between $350M-$1B.  Solazyme has other advantages over competitors, namely in their technology.  They have the ability to grow food in controlled environments, eliminating the yield and quality inconsistencies that weather creates.  The company can also choose its own input resources ranging from sugarcane to forest residue.   

                  While the company has been around for almost 10 years, Solazyme recently became public, debuting in May 2011 at $18/share, hit a high in July of $27.26, only to free fall to an all-time low of $7.68/share in October.  Since then, the stock has rallied almost 80% to today’s close of $13.69.  Looking at Fibonacci retracements, trendlines and resistance/support levels, the stock is currently sitting near four-month highs and a current resistance level.  Four of the last six walks traded to a high of $14.24, $14.34, $14.23 and this week’s high of $14.16.  Clearly the $14.20 area is a decision point and it’s going to take a strong earnings report (Solazyme reports August 6^th) to blow through that level.  Taking a look at Fibonacci levels, Solazyme is trading in the middle of the 23.6% ($12.35) and the 38.2% ($15.24), the latter a level it hasn’t traded above since the first week in April.  Drawing a trendline from the high of $27.47 in July 2011 to this April’s high of $15.24, the stock has about 37% downside risk before finding real strong support. 

Currently there are 13 analysts covering the stock with 11 buys, 1 hold and 1 underperform, with an average 12-18 month price target of $18.18/share ($33% gain from Friday’s close).  Analyst estimates for FY12 are calling for Solazyme to lose $1.20/share compared to a loss of $1.22/share FY11, an increase of only 2% YOY.  My long-term price target for Solazyme is $17.58/share, which is the 50% retracement from all-time highs and lows.  While that’s a 28% gain from here, I think the stock goes lower before going higher.                    At today’s closing price of $13.69, I cannot recommend buying the stock.  I also don’t want you to buy this stock before the company reports earnings next week.  With so many companies getting slammed on weak revenues and lower guidance, wait to see what earnings look like and listen to what management says about the future of their new production plant.  While I like this stock as a long-term speculative stock for your portfolio due to its high growth prospects, I would still wait until the stock pulls back before buying.  I would look for the $11.50-$12 range, which you could get on a terrible jobs number tomorrow followed by weak earnings on Monday.  From all of my years of investing, one thing that I have learned is to wait for your price to buy/sell because when you start chasing stocks, then that’s when you get your head cut off.  If you miss it, you miss it, and you go get the next one. 

                 Full disclosure: I currently have no open positions and have plans to buy Solazyme. 

Jeff Lewison