It
was an interesting week on Wall Street, with a steep sell-off on Monday,
completely erased by Wednesday as the S&P and Nasdaq pushed through new
all-time and multi-year highs respectively. The companies that reported strong quarters (Bank of America
and Morgan Stanley) were rewarded, while the companies that reported bad
quarters were obliterated (Best Buy, CSX, United Healthcare, Intel, Citibank,
etc…). As I wrote a couple weeks
ago, I expect this to be the yearly trend as corporate earnings have long been
forgotten during this multi-year bull market. However, it’s important to note, just because a stock drops
on an average quarter or earnings warning (UPS lowered Q4 and FY13 guidance on
Friday), doesn’t mean that the company or stock is broken, nor does it mean the
economy is getting worse. The
warning by UPS is more about the company not being able to keep up with the
strong consumer demand, which is a positive for the economy. Intel dropped almost 3% on Friday after
reporting a quarter that just met analyst expectations. However, the stocks had already rallied
about 10% during the week, so unless they blew out the quarter, the stock was
set up to fall. Both sell-offs
were a buy opportunity, as UPS rallied about 2.5% from the low on Friday and Intel
about 1.5%. It’s always important
to look past the headline and read into the quarter, and see where the stock
has been, before deciding whether to buy or sell.
This
is a very important week of earnings with IBM, United Technologies, Ebay,
McDonalds, Starbucks, Honeywell, Netflix and Microsoft all ready to
report. Some of these reports
could give you a great buying opportunity on any pullback. Starbucks has gotten a number of
downgrades in the last three weeks because of a near-term slow down in mall
traffic, as the stock has dropped about 5%. The chart is also signaling a drop is coming with the stock
building a head-and-shoulders formation since September. The long-term growth story is still in
tact so any sell-off should be bought.
I’m looking for Starbucks to drop to $71 on the heels of a quarter that
just meets analyst expectations, where the stock should be bought
hand-over-fist. As for the other
big earnings reports coming up, Netflix has rallied over 225% in the last year,
has a P/E of 276 and short interest of 13%. I can spend 2 hours looking through the Netflix library and
not find anything that I actually want to watch. The last 55 hours that I’ve spent on online streaming has
been watching The Shield (which I highly recommend and isn’t found on Netflix) on Amazon Prime Instant Video. I expect the company says that
competition is heating up and new subscription growth is slowing, leading to a
stock sell-off. For a trade
only…if $293 (61.8% Fibonacci retracement from 52-week high to low) holds, then
you can buy against that level. If
the stock rallies on earnings, I would look to sell against the previous high
of $389.16.
Based
on what we’ve seen in the first week of earnings, I expect the market to trade
flat to slightly higher over the next three months. With that in mind, there are a couple trades that I want you
to make when the markets open on Tuesday morning. Buy gold (which I did on Friday afternoon) and buy US
treasuries. A couple weeks ago, I
wrote that I expect gold to rebound this year and so far, gold has gained 4.3%
compared to the S&P, which is flat for the year and the Dow, which is down
less than 1%. Looking at a daily
chart of gold, you can see it has a strong double bottom base at 1180. Since mid-November, gold has built a
real strong bullish formation (inverted head-and-shoulders) and the first level
of support is at 1207. I’m looking
for gold to rally to 1300 before hitting any resistance. To buy gold, you should be looking at
the Spider Gold Trust ETF (GLD) because the same formation applies, it closed
above the 50-day moving average, and it moves exactly as the commodity
does. So buy GLD at the open and
look for a move to $126.20 (4.3% gain from Friday’s close) over the next
month. Stop yourself out on the
downside at $117.
The
reason I want you to buy US treasuries is the same reason I want you to buy
gold. The technical formation is
very bullish, and much like gold, everyone is on the “sell bandwagon.” The heavily traded 10-year treasury
contract is almost a mirror image of gold over the last year, with a double
bottom and inverted head-and-shoulders.
The best way to buy treasuries is through the iShares 20+ Treasury ETF
(TLT). I am looking for a move up
to $110 in the next 4 weeks, which is also a 4.3% gain from Friday’s
close. However, with the TLT
paying about a 3.81% dividend, I would make this a position in your folder for
at least the first three months of the year, so you’ll have a nice steady
performer with a good dividend, while the market trades flat. The TLT will give you some downside
protection and diversification.
It’s
going to be a busy shortened week, with big Dow components reporting
earnings. I like Starbucks the
most on any pullback and I want you in GLD and TLT as the market pauses and
trades relatively flat for the first quarter of the year.
My current positions:
Long Ford (F), Home Depot (HD), Toll Brothers (TOL), Gilead Sciences (GILD), SunPower
Corporation (SPWR), Starbucks (SBUX) and Anadarko Petroleum (APC), and Visa (V), short SUGAR, long GOLD, long 10-YEAR TREASURIES.
Jeff Lewison
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