My
last writing was April 6, and since that time, the S&P dropped 50 points, and
then rallied back 70 points, only to then sell off on Friday to 1863 to end
down just 2 points. But in the
last few weeks, a lot has happened, including a number of great earnings
reports from the likes of Apple, Facebook, Google, Boeing, Gilead Sciences,
Starbucks, etc…Unfortunately, earnings don’t seem to really matter in this
market. Nevermind, that Boeing is
on pace to deliver more planes than any other year in the history of the
company. Forget the fact that
Gilead Sciences has what could end up being the best selling drug to ever hit
the market. It doesn’t matter that
Facebook grew EPS by more than 300% and blew away revenue estimates. The only two factors that matter to
this market are macroeconomic events and stock valuations. Just look at the price action on
Thursday. Wednesday night,
Facebook and Apple both reported much better-than-expected quarters, sending
the Nasdaq and S&P futures soaring.
However, by Thursday morning, everything changed. Vladimir Putin issued a stern warning
to Ukraine and the rest is history, leading to a 1.2% drop in the S&P and a
2.2% drop in the Nasdaq to end the week.
Despite Facebook’s strong quarter that should have rallied the Nasdaq,
and in turn, the entire market higher, Facebook fell about 9% from Thursday’s
high, leading the continuous disaster in the Nasdaq.
As
long as Russia continues to keep troops along the Ukrainian border, and US and
European economic sanctions aren’t drastic enough to push Putin away from
further conflict, the market will continue to trade in a range. The first level in the S&P that you
need to keep an eye on is 1858, which is the 50-day moving average. The market traded right down to that
level on Friday, before rallying back a few points into the close. If Russia pushes the S&P through
that level, keep your eye on 1815, which is the level that held when we traded
down there three days in a row a couple weeks ago. I fully expect the S&P to hold that level, but I don’t
anticipate the market making new highs until issues in Ukraine are completely
resolved and investors can focus on the actual companies again. 75% of the companies in the S&P
that have already reported quarterly earnings have beaten expectations, yet,
none have been able to move the market higher.
While
I still see the broader market staying range bound for the near future, the
high growth, high momentum stocks could be in for a big further meltdown. Looking at a daily chart, a massive
head-and-shoulders formation has formed at multi-year highs, with Friday’s
close (3533) taking the index below the 78.6% Fibonacci retracement from the
52-week low to high. Stocks like
Google, Amazon, Netflix, and Facebook are all continuing to break down despite
reporting strong quarterly earnings.
With every single momentum stock in complete freefall, I fully expect
the NDX to trade all the way down to 3415, which has been support on two
different occasions this year, representing another 3.3% to the downside. The chart of the Nasdaq Composite Index
looks almost identical, so the level to watch is the 50-day moving average of
3695, another 2.6% drop from Friday’s close. Despite this recent meltdown, I would and am using this
weakness to start building positions in some of these high quality names that
will absolutely return to dominance.
I have been buying Google (GOOGL) since they reported a strong quarter
and plan to hold that position for a long time. My price target on Google is $600, which would represent a
15% gain from Friday’s close. I
would also begin to look at buying Facebook if it continues to sell off, since
the quarter they reported showed that they may actually know what they are
doing.
Last
month, I wrote that the most important sector to watch is the financials, and
more specifically the XLF (Financial Sector ETF). Stocks like Bank of America, JPMorganChase, Goldman Sachs,
and Morgan Stanley are all well off their multi-year highs that were made
earlier this year, and have led the XLF lower over the last two months. If that trend continues, I expect the
broader market to sell-off along with it.
The XLF closed Friday at $21.85, just above the 78.6% Fibonacci
retracement, however, much like the Nasdaq chart, the XLF has built a large
bearish head-and-shoulders formation at multi-year highs and looks poised to
break down. The level to watch is
$21, which is the 61.8% retracement and the 200-day moving average, which is a
technical level that hasn’t been challenged since late 2012. I would use this recent weakness in the
market to start buying some of these financials stocks that have been hit hard,
because a lot of these names have a strong upside. Most of the lawsuits that have troubled the big banks are
behind them now and I could easily see 15% upside in the index. If you don’t want to be heavily levered
to one particular company, then buy the XLF in pieces down to the $21 level and
hold on for the long-term. I
started buying Bank of America last week and will continue to do so if it drops
further.
While
the tech and biotech sectors continue to get hammered, and I think will
continue to do so for about another 3% downside, I expect the broader market to
remain range-bound, trading between 1825 and 1885 until the Ukraine situation
is resolved. Pay attention to the
levels that I mentioned above for reference points. As long as you have a long-term outlook and investment
strategy, use the sell-off in the Nasdaq and financials to being building core
positions in your portfolio.
Lastly, an update from my copper recommendation…If you bought copper
when I first recommended, you would have an 8% gain in Southern Copper (SCCO),
9% gain in Freeport MacMoran (FCX) and 5% gain in the Barclays Copper ETF
(JJC). I would take about 50% of
those gains off the table and let the rest ride. This protects you from any near-term volatility in the
metal, but ensures you still have a profit.
My current positions: Long
Ford (F), Toll Brothers (TOL), Gilead Sciences (GILD), SunPower Corporation
(SPWR), Starbucks (SBUX), Macy’s (M), Southwest Airlines (LUV), Boeing (BA), Disney
(DIS), Bank of America (BAC), Google (GOOGL), Nike (NKE), long COPPER.
Jeff Lewison
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