Last
week’s stock market blood bath may have seemed like the end of the world, but
rest assured, it’s not. The Dow,
Nasdaq and S&P dropped 3.5%, 1.7% and 2.6% respectively, almost all of
which came on Thursday and Friday.
What really sparked the drop was a whole host of worse-than-expected
data, starting with Wednesday night’s China PMI, which showed contraction. That, coupled with plummeting foreign
currencies (Argentina Peso being the biggest) and another missed quarter by
IBM, led to panic profit taking with thoughts of a correction about to
come. Everything from Apple to
Google to Boeing to Mastercard got shelled late in the week, but there were
some bright spots. Gold and Treasuries
(which I bought last week) were both up sharply, with GLD up 2.6% and TLT up
2%. Companies that reported strong
quarters Thursday night and Friday morning held up very well with Starbucks
& Microsoft both rallying more than 2%. This season, 67% of companies are beating revenue estimates,
compared to the 4-year average of 59%.
Quarterly sales for companies in the S&P who have already reported
are up 0.7%, also better than the 1 and 4 year average. So despite Thursday and Friday’s price
action, I continue to believe that companies reporting strong revenues and
raising guidance should be bought on every sell-off, like the one we got last
week, and the one that may come this week.
This
is another big upcoming week with earnings reports coming from Apple, Visa,
Boeing, Ford, Biogen, Google, Amazon and Caterpillar. I think you can buy Apple on Monday morning before their
report after the close. There has
been a big shift in momentum with Apple sharply outperforming rival, Samsung,
over the last 4 months, and I look for that to continue. Apple’s chart looks strong, with good
support around $540. A few weeks
ago, Ford CEO, Alan Mullaly, announced that he will be staying with the company
until at least 2015, which caused the stock to rally, while GM sold off. Autos and housing were the backbone of
the 2013 recovery and I don’t see any reason that won’t continue. I think you can buy Ford at these
prices and ride the wave higher.
While many retailers have warned that sales struggled during the holiday
season, online shopping should be at all-time highs. I fully expect Amazon to report record sales and revenues,
but with the stock trading at a P/E above 200, any slight miss will knock the
stock down, which you should buy.
Amazon continues to remain the best retailer in the world, and is only
going to get stronger.
This week, we will also get Q4 GDP data, January Chicago PMI, University
of Michigan consumer sentiment, December new home sales and consumer
confidence. But, the biggest
moment of the week will come Wednesday at 1:00pm, when the Fed will release
minutes from it’s Federal Open Market Committee (FOMC) meeting. Analysts expect the Fed to announce
another round of $10B tapering, dropping it’s monthly bond purchases to
$75B. I strongly recommend NOT
trading before this news. If the
Fed does decide to taper another $10B, there is no telling how the market will
react. Ideally, taper is good news
since it signals that the economy is getting stronger. However, that will push interest rates
higher, leaving investors wondering if that’s really good for the economy. On the otherhadn, if the Fed decides
not to taper because the economy isn’t moving as quickly as they would like
(should push stocks higher because rates will stay much lower and stocks will
be well supported), that could signal a strong sell-off instead of a rally
because that’s more bearish news than good news. I don’t see the Fed announcing another round of taper
because of the recent economic data that has come in (December jobs, global
currency collapse, lower China PMI, etc…). I expect investor’s initial reaction will be to sell, but I
think it will be short-lived, and the market should rally higher. Look for the S&P to fall to 1772
(78.6% Fibonacci retracement), where the market should have a new group of
buyers supporting it. That level
would also mark a 4.4% drop from the high and where I would look to buy stocks
that have reported strong quarters and have strong long-term fundamentals. Buy 50% of your position at that level
and wait to see how the market reacts.
If 1772 does not hold, the S&P should drop another 61 points to the uptrend
line and 61.8% Fibonacci retracement.
As long as you’re investing for the
long-term, there is no reason to panic and sell everything. The only stocks you should sell now are
ones that you don’t have a good feeling about, where you can get out and raise
some cash to buy the stocks you like at lower levels (start with the ones you
have losses on). While some of the
macro economic data last week was weak, Thursday and Friday was more about
profit taking from a market that rallied over 30% last year, and less about
investors getting scared that the economy is really that bad. In the meantime, I think you can
stick with gold (GLD) and Treasuries (TLT) if you bought them last week, as I
still think they will outperform over the next month.
Last
Thursday and Friday was difficult to sit through, however, the reality is the
market is just 3% off all-time highs, and no real damage has been done. I think the markets will be relatively
flat until Wednesday at 1:00pm, when we hear from Big Ben Bernanke for the last
time. Wait for the market to sell
off to 1772, where you should start buying more equities for the long
haul. Watch the earnings from
Apple and Google, which will carry the Nasdaq for the week, and Caterpillar,
3M, Boeing and Visa will determine where the Dow goes. If Visa, Boeing, Apple or Google sell
off on earnings, I would be a buyer because the long-term story is still
strongly intact.
My current positions: Long Ford (F), Toll Brothers (TOL), Gilead Sciences (GILD), SunPower Corporation (SPWR), Starbucks (SBUX), Anadarko Petroleum (APC), Visa (V), short SUGAR, long GOLD, long 10-YEAR TREASURIES.
Jeff Lewison
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