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 2nd and
the high of 1415 on May 1st.
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 4th
and July 12th lows, but is also the 50% retracement from the 52-week
high to the June 4th low.
The reason I continue to use the June 4th 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, 5th 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 23rd 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 13th.
On July 24-27th, 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 31st. 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
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