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 5th wave down from the all-time highs in February 2011. While you don’t know when exactly the 5th
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
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