Germany & FOMC

9/9/12

                  Welcome to this week’s edition of the Lewison Letter.  It was a breakout week for the stock market as Mario Draghi decided to go ahead with a bond-buying plan for countries in Europe who ask for help.  That drove yields on Italian and Spanish bonds to their lowest levels in months and the US stock market to new multi-year highs.  Then on Friday, we received a very disappointing jobs number, but nevertheless, the markets finished higher on Fed stimulus hopes.  The Dow rose 1.6%, the Nasdaq is at it’s highest level in 12 years and the S&P finished up 2.2%, its highest weekly gain since June. 

                 

INDICES

The US economy showed an increase of 96,000 jobs in August, which was much lower than the 125,000 analysts were expecting.  Job growth continues to disappoint, but as I mentioned in last week’s letter, a bad jobs number would actually be bullish for the stock market, which it was.  There are a few key events this week, starting with Wednesday.  Apple will hold it’s press conference to announce the iPhone 5, an event that will lead to a drop it the stock, as it always does.  Expectations are so high for Apple that no matter what the iPhone 5 has, it won’t be good enough was investors.  Also on Wednesday, the German Constitutional Courts will rule whether or not Europe can go ahead with its rescue strategy.  The market has already priced in a positive ruling, so anything negative from Germany, and the stock market will sell off.  Thursday brings the 2-day FOMC meeting to a close where the market expects Bernanke to announce a new round of Quantitative Easing through some sort of bond-buying purchasing.   I think we get exactly that, which will remain long-term bullish for stock prices. 

Obviously the two biggest market movers for the week will be the German court decision and the results from the FOMC meeting.  The markets have already built in the German courts ruling in favor of the ECB bailouts and the Fed to announce QE3, so I do expect the markets to sell off slightly on both pieces of news.  If the markets are surprised with the opposite results, the S&P is a shoo-in to fall back to the 1400 level, about 2.5% from Friday’s close.  While I do expect the markets to continue to march higher, look for some profit taking this week and a move in the S&P back down to the previous breakout level of 1415 and the Dow 13,100.  This market has gone almost straight up since June and is ripe for profit taking, so I would look to be a buyer at those levels.  But like I said, the stock market is poised to go higher despite all the analysts calling for a pullback in the S&P to 1300-1350.  Copper prices, Euro currency, and energy prices are all trending higher to go along with a dropping US Dollar, which is all good news for equities.

My recommendation for this week is to watch and see.  Wait until we hear from Germany on Wednesday and the Fed on Thursday.  Let the markets digest the news and put in a bottom before you start buying.  Have a stock shopping list ready to go, so when you get the prices you want, you are ready to buy.  Stick with my previous recommendations for stocks.  I like companies that have minimal to no European exposure and have already reported strong earnings and guidance. 

METALS 

                  Gold, Silver and Copper all continued their march higher last week, with gold and silver trading at their highest levels since February.  Likewise, copper is trading at its highest level since May 14.  Gold & Silver traded sharply higher late in the week after the ECB announcement, along with a terrible jobs number, passing through key Fibonacci levels.  Friday morning, gold and silver rallied through the 50% retracement, making that the new floor in the stock.  For silver, look for $32.19 to hold as support and for gold, $1723.80.  I expect the two metals to continue to trade higher, no matter what the outcomes of Wednesday and Thursday are.  If you already bought either the GLD or SLV, continue to hold them through the week, if you have not bought either, buy on Monday and use the Fibonacci levels as your stop loss.  For the SLV and GLD, those come into play at $31.54 and $167.06, respectively.    

                  Copper made a huge rally on Friday behind strong Chinese construction data, and that rally should hold.  Copper broke through previous resistance of $3.55/lb, through the 50% Fibonacci of $3.6085, to close at $3.6415.  I am looking for the $3.6085 level to hold, so continue to hold Freeport MacMoran (FCX), Toll Brothers (TOL) and Pulte Groups (PHM).

                  Last week I recommended buying the Euro currency through FXE, which, if you took that advice, you got a nice gain for the week.  The FXE is going to be a key indicator to watch late Tuesday and early Wednesday.  The euro will indicate what the market thinks the German courts will decide on, which should translate to same move in the stock market, meaning that where the Euro goes, US equities go.  Again, I reiterate not doing anything this week, but let the market come in and then buy before another move higher. 

Full disclosure: I currently hold no open positions.

Jeff Lewison

ECB & Unemployment

9/3/12

Welcome to this week’s edition of the Lewison Letter.  As expected, it was another very quiet week on Wall Street until Thursday & Friday’s market sell-off and rebound.  On Thursday, the market took a dive as investors repositioned themselves for Big Ben’s speech at Jackson Hole, with the broader averages dropping about 1%, and the S&P closing right at that key 1400 level at 1399.48.  While that technically is a close below 1400, Friday’s price action wiped it out with a rally to close at 1406.58.  While the initial reaction to the Fed Chief’s speech was a sharp 12 point sell-off, the market quickly rallied back to close 8 points off the low and once again, holding the 1400 level. 

It’s important to note what was behind Friday’s rally, which was absolutely nothing other than smart money realizing the technical level at 1400 is a true floor for stocks.  Ben Bernanke said absolutely nothing that he hasn’t said over the last month, and did not announce any new form of quantitative easing.   In fact, the futures indicated this rally was entirely induced by the European markets since at 7:45am on Friday, the S&P futures were already up 13.5 points, at what turned out to be the highs of the day for not only the US market but also the highs for the day in the DAX, Stoxx 600, FTSE and the rest of Europe. 

As positive as Friday’s price action was, it does bear noticing that the indices, treasury prices, metals, energy, and currencies all traded higher, an anomaly that should not exist.  Treasury prices and the metals should move in the opposite direction of the Euro and stock market.  With everything moving in the same direction, one of these markets are wrong and exactly which one will be made very clear by Friday at 7:30am. 

INDICES

As I mentioned previously, the stock market has found its’ footing at 1400 on the S&P and 13,000 on the Dow.  Both levels have been real strong support since August 6^th, and should remain that way until it gets tested when the ECB (European Central Bank) meets for their policy meeting later in the week, only to be followed by US Non-Farm Payrolls for August.  Both will be major market movers, and events I do not want you trading in front of because they could go either way.  Europe has yet to prove they have any idea how to get themselves out of a recession and although we saw a better-than-expected jobs report last month, I don’t see that continuing in August. 

                  First, the ECB will hold a policy meeting later in the week, and market bulls expect European leaders to come up with a way to help the struggling economies of Spain and Italy through some sort of bond buying program.  Since nobody really thinks that will actually happen, I’m taking the other side and think they will get some sort of resolution going.  Early in August, ECB leader, Mario Draghi announced they are ready to use any means necessary to help the struggling Euro, only to be shot down by German leader, Angela Merkel, a few days later.  Second, with last month’s jobs number being higher than market analysts anticipated, the August estimates have been raised to a bar which is way to high.  But if you think that means the market will sell of, think again.  A lower number means the Fed is more likely to stimulate the economy when they meet on September 12^th, which in turn should actually rally the stock market. 

                  When I listen to analysts on Wall Street, I keep hearing everyone waiting for the big market sell-off.  The problem with that is that everyone is waiting for something that just isn’t going to happen.  There is so much bearishness on the street right now that the easiest thing to do would be for the stock market to continue to rally to new multi-year highs in what is historically the worst month of the year for stocks.  Nobody expects the market to continue higher, which is why I continue to reiterate that you should be a buyer on every pullback.   

METALS

                  If you bought SLV two week ago on my recommendation, you would have a 13% gain, and looking at the charts, should have a lot more coming.  On a weekly chart, if you draw a trend line from the highs of April 2011 ($48.35) to the high made on February 29, 2012 ($36.44), you would see that SLV is trading above the long-term downtrend line that it broke through on Friday.  I’m using those two points because April was the all-time high in silver and the February high was the yearly high and an outside reversal day.  For those in the trade already, I want you to move your stop to $29, which is where the trend line comes into play and is also the 23.6% Fibonacci retracement.  For those who are not in the trade yet, wait for a move back closer to $30 before you buy and use $29 as your stop loss.  The next point of resistance level will come into play right around $31.54 (38.2% Fibonacci) and also a previous floor that the metal crashed through.  My price target for SLV is $33.46 which would be the 50% Fibonacci number and about another 15% upside from here.  Say what you want about how gold and silver are trading as a safe haven, the real reason these metals have broken out and will continue to do so, is simply on the technicals and nothing else.  These metals were rallying 2 weeks before Bernanake’s speech at Jackson Hole and no matter how good or bad the ECB meeting and jobs report is, silver will continue to rally higher.

                  As mentioned last week, copper doesn’t seem to want to go lower and much like silver, looks ready to break out to the upside.  The week of August 20^th, was just the third time in last five months that copper closed above the 38.2% Fibonacci level of $3.4635, and although it traded below that level last week, the metal held in there and closed right at $3.4650.  As of this writing, copper is currently up $0.03 at $3.49/lb., again holding that level.  I don’t really like the copper ETFs, so I continue to reiterate the best way to play copper is through the homebuilders like Toll Brothers and Pulte Group.  While I realize these two stocks have already rallied more than 15% each since I first recommended them, they are still great buys on a pullback (TOL at $31.15 and PHM at $13).  You can also play copper through Freeport MacMoran (FCX), but as I mentioned last week, wait for a pullback close to $34 before buying and stop yourself out at $31.  My outlook for copper is a move back up to $3.7535/lb, which is the 61.8% Fibonacci level.

ENERGY

                  Turning to energy, I continue to be a bull of this market as heating oil has been up four straight weeks, crude oil up five of the last six weeks and gasoline up nine of the last ten weeks, I would say that’s a trend that I want to be a part of.  While I do realize that the summer driving season is now behind us and the effects of Hurricane Isaac are already priced in, I still see further upside for the sector.  Gasoline prices for the front month are at $2.99, just $0.05 off multi-year highs made in March.  Oil, having broken through the resistance of $95/barrel, has turned that into a nice floor and should rally all the way up to $100/barrel again, especially if the unemployment data on Friday is anywhere near expectations. 

                  Over the last 4-6 weeks, I have been recommending the refiner stocks like Valero and Tesoro, which have been great trades, but while both still have some room to the upside, there are better ways to play higher energy prices.  If you own these two stocks, I recommend taking profits.  I would rather see you in names like Phillips 66 (PSX), Chevron (CVX), Exxon Mobil (XOM) and Conoco Phillips (COP).  All are trading near multi-year highs and with the exception of PSX, pay very hefty dividends, which is a trade that is working very well right now. 

CURRENCIES

                  A key metric to watch that I haven’t really mentioned for months is the US Dollar and its counter currency, the Euro.  After hitting a two-year high back in mid July, the Dollar has sold off almost $2 to $81.175.  Additionally, on a weekly chart formation, the US Dollar put in a 5^th wave up on that high, and as it should, sold off.  I’m looking for the Dollar to continue to sell-off towards $79.458, the 50% Fibonacci retracement from the 52-week high to low. 

                  Looking at the Euro, it looks poised to break out, and could very well do so on anything positive this week out of the ECB meeting and better than expected US unemployment data.  On a daily chart formation, the Euro built an inverted head-and-shoulders at multi-year lows, with the head at 1.2051.  The Euro is currently sitting at 1.2591, slightly above the 23.6% Fibonacci retracement from the 52-week high to low.  If it closes tomorrow above that level, it will be three straight closes and new support.  I’m looking for a move in the Euro back up to 1.2904, the 38.2% Fibonacci level.  With a rally up to that level, stocks and metals should trade higher and US Treasuries should sell off.  Keep a close eye on the Euro currency that has closed higher for three straight weeks.  The best way to play the Euro is through the Currency Shares Euro Trust (FXE).  As long as the FXE holds the 122 level, it should continue to trade higher.  Wait for a pullback to 122.75 before buying and stop yourself out at 122 on the downside. 

                  It should be another calm week in the stock market until the ECB meets on Thursday and the US unemployment data is released Friday morning.  Use the key levels in my letter to trade against and never buy on rallies.  Be patient and wait for a pullback to get into a trade. 

Full disclosure: I currently hold no open positions

Jeff Lewison