In
what should have been a relatively quiet week, the S&P finished down 1%,
with most of the losses coming Wednesday on the heels of a possible bankruptcy
for Portuguese bank, Banco Espirito Santo. When the markets opened on Wednesday morning, the S&P was
down about 20 points, not because of problems in Portugal, but because
investors got spooked that this could be the start of another European debt
crisis. The last time the markets
saw a 10% correction was in 2011, which was fueled by the European debt crisis. But this is not 2011, ECB (European
Central Bank) President Mario Draghi will absolutely do everything in his power
to keep the European economy headed north, so do not be spooked by negative
news from Portugal. After all, the
total market cap of every publically traded stock in the country is less than
that of Home Depot.
One thing you can take away from
Wednesday’s price action is that this bull market is on edge right now, and
investors are looking for any reason to sell because they simply don’t buy into
the fact that the economy truly is getting better. As usual, investor’s first reactions were to sell the
headline before actually understanding the situation. Hopefully you used this pullback to your advantage, which
yielded some nice profits in just 2.5 days. So with that, one of the most important things to remember
when investing in the stock market is to fully understand the news before
making a buy/sell decision. Never
trade on just the headline.
Taking a look ahead to this week,
earnings will be in full swing, starting Monday morning when Citibank reports
and Tuesday with earnings from JPMorgan.
Last week I recommended buying Citibank, which sold off throughout the
week. I still reiterate a “buy”
rating on Citi and I think you could see a nice pop Monday. With Citibank, make sure to pay
attention to what they say about the regulatory issues they’re having and what
they expect to pay the government in lawsuits. The market has priced in about a $10B lawsuit, so if
Citibank says it expects to come in between $5-$7B, the stock should
rally. Either way, Citibank is
still trading at about 0.7 times book value, which is incredibly cheap and I
believe the negative news is all priced in. JPMorgan earnings will be all about what they say regarding
the housing recovery. Wells Fargo
issued a warning that consumer lending hasn’t been as strong as they expected,
but auto lending and commercial lending is making up for the gap. If JPMorgan issues the same
warning, I expect the market to use this as another reason to sell everything
from housing stocks to biotech.
Later in the week, I will be paying
attention to Google and IBM. I
have been bullish on Google for a longtime and I expect them to have another
real strong quarter. Unfortunately,
Google never offers any guidance so a strong quarter for Google doesn’t
necessarily mean investors will be happy.
If you haven’t been in the Google trade, do not buy before
earnings. Wait and see if the
stock pulls back and buy it if it does and hold it for the long haul, otherwise
move-on. Also on Thursday, we’ll
hear from IBM. If there is ever a
company that absolutely needs to report a strong quarter, it’s IBM. The last 4 quarters, IBM has dropped 2.4%,
6.3%, 3.3% and 3.3%, respectively.
Since the beginning of the year, the stock is flat and down about 4.5%
in the last 52 weeks. With
expectations so low right now, I think IBM will finally get back to beating
earnings, which could send the stock to $195 (up 4% from Friday’s close). However, that’s not enough for me to
get excited about, because $195 will act as resistance. Looking at a 1-year daily chart of IBM,
the stock triple bottomed at $172, which also built the head of an inverted
head-and-shoulders formation. If
you are looking for an entry point into IBM, wait for a pullback to $179, which
you could see if they disappoint Thursday. Begin buying at $179 and if the stock pulls back to the $172
support and holds that level for a fourth time, buy it hand-over-fist.
Finally, with oil prices down about
7% in the last three weeks, now is a good time to buy some of the refiners that
sold off a couple weeks ago on higher oil prices and news that the US will
begin exporting unrefined oil.
This goes along with my theme of the last few weeks, that one big
negative news event usually leads to a great buying opportunity. The oil boom is still alive and well
and stocks like Tesoro (4.7% off the highs), Phillips 66 (7.8% off the highs),
and Valero (15% off recent highs).
Last week, I did sell my position
in Toll Brothers, as the stock has been range bound all year. While Toll Brothers is performing as
well as any company out there, the stock continues to get hammered on any
negative news from the housing market in general.
My current positions: Long
Ford (F), Gilead Sciences (GILD), SunPower Corporation (SPWR), Starbucks (SBUX),
Macy’s (M), Boeing (BA), Disney (DIS), Google (GOOGL), Facebook (FB), Coach
(COH).
Jeff Lewison
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