It was a roller coaster ride in the
markets this week, with the S&P first falling Tuesday on the back of Janet
Yellen’s ill-advised comments regarding social media and biotech stocks being
overvalued. Not only is it
ridiculous that the Fed Chairman is acting as if she’s now a stock analyst, but
to say biotech stocks are overvalued couldn’t be further from the truth. Biotech P/Es are roughly 40% below
all-time highs and according to ISI’s Mark Schoenbaum, current P/E levels are
in line with the historical median.
To that I say; Ms. Fed Chairman…stick to what you know.
After
the markets closed on Wednesday, Barack Obama issued a new round of targeted
sanctions against Russia, as war in Ukraine had yet to subside. Couple that with Israel raining war on
Hamas, and you have fear in the market.
While the markets opened strong on Thursday, they were quickly slammed
by news that a Malaysian Airlines plane was shot down at the Ukrainian border,
with all signs pointing to Russian separatists as the culprit. Then later in the trading day, word broke
that Israel was sending ground forces into Gaza for a quick, targeted strike
against Hamas. The S&P fell 23
points (1.2%), the worst drop since April and the Nasdaq was hit the hardest,
falling 1.4%. The VIX (fear gauge)
soared about 32% and the world looked as if it were ending.
Since this bull market began, every
geopolitical sell-off was an opportunity to buy the dip, which I did and
hopefully you followed my lead.
Stocks rallied hard Friday, wiping out all the losses from Thursday’s
macroeconomic news, led by, much to Janet Yellen’s chagrin, tech and
biotech. So what led to Friday’s
rally? Investors took the night to
realize that none of these events negatively impact the global economic
recovery. Right now is very much
an earnings story and so far, they have come in very strong. You also have Hedge Funds being very
underweight the market and losing investor money month after month, so these
hedge funds have to start buying every single market dip.
Last week, I mentioned that
earnings would be in full swing, led by the banks and tech. Early in the week, JPMorganChase, Bank
of America, Goldman Sachs and Merrill Lynch all reported strong quarters,
including surprisingly better than expected trading revenue. Then Thursday after the close, 2 tech
stocks veered off in separate directions.
IBM reported a better-than-expected quarter, however sales dropped
again, which sent it lower. I
predicted last week that IBM would rally to $195 and sell-off from there. I sold the stock short on Thursday at
$195.37 and will stay short for now.
The other tech giant to report Thursday night was Google (full
disclosure: I added to my Google position during Thursday’s sell-off prior to
earnings). Google reported another
monster quarter, sending the stock to $605. Prior resistance has been at $597, and with Google shooting
through that level, that should now act as support. I recommend buying Google against $597.
As
for this week, Russia vs. Ukraine and Israel vs. Hamas will still be a focus,
but it’s important to realize that if a stock sells off that doesn’t have
anything to do with these macroeconomic events, you should go in and buy as
long as the fundamentals and technicals are still in place. With that said, there are a number of
big earnings reports this week, so keep your eye out. Apple will report earnings after the close on Tuesday,
sitting just a couple percent off of all-time highs. It’s going to take a huge quarter for Apple to continue its
run as the stock has rallied 26% since it last reported. With Apple introducing a bigger iPhone
6, iWatch, iTV, iANYTHINGYOUCANTHINKOF, I would buy Apple on any pullback if
earnings disappoint. I would be a
buyer around $84, which would be a roughly 11% drop from Friday’s close. If the stock rallies to new all-time
highs, then move on.
On
Wednesday, Facebook will report quarterly earnings and I think it will once
again surprise to the upside. They
reported about as good a quarter as you could last earnings period, and the
stock is up 8.5% since then. Google
and Facebook tend to trade hand-in-hand, and with Google reporting a monster
quarter, I think Facebook does the same and rallies to new highs. As you know, I recommended buying
Facebook when the stock sold off to the mid-$50s, so hopefully you took my
advice. If you missed the
opportunity, I would hold off and look for a better entry point in the
future.
On
Thursday, auto stocks, Ford and GM will report earnings. GM continues to put up huge monthly
sales figures despite the massive recalls. The stock is cheap and chart is strong, so I recommend
buying before they report. Ford
hit a new 52-week high on Thursday and this stock has been red hot, up 15%
YTD. I think Ford will have a
strong quarter and increase full year guidance and should also be bought before
they report. Working with Alcoa on
developing more full efficient cars and trucks will be Ford’s driver of the
future, no pun intended.
Starbucks
will also report on Thursday. I
have been a longtime holder of Starbucks stock and last recommended buying it
when coffee prices were at multi-year highs and Starbucks was trading at
$70.29. Since then, the stock has
rallied 11% and the company has increased coffee prices on bulk coffee in
stores and for certain drinks.
Starbucks Teavana stores are only getting better and the company has
been introducing new food and drink items. I’m looking for Starbucks to show international strength and
improving US sales. CEO Howard Schulz will likely touch on mobile payments and
an improved in-store experience that will continue to drive future
business.
Lastly
on Thursday, Amazon reports after the close. Since Amazon last reported, they increased the cost of
Prime, introduced a new Fire phone, signed a streaming deal with HBO, and introduced
a monthly membership for unlimited Kindle books. But all of these events will lead to future and not past
revenue streams and Amazon is still a sales and margin story. While I think sales will come in
strong, I don’t see margins improving much right now because they are still
losing money on every kindle and phone they sell and the price point for Amazon
TV is too high. The stock is up
11% in the last 2 weeks and I would not be a buyer into earnings. Wait to see what they say and if the
stock sells off, I would pull the trigger. Use $309 (23.6% Fibonacci retracement) and $328 (38.2%
retracement) as your entry points to build your position.
With
everything that is going on in the world, don’t get caught up in a selling
frenzy. Instead, buy high quality
stocks that sell off just because of broader market weakness. Look for the next big down day in the
market based on geo-political events, because that will be the market pricing
in the worst-case scenario. As
long as earnings continue to impress, and I fully expect them to, I see
downside of just about 1.5% from Friday’s close, with support in the S&P at
1952.
For
full disclosure, I did buy more Google on Thursday’s sell off before
earnings. I also bought Citibank
on Monday and Delta Airlines on Thursday’s sell off.
My current positions: Long
Ford (F), Gilead Sciences (GILD), SunPower Corporation (SPWR), Starbucks (SBUX),
Macy’s (M), Boeing (BA), Google (GOOGL), Facebook (FB), Coach (COH), Citibank
(C), and Delta Airlines (DAL), short IBM (IBM), short SUGAR, and short GAS.
Jeff Lewison
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