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
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