Obama vs. Congress

11/18/12

                  Welcome to this week’s edition of the Lewison Letter.  The Dow finished lower by about 2% and the S&P closed down 1.5%, despite the strong rally on Friday.  It was really a tale of two types of politicians this week and lets start first with Obama.  On Wednesday, Obama held a press conference where it wasn’t so much what he said, as to how he said it.  Obama took a “putting his foot down” tone in talking about the fiscal cliff, which caused the S&P to drop about 20 points or 2.5%.  On Friday, House Speaker Boehner, Senate Majority Leader, Harry Reid and House Minority Leader, Nancy Pelosi, came out and showed a unified front with a positive overtone, and the S&P rallied from its lowest level since July 26 (1343) only to close up 6.55 points at 1360, a whopping 2% off the low.  So whom do we believe…Obama and his market dropping rhetoric or Boehner, Pelosi and Reid and their market saving unified front?                     

                  There is no question that Friday’s price action was a key reversal and cannot be ignored.  Anytime the stock market drops to make new lows, only to bounce back immediately that same day to close at the highs for the day, you have to respect that price action.  Before I get to the technicals, let’s revisit the fundamentals in this market right now.  Friday’s meeting between Obama and Congressional leaders seemed to go better than planned and anytime something is better than expected, stocks rally, as worst case scenarios are always priced in first.  But at the same time, what did Boehner, Reid and Pelosi really say that we didn’t already know?  Boehner said he believes they can solve the fiscal cliff, Reid said they understand what the problem is and they have the cornerstones to work something out, and Pelosi said it was a constructive meeting and they have to work something out.  Perhaps the only real news that came out of Friday’s meeting was that talks were constructive, and “hope” of a debt deal alone seemed to be enough to rally 20 S&P points…and hope is never a reason to buy stocks. The markets are also dealing with tensions between Israel and Palestine, a European crisis that just won’t go away, a rising dollar, high unemployment and corporate profits coming in much lighter than expected.  While I have no doubts a deal in Washington will get done before the end of the year, it will still be a while before that happens and with more negative news than positive, I am looking for the market to continue to trend lower.                            

                  Now to the charts…Friday’s bullish price action resulted in a bull hammer, price action in which the market opens, trades lower, often times to a new low, only to rally back and closer higher on the day.  This candlestick chart formation is often times a key reversal day and signals overwhelming demand at the lows that indicate a bottom has formed.  Ordinarily I would say that it would be time to buy against that level, however, this price action was created by an outlying event (Boehner, Reid, Pelosi), not a technical level, and therefore cannot be trusted.  As I mentioned previously, I see no reason to jump all in at this time and reiterate that I am looking for a drop to S&P 1315, where there is actually technical support in the market.  Also, it’s important to note that Friday’s close at 1360 is actually a point of resistance to the upside.  If you connect the 52 week low of 1159 from last November, to the low on June 4 this year at 1267, and carry that line out, it leads to 1362, which happened to be Friday’s high.  While it would not surprise me if the market had another day or two of a relief rally, I fully expect that uptrend line to hold, and you should look for another move lower over the next couple weeks. 

                  I do want to reiterate that if you are looking to buy in this market, do not do so all at once.  Identify high quality stocks that have been unfairly hit, and buy in blocks until 1315, where I recommend buying aggressively.  While I think Apple is getting close to a “buy of the century,” I would wait for a move back down towards $500 again as I think the stock could ultimately pull back to $493.87.  I also love Starbucks and Dunkin Donuts (Starbucks more for long term growth especially for their recent acquisition of Teavana), Amazon, Macy’s, Visa, Union Pacific, Petsmart, Cummins and Ford for long term plays, and CVS Caremark, just to name a few.  Be careful buying this week, as there will be light volume going into the holiday. 

Full disclosure: I currently hold no open positions, but will be selling the S&P on rallies and buying US Treasuries on dips.

Jeff Lewison

Welcome Back

11/11/12

                  Welcome back to the Lewison Letter.  A lot has gone on since my last writing…and a lot has also stayed the same.  Obama is still in office, Republicans and Democrats are still fighting and the equity markets are still moving around.  Europe still has problems and US unemployment still sits around 8%.  Nevertheless, there is about to be a perfect buying opportunity in these markets and I want you to be able to take advantage of it.  

                 

                  Last Tuesday, before Obama was re-elected, the S&P rallied 11 points in anticipation of a Romney victory.  Since that time, the last three days saw a drop in the index of 48 points or about 3.5%.  Before I get into the technicals, I’ll talk about what is fundamentally wrong with the market right now.  Unless you’ve been living in the box the last few months, you know that the Bush era tax cuts are about to expire and unless Congress gets its act together, the economy will go back into a recession, unemployment with rise back up and the market will continue to sell off.  There’s also the concern that third quarter earnings, which were already expected to be bad, are actually looking worse than expected, to go along with weaker outlooks.  While those are two real big problems, there are some positives that people are missing.  China’s economy seems to have bottomed and is actually starting to grow again.  The bad news in Europe is so overplayed that it no longer is affecting the US markets, despite what you may hear or read about.  The reality of the situation is that nothing fundamentally has really changed from when the S&P hit a high of 1475 to where it is now, about 100 points lower.  Everything I previously mentioned was in play in September, as much as it’s in play right now. 

                  As for what the charts say…we could be in for a lot of pain and very little gain..short term.  Since September, the S&P has built a massive head-and-shoulders formation that is working out perfectly.    In fact, it was one of the more perfect formations I have seen on a daily chart in a long time.  The head is a series of lower highs and lower lows, which is a dead giveaway that a drop is coming.  As soon as the S&P failed for a third time to make new highs on October 18, that should have been your signal to sell.  The market sold off and then built the right shoulder for the first 12 days of November, until Wednesday when the market dropped through the armpit line, leading to where we are today.  What you also have in play is the armpit line at 1406, just so happens to be the 78.6% Fibonacci retracement from the 52 week low to high.  The next level of support doesn’t come into play until 1353, another 2% drop from Friday’s close, which we are sure to hit.  In fact, until there is a resolution to the debit crisis, I expect the markets to continue to trend lower, with a few days of relief rallies interspersed.  In fact, I’m looking for a sell-off down to 1315, the 50% Fibonacci retracement and an 11% drop from the 52 week high. 

After hitting a year-long low last November of 1159, the market turned and rallied to a new 52 week high on April 2.  From March through May, the S&P built a head-and-shoulders at the 52 week high, only to fall 11% to 1267.  This recent formation built since September, at multi-year highs, looks exactly like what we saw earlier in the year.  If you look at a one year chart, as I am doing, there is actually a much bigger picture that is taking place this year.  From the 52 week lows last November to where we are now, there is a big Elliot Wave count developing, where we are currently building out the 4^th wave down.  Elliot Wave Theory says that markets alternate between an impulsive phase to corrective phase with a total of 5 wave counts.  If you look really closely, wave 1 (1159-1405), is almost equal to wave 3 (1267-1475).  Wave 2 (1405-1267) should lead to the drop I am expecting of wave 4 (1475-1315).  At 1315, I want you to buy aggressively, as it should lead to new multi-year highs of 1525, which is my 2013 S&P price target.  Until we hit 1315, be cautious in what you’re buying.  Without a resolution in Congress, the retail stocks are going to get slammed because of the anticipation of people not having as much money to spend.  But if you want to be in a retailer, go with Amazon, Macys or TJX Companies, who I think are best in class.  Buy stocks of companies that have already reported strong quarters and maintained a positive outlook for future quarters.  Coffee stocks like Dunkin Donuts and Starbucks are two that I like, especially with coffee prices sitting at multi-year lows, and those two restaurants are not lowering their prices, which will increase margins.  I also like financials like Discover and Visa, who continue to make new all-time highs.  Until Apple turns around from it’s 20% drop from all-time highs (no it’s not time to buy Apple), avoid tech stocks because that seems to be the most hated sector right now.

                  There is too much going against the stock market right now so trim profits where you have some and cut your losers if you have those.  Be patient when buying stocks and don’t buy all at once.  Until we know exactly what is going to happen with the tax situation, the markets should continue lower, giving you a great buying opportunity.

Full disclosure: I currently hold no open positions.

Jeff Lewison