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 6th, 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 12th, 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 20th, 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 5th
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
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