Welcome
to this week’s edition of the Lewison Letter. Two weeks ago I wrote that I expected the stock market to
continue to sell off toward 1315, despite the key reversal day on the previous
Friday. Since that time, the
S&P has rallied in a straight line up 67 points, or 5%. Given this recent 2 week rally that
just priced in a fiscal cliff deal getting done this year, I can admit that I
was wrong in thinking the market would continue lower and ignored the technical
signs that said the selling pressure was over. This entire past week, we heard from both Democrats and
Republicans that they are nowhere near a deal on the fiscal cliff, and the
market’s reaction was positive.
One of the most important signs of a strong bull market is that it’s able
to shake off any negative news. As
soon as House Speaker Boehner came out on Friday and said that they were at a
stalemate, the Dow immediately dropped 60 points, only to rally back and
actually close higher by 4 points.
Then, this morning on Meet the Press, Treasury Secretary Tim Geithner
said that Republicans would eventually buckle under the pressure and settle for
tax hikes. Two weeks ago, that
would result in probably a 10 point drop as the futures opened Sunday
night…tonight the S&P opened 2 points lower. If you look at other “risk-on” trades like oil, Euro
currency, and copper, they have all traded higher for 4, 3 and 2 straight
weeks, with very bullish looking charts.
The S&P has reversed course and traded higher 2 straight weeks,
after trading lower 4 straight weeks.
While there will be minor pullbacks along the way, I am looking for
these trends to continue and you should be a buyer of the market on dips.
As
for the S&P, there are a few levels that I am looking at on the downside to
hold as support. As usual, I’m
using Fibonacci retracements from the 52 week high of 1475 to the low of 1202
last December and the 200-day moving average. Friday’s close of 1416.18 is exactly the 78.6% retracement
and should actually be resistance to the upside, so see if this level
holds. I’m looking for three
straight closes above this level, if not, the S&P should head lower towards
the 200-day MA. Looking back at
Wednesday’s price action, it was no surprise that the market traded as low as
1385, only to rally back sharply and end the day higher by 11 points. 1385 is the 200-day MA and a major
support level that should hold if tested again. If that level fails to hold, then the S&P should be a
lock to trade down to the 61.8% Fibonacci retracement of 1371, another 45
points, or 3%, from Friday’s close.
Right
now there are a number of places where you can put your money and have
success. The most unfairly beaten
down stocks right now are the retailers.
With the negative November sales caused by Sandy and the notion that if
taxes rise, consumers have less money to spend on discretionary items, top
names like Macy’s, TJX Companies, and Nordstrom all trading at a nice
discount. Macy’s is my favorite in
this sector and around $38 is the best price to buy it. Since September, everytime Macy’s has
traded this low, it’s rallied three or four dollars and has put in a series of
higher highs and higher lows, representative of a bull market. This could be the last great chance at
getting Macy’s before it rallies to a new all-time high. I like TJX at $42.50 and Nordstrom at
right here at $54.
If
you’re bullish energy stocks like I am, then look to be a buyer on
pullbacks. I really like the refiners
like Valero and Tesoro. Valero has
built an inverted head-and-shoulders over the last two months, and I want to
own the stock at $30.40, which is the top of the shoulders and Tesoro at $40,
which is also the shoulder line.
If you would rather have yield, buy Chevron and Conoco Phillips or
Phillips 66 (but only on a pullback to $47, a 10% drop…the stock has gone
straight up since its went public).
There
is no question that the long-term trend is going to push the stock market much
higher, as all the bull market technicals are in play. Since putting in the key reversal 2
Fridays ago, the market continues to shrug off any talk of a stalemate in
Washington. As it gets closer to
December 31st, and no deal gets done, the market will start selling
off, giving you a good opportunity to buy. Use these sell offs to your advantage.
Full disclosure: I have no open positions at this time.
Jeff Lewison
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