Time For a Q2 Rally

3/30/14

                  With March and the first quarter coming to a close on Monday, the broader market is going to finish almost completely flat, with the S&P up just 0.5%, well underperforming gold (up 8.1%) and Treasuries (up 7.4%).  I think I did a good job of helping all of you navigate this first quarter and if you took my advice, you would be well outperforming your peers this year.  But, now that Q1 is coming to a close, it’s time to look at what is next in store for the market, and more importantly for your portfolio. 

                  I think the stock market performed extremely well given all that has gone on globally this year.  We’ve dealt with a worse-than-expected slowdown in China, possible war in Ukraine, horrible retail, housing, and auto sales due to extreme weather across the US, lowered GDP expectations across the globe, horrible unemployment numbers, Fed bond tapering, etc….If the market can trade flat given all of that negativity, imagine how strong stocks will be when economic data actually improves.  I’m looking for some sort of Chinese stimulus package to be announced this week in order to keep their GDP goal of 7.5% in tact.  Friday’s March unemployment number should come in better than expected because business has picked up across the board with an improvement in the weather. 

                  I still reiterate my 2014 S&P price target of 2163 and hopefully we can continue to navigate this market profitably.  A couple weeks ago, as I said I would, I closed out my positions in gold and treasuries and initiated a new position in copper.  I am not recommending shorting gold or bonds, but I would say that if you are in both, lock in those gains and move some of that money into equities and copper.  A Chinese stimulus package, along with their government propping up the Yen currency, will lend strength to the copper market.  I also think you will see housing come back stronger with the weather improving and with buyers getting used to 4.5%-4.75% mortgage rates.  I am looking for copper to rally to $3.30 after rallying 3% last week and crossing through key resistance levels.  Again, the best ways to play copper is through JJC, which will give you pure copper exposure, however it is very illiquid, Freeport MacMoran (FCX) is a copper and gold miner with a strong dividend and Southern Copper (SCCO), which has a smaller dividend, but more directly trades with copper than Freeport MacMoran. 

                  The big story in the markets the last two weeks has been the absolute bludgeoning in the Nasdaq.  The Biotech ETF (XBI) is down 11.9% led lower by Gilead Sciences (down 8.6%, Celgene (down 5.7%), and Biogen (down 11.5%).  The high P/E & momentum names that have led the rally over the last 2 years were all hammered as well.  In the last two weeks, Facebook is down 11.5%, Telsa is down 8%, Netflix is down 15.5%, Google is down 4.5%, and Amazon is lower by 9.5%.  Hot names like 3D Systems, Solar City, Pandora and FireEye are all about 20% or more off their all-time highs.  This recent sell-off has led to a great opportunity to begin or add to positions in some of these stocks.  While I think there is still a little bit of room to the downside, as long as you have a longer-term time investment horizon (more than 1 year), Monday will be a great time to buy some of these names starting with Gilead Sciences, Biogen, Google, Amazon and Tesla.  I haven’t seen any fundamental reason that any of these stocks should have sold off as much as they did and almost every single one of them are now in oversold territory (which means that investor sentiment has gotten overly negative, which is usually a good indicator of a bottom).  I think a big part of this sell-off is due to big profit taking ahead of the end of the quarter and a rotation back into value stocks like financials, industrials and old-tech names.  Over the same time period, bank stocks like JPMorgan, Bank of America, Morgan Stanley, Wells Fargo and Goldman Sachs have held up very well.  Industrials like Caterpillar, United Technologies, Honeywell, and Deere, have all outperformed the market over the last couple weeks.  Old technology names like Microsoft, Intel, Qualcomm and even Apple are higher as well.

                  The biotech and momentum stocks make up a majority of the Nasdaq 100 (NDX), which bounced off the low of 3543.07 on Thursday, which is right at an uptrend line connecting the 52 week low of 2731 (4/17/13) and the 2014 low in February of 3419.  That level held on Friday, and I would expect that low to continue to act as support.  However, if we do get a sell-off, look for support around 3523, which is the 78.6% Fibonacci retracement from the 52-week low to high.  That’s the level I would be a buyer against.  As long as the Fibonacci level holds, you should be all-in with these stocks.  Additionally, given the new quarter starting on Tuesday, hedge funds and mutual funds should begin buying back these stocks at much lower levels than they sold them, offering additional support. 

                  Over the next leg of this rally, I would look for financial stocks to lead the charge.  All except for Citibank and a couple smaller banks successfully passed the Fed’s stress test last week and went on to sharply raise dividends and buybacks.  I like Bank of America, Morgan Stanley, JPMorgan and Wells Fargo to outperform.  The technicals look good and with interest rates rising, banks should be the prime benefactors.  I also believe that housing is still very strong and will stage a comeback this spring.  I have been in luxury homebuilder, Toll Brothers (TOL), for a while now and believe they are the best in the industry.  Toll has held that $34 level all year long and trading at $35.72 on Friday, gives you a good opportunity to get in this name.  The housing recovery will be great for Home Depot, Whirlpool, and Sherwin Williams, which are all strong buys right now. 

                  Given all of the negative global news this year, stocks should have traded much worse than they did.  I expect financials and housing to lead the way and with the recent sell-off in momentum and biotech stocks, I would be a buyer of both in the second quarter.  Look for copper to continue to rebound off multi-year lows and avoid gold and treasuries.  We should get a strong jobs number on Friday, which should give this rally another boost.                

                         

My current positions: Long Ford (F), Toll Brothers (TOL), Gilead Sciences (GILD), SunPower Corporation (SPWR), Starbucks (SBUX), Visa (V), Macy’s (M), Southwest Airlines (LUV), Boeing (BA), Disney (DIS), Control4 (CTRL), long COPPER, long WHEAT.

Jeff Lewison

Buy the Dip…in Copper???

3/16/14

                  The good news about the markets falling about 2% last week is that they just priced in everything negative about Russia’s invasion of Crimea, short of taking over all of Ukraine.  Stock markets also priced in a much weaker than expected China, after just about every piece of economic data from the country came in far worse than expected.  Crimea’s vote on Sunday to become part of Russia (which will certainly be a “yes” vote) should have little to no effect on the US stock market when it re-opens Sunday night, and any news out of China that is even remotely positive, should have an upward affect on global stocks. 

                  The only major domestic news story that could affect the stock market this week is Wednesday’s release of the FOMC meeting minutes, which will be followed by the usual press conference with Janet Yellen.  I fully expect the Fed to continue with another round of $10B tapering.  With that in mind, are stocks headed for an additional pullback, or should we begin to rally from here?  As I mentioned earlier, the markets have already come to terms with Putin making up his mind and doing whatever he wants in Crimea, so unless he looks to take over the rest of Ukraine, which I highly doubt will happen, nothing out of Ukraine should have any impact on US equities.  Since just about every country in the world, including Putin’s good friends in China, are against his move in Crimea, economic sanctions that will reign down on Russia by the US and most of Europe will keep Putin in check.  Russia’s economy is already in disaster mode with the Russian ruble at its lowest level in a century and the Russian stock market already down 20% YTD, so Putin knows that as much as economic sanctions can hurt the US and Europe, they will have a much greater impact on his home country.  Let’s just move on from Russia. 

                  A lot of investors are concerned about a slowdown in China, which accounted for a majority of last week’s sell off.  But a slowdown in the world’s second largest economy isn’t anything we haven’t known for a couple years now.  While I will say that the data last weekend was God awful and seemed as if it was a complete miscalculation, the Chinese economy is still expected to grow between 7%-7.5% this year, which last time I checked was more than 2X the pace of the US economic growth.  Last weekend, Chinese exports dropped 18.1%, when economists were expecting a 5% increase, which is what spooked investors the most about a possible dramatic decline in the Chinese economy.  That sent copper prices sharply lower last week to the levels not seen since July 2010 (more on this later), and in turn, sent investors back into the safety of US Treasuries and gold (eventhough I don’t consider gold to be a safe haven).  Given the recent data out of China, the snail-pace recovery of Europe, and the issues in Russia, I am under the opinion that money will start flowing into US equities at a far greater pace than before, as it will be considered a safe-haven for investing.  The US lacks the geo-political risks that many of the other world is dealing with, and recent economic data indicates the winter slowdown was due almost entirely to the miserable weather across the country.   

                  Looking at the technicals of the S&P 500, the two levels that I am watching is 1827 and 1810.  If you just focus of the YTD low and high of 1738 and 1884, 1827 would be the 78.6% retracement and 1810 would be the more important 50% retracement.  1810 is also the 78.6% retracement from the 52-week low to high of 1536 to 1884.  I would look to buy part of your position this week if we trade down to 1827, and the rest of your position at 1810, which should absolutely hold.  That would mark a 4% pullback from the highs made a few weeks ago.  Forget all the talk about a 10% correction or 20% bear market because that isn’t going to happen.  The winter weather is subsiding, hiring is picking up, mortgage rates are dropping, and as I mentioned earlier, the US doesn’t have the geo-political risks that the other countries around the world are experiencing.  I also think that 1810 on the S&P will be when gold hits $1,400/oz. (GLD will be at $135) and the TLT will be at $112, which should equate to rates on the 10-year note at 2.5%.   Sticking to my call a couple weeks ago, those have been my targets for when I will close out those positions and put that money to work in the stock market.

                    One trade idea that you can act on with very minimal risk is going against the grain on the copper trade.  I think the sell off in copper on the heels of weak Chinese data is overdone, and where it’s priced right now is a good entry point for a trade.  If you look at a long-dated 10 year chart of copper, last week’s 9.2% sell-off pushed copper down to within 3 cents of 50% retracement from the 10-year low to high, $1.14 and $4.6495, respectively.  Copper has rallied off the 50% retracement of $2.8948 everytime it’s traded down there since June 2010.  Since that time, copper has bounced off that level, once in 2010, 2011 and 2013, which led to rallies of 28%, 33% and 15% over the following 3 months.  To further my point, last week’s move confirmed a 5^th wave down from the all-time highs in February 2011.  While you don’t know when exactly the 5^th wave will end, I think the 50% retracement will provide strong support and is a great way to play a low risk, high reward trade in copper.  My short-term price target on copper is $3.30, which would be about a 13% gain from Friday’s close.   

                  There are three ways to make this copper trade.  If you want to trade strictly on the copper prices without any company-specific risk, then buy the JJC, which is the Barclays Copper ETF.  The ETF closely mimics actual copper prices and has a similar set up and technical levels as copper.  The JJC closed on Friday at $35.46, above the 38.2% retracement of $34.67, from all-time low to high since its inception in 2007.  That gives you a risk of 2.2% and a reward of 13%, which would be at my price target of $40.  The other two ways of buying copper is through Freeport MacMoran Copper & Gold (FCX) or Southern Copper (SCCO).  Both are two of the largest copper miners in the world, but Southern Copper has exposure to zinc and silver, while Freeport also mines for gold.  Freeport pays a 4.02% dividend while Southern pays a 1.72% dividend.  Freeport closed Friday at $31.06, above the 10 year 38.2% retracement of $29.15.  You can buy Freeport and give yourself about 6.5% risk, versus my price target of $35.83, which would be about a 15.5% gain.  You can also buy Southern Copper, which closed at $27.85 on Friday.  Southern is more closely aligned with copper prices as the stock has the exact same formation and technical set up as Copper does over the last 10 years.  If you buy Southern Copper, use $27 ($27.35 is the long-term 50% retracement), or 3%, as your risk and look for a move to my target of $32.78, which would represent a 17.7% gain.  Decide which trade is right for you.  If you want a pure copper trade, then JJC and SCCO are the best plays, but if you want a copper trade, which also has some gold exposure and pays a higher dividend, but has more downside risk, then buy Freeport MacMoran.

                  With almost every Ukraine scenario and most of the negative outlook in China already priced into the market, it would not surprise me one bit to see US equities rally back this week.  Mix your portfolio up with stocks that have gotten beaten down but which still have strong long-term fundamentals like biotechs (Gilead Sciences or Biogen), housing (Toll Brothers, Home Depot or Whirlpool), financials (Bank of America, or Morgan Stanley) and tech (Google or Apple).  Keep your eye on the 1810 level for support, and a great entry point to build on your stock positions.  Again, I like copper as a low-risk, high-reward trade opportunity, by buying JJC, FCX or SCCO.

My current positions: Long Ford (F), Toll Brothers (TOL), Gilead Sciences (GILD), SunPower Corporation (SPWR), Starbucks (SBUX), Visa (V), Macy’s (M), Southwest Airlines (LUV), Boeing (BA), Gold (GLD), Treasuries (TLT), Disney (DIS), Control4 (CTRL), long CORN, long SOYBEANS, long NASDAQ.

Jeff Lewison

Financials Will Lead the Way

3/9/14

                  One and done.  Russia’s invasion of Crimea had a long-lasting aeffect on the stock market for a grand total of…1 day.  The S&P 500 dropped less than 1%, gold rallied 1.6%, treasuries rallied 0.75% and oil rallied almost 2%, trading at it’s highest level since September.  But, by the very next day, all in Ukraine was forgotten, when the S&P traded to new all-time highs, rallying 1.5%, and gold, bonds and oil all cratered.  The rest of the week was quiet until February non-farm payrolls were reported.  Last week, I mentioned that I was looking for 160,000 jobs, but the actual number came in at a surprisingly high 175,000.  While that number may sound great compared to December and January, and given the daily Polar Vortex this winter, the unemployment number was still relatively weak when compared to the monthly average last year of 194,000.  But it was weak because of the weather.  If people can’t get to interviews because of 1-foot snow storms, then they can’t get hired.  So while the jobs number is still not great, I am not concerned about the economic growth trajectory.  The unemployment rate ticking up 6.7% from 6.6% is actually a good sign for the economy because more people are starting to look for jobs again, showing the confidence in the ability to actually get a job again.  What wasn’t good news was how the market actually reacted.  The immediate reaction in the futures market was a rally in stocks and a sharp sell-off in gold and treasuries.  But, as soon as the stock market opened, stocks began to sell off, and gold and treasuries gained a little bit of ground back.  Investors took the opportunity to take profits off the table going into the weekend, as they didn’t want to be caught being on wrong side a Putin maneuver.  So with the stock market selling off on a much better-than-expected jobs number, how do you play the upcoming week?

                   There isn’t a lot of market-moving macroeconomic data this week, so take the week to evaluate your portfolio and look to raise some cash to buy the next stock or stocks that you have your eye on.  I am not convinced that the problems in Ukraine are over because Putin, who has bitch-slapped Obama over the last few years, has no respect for any US ally and will do what he wants, when he wants.  I also didn’t like the price action on Friday (more on this in the next paragraph), eventhough I attribute it more to profit taking ahead of the weekend and not to an economy struggling to find it’s footing.  When I look at what traded higher and lower on Friday, the market was held up on the back of the financial stocks like JPMorgan, Goldman Sachs, and Morgan Stanley.  The bank stocks have led the stock market since the 2009 rally began, outperforming the S&P by almost 100%.  They were also the stocks that led the rally out of the whole since the early February lows.  The XLF (Financial sector ETF) has outperformed the S&P by about 2% since that time, and that is what you need to keep your eye on for overall market direction.  If the banks start to breakdown, then I would look to be a seller of stocks that you currently have big gains in.  The stocks that underperformed were all of the high-flying momentum names that you know, like Tesla, Facebook, Twitter, Pandora, and Netflix.  Any weakness in these names should be used to buy them if you are looking for an entry point.  I still like Tesla the most and would be a buyer around $230.         

                  On Friday, after trading higher and then lower throughout the day, the S&P closed up 1 whole point, putting in a doji candlestick chart formation (when a stock opens and closes at about the same price, but trades higher and lower throughout the day).  Anytime you see that technical formation, it indicates that a volatile price move is imminent.  The last time there was a doji formation in the S&P was on January 22, which preceded a 6% drop over the following 2 weeks.  While I do not expect that kind of move lower, I can easily see investors continuing to cash-in on big gains pushing the S&P down to 1850 or 1.5%.  Why do I say 1850?  Not only is that the mid-point of the Putin Invasion, but was also the 2013 high, and acted as resistance this year, really until the market powered through last Tuesday.  That would be a healthy pullback for the market and a good entry point if you were looking to get in.

                    Last week I recommended buying Disney if it pulled back to $77 because of the Ukraine news, but unfortunately it never got that low.  If you are still looking to get in, I would buy half your position Monday morning, and buy the other half if it pulls back.  They announced on Friday that they signed a long-term partnership agreement with Shanghai Media Group Pictures to collaborate on movies specifically tailored to China.  These movies will contain all the great features of a Disney film, but will have specific Chinese elements.  This is a huge deal for Disney since China’s film industry is the 2^nd largest in the world behind the US and PWC is forecasting it to grow by 23% this year.  I am now looking for Disney to trade up to $98, which represents about a 20% gain from Friday’s close. 

                  Without much US economic data coming out this week, keep your eye on the XLF.  The market will go where the financials go.  Use this week to take some, but not all, profits in stocks that have rallied much more than you expected.  If you have losers in your portfolio, take some time this week to do some research.  Forget about where those stocks have gone and worry more about where they are going to go in the future.  This past week, I took some profits in gold (GLD) and treasuries (TLT), but didn’t sell all of my position because of my reasoning above.  I still think there is some downside in the stock market and gold and bonds offer up protection.  I also sold my full position in Anadarko Petroleum since I put that position on only as a trade and got more than I expected from it. 

My current positions: Long Ford (F), Toll Brothers (TOL), Gilead Sciences (GILD), SunPower Corporation (SPWR), Starbucks (SBUX), Visa (V), Macy’s (M), Southwest Airlines (LUV), Boeing (BA), Gold (GLD), Treasuries (TLT), long CORN, long SOYBEANS, long NASDAQ.

Jeff Lewison

Ignore Ukraine

3/2/14

                  January led to a 4.5% drop in the S&P 500, which was then followed by a 5% rally in February.  January was the worst month in over a year for stocks, followed by February, which was the best month since July.  So with stocks hitting new all-time highs, where does the market go now?  After all, we don’t care where stocks have gone; we only care about where they are going.  While I remain bullish this year, I think now would be a good time to look through your portfolio and take some gains in stocks that may have rallied too far, too fast, or have vastly underperformed the market, raising cash so that you can buy high quality stocks that get hammered on the sell-off that will come this week.      

                  This week is going to be very volatile and could get really ugly, really fast.  On Friday afternoon, the S&P dropped 20 points in 90 minutes before rallying back 12 points, on news that Russia had sent troops to Ukraine.  After the markets closed, Obama issued a stern, yet useless, warning to Putin, which had he done so during market hours, would have sent stocks back down to the lows of the day.  On Saturday, Obama spent an hour on the phone with Putin, warning of economic and financial sanctions on Russia, all of which Putin dismissed, as he later received authorization to deploy more troops to Ukraine.  The unrest in Ukraine will likely lead to NATO troops being deployed, which will cause great uncertainty in the world, and markets hate uncertainty.  Keep an eye on daily news out of Ukraine, as markets will certainly be trading wildly on that news.  Wall Street is looking for every reason to sell stocks, so I would expect that to happen with a sharp drop when the futures market opens Sunday night, and trade down toward 1810 during the week. 

                  With all eyes on Ukraine and Russia to start the week, Friday will be a big day for US markets, when the February non-farm payrolls number gets reported.  The market shrugged off the last 2 months of economic data because of the horrible weather across the country, but I think a third straight month of terrible job growth, could send investors running for the hills.  Any number below 160,000 would be a disaster and indicate the recent economic data is NOT a byproduct of bad weather, but that the economy is just actually slowing down.  I don’t think that’s the case, so any weakness that you get this week, should give you a great opportunity to buy those stocks that you have missed.  New Fed Chairwoman, Janet Yellen, has already said that they will continue to prop up the economy if need be and reduce bond tapering, so I am not to worried about the market going into a complete free-fall.  January new-home sales came in much better than expected, consumer confidence is higher than expected and if you listen to companies like Disney, Honeywell, and Macy’s, you know that the economy is just as strong as it was last year and that any weakness in the data is just temporary.  As I stated in previous articles, this is a very stock specific year, and you should stay away from the companies that show continued weakness.  Buy stocks that have reported very strong quarters, trading at or near new all-time highs and have strong future growth.  Among stocks that you should target on any overall stock market weakness, are Disney, Tesla, Macy’s, Google, Home Depot and Nike. 

                  Hopefully you took my advice from the beginning of January and added some bonds (TLT) and gold (GLD) to your portfolio.  If you are still in those trades, you have a 6.7% and 8.2% gain, respectively.  With Russia’s invasion of Ukraine over the weekend, and if we get a weak jobs number of Friday, I don’t see any reason to sell either asset yet.  My target on the TLT is $112, which should put interest rates on the 10-year note at 2.5%, and I am looking for the GLD to rally to $135, which is the 50% retracement from the 52-week low to high.  When bonds and gold trade at those levels, most investors will be panicking and selling out of the market like we saw at the beginning of year, that’s when I want you to sell your TLT and GLD and move back into stocks, as you could be looking at the best buying opportunity in the market this year.

                  If you had to choose one stock this week to buy on a pullback due to broad market weakness, look at Disney (DIS).  The stock us up about 6% this year and earlier in the month reported a phenomenal quarter with earnings growing 33% and revenues up more than 8%.  This is a company that can turn a single movie into a marketing phenomenon as it has done so with it’s recent animated film, Frozen.  Disney has yet to reap any reward from its acquisition of Lucas Films, which will only help the company’s long-term growth.  Disney, which also raised full-year guidance, is trading at a 31% premium (P/E of 22) to it’s average P/E over the last 5 years, but given how the company is growing earnings by 33%, it’s current price is very cheap, and will only be made cheaper on a pullback.  If Disney drops to $75-$77/share, start buying because you will be rewarded, as my price target on the stock is $92. 

                  Be ready for rough week in the market.  New developments out of Ukraine will be a daily occurrence, sending the market on a whipsaw ride.  Pay attention to Friday’s unemployment number, as any weakness will no longer be accepted by the market.  Instead of following the panic selling, get ready to be a buyer on the pullbacks, as any weakness will be short-lived.    

My current positions: Long Ford (F), Toll Brothers (TOL), Gilead Sciences (GILD), SunPower Corporation (SPWR), Starbucks (SBUX), Anadarko Petroleum (APC), Visa (V), Macy’s (M), Southwest Airlines (LUV), Boeing (BA), Gold (GLD), Treasuries (TLT), long CORN, long SOYBEANS, long NASDAQ.

Jeff Lewison