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 2nd 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
7th, 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 28th. 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
14th, 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 10th. 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 25th,
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 8th, 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 28th, 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
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