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 4th
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
No comments:
Post a Comment