Right
on queue, the calls for market corrections and bear markets come screaming
out. On Marketwatch.com alone,
there are three headlines front and center about a 20% correction coming. Yes, the Dow wiped out all of its gains
for the year in a single day (Thursday), the S&P had its worst weekly
percentage decline in over a year, and the Russell 2000 is now 8.1% off the
highs made on July 1. The sell off
could be a result of negative housing data, recent calls or a top in auto
sales, war in Gaza or Ukraine, Russian economic sanctions, Argentina default,
uncertainty about the Fed, stock valuations, etc…I personally think this
sell-off has everything to do with when investors expect the Fed to begin
raising rates and what affect it will have on the economy. But I don’t think the Fed will do
anything to hurt the US economy and I can’t see them raising rates until
inflation and wage growth start picking up, job market participation increases
and housing data strengthens. But,
as I’ve said many times before, investors are looking for any reason and every
reason to sell this market, so they are using this past week’s events to do so.
While
the fundamentals of the market are still intact, when I take a look at the
technicals, two markets in particular are at key levels that need to hold. While the S&P fell straight through
the previous support level of 1950, the next support level actually held a couple
times on Friday. 1913 is the 78.6%
Fibonacci retracement over the last 52 weeks, and the S&P traded down to 1916
on Friday, only to bounce back and close 9 points off the low. Furthermore, 1910 is the 100-day moving average, a technical indicator that has been support for more than a year now. Looking at the S&P futures, 1908.50
is the 78.6% retracement, and twice on Friday, the index bounced off a low of
1910. Any break below that level
and 1852, here we come. That would
represent a 139 drop from the highs but only a 7% move. The last time the market dropped that
much was from May 2013-June 2014, and since then, the market has rallied
24%. There hasn’t been a 10%
correction in more than two years and as much as analysts and investors think
it’s going to happen…I don’t see it.
The US economy is growing at a 4% clip, the job market is steadily
improving although wages still aren’t growing, and corporate profits are coming
in very strong.
The
other chart to watch is the Russell 2000 (RUT), which I have mentioned before. The small-cap index led the market on
the way up and is leading on the way down. On Friday, the Russell traded down to 1107 before bouncing 8
points to close at 1115. The
significance of that is that the Russell 2000 held a very key uptrend line support
level, and the close at 1115 is also above the 50% retracement of 1111. I will be watching the Russell very
closely because any move below the uptrend line will likely lead to not only
the Russell 2000 but also the S&P going lower.
One
last point of concern I have with this market is how investors are reacting to
quarterly earnings. Companies like
Starbucks, Exxon Mobil, Honeywell, Google, Ford, and Trinity Industries all
reported great quarters and strong guidance, yet all have sold off
significantly since reporting. On
the flip side, Panera Bread and Whole Foods reported really bad quarters and
weak guidance, yet both have rallied.
The difference is that Panera and Whole Foods were trading at multi-year
lows while the others were trading at multi-year highs. Instead of investors riding the winners
like they have been over the last couple years, they are taking profits and
moving most of their money to the sidelines. That is the biggest change that I’ve seen during this bull
market rally; a lot of companies that report great quarters have stopped moving
higher, which means that investors are now feeling like the market is toping
out and they are taking profits.
While I remain cautious in the
near-term and feel the market may be getting a little stretched in many
investor’s eyes, by no means do I think the bull market has come to a
stop. I have used and will
continue to use the weakness in the price action of great companies that have
reported strong quarters and strong long-term growth to buy more, as I did with
Google, Starbucks and most recently Buffalo Wild Wings (BWLD). Buffalo Wild Wings reported another
great quarter but fell 15% because they guided to just 25% growth in 2015, when
analysts were looking for 30%.
However, management maintained it’s 5 year outlook, but nevertheless,
investors were so spooked that growth may be slowing, they sold the stock off
almost into a bear market in one day.
Use that weakness to buy the stock.
One
trade that I like as a speculative one is investing in the most recent US
enemy, Russia. If you want to do
so, look at the Russia ETF (RSX).
Especially if you think Vladimir Putin will eventually give in to the
economic sanctions, the RSX should rally.
The RSX closed at $24.07 on Friday, just below the 38.2% retracement
from the 52-week low to high.
$23.08 is the key level to watch, that is the 23.6% retracement and if
the market holds that level, the RSX will have built a weekly inverted
head-and-shoulders formation. You
don’t have to rush out and buy the RSX on Monday, but if you get a move lower
towards $23, I would pull the trigger.
Again, this recommendation is only as a speculative trade, but one that
could really pay off well.
Last week was rough for equity
investors, but I believe it is just a temporary pause, as the bull market will
continue later in the year. Keep
your eye on key technical levels in the S&P and Russell 2000. A break below 1908 in the S&P could
mean a 7% drop is in store for the market. With the Russell, the index has to hold 1107 like it did on
Friday. If the Russell 2000
breaks, then the Nasdaq will break, taking the high P/E stocks like Facebook,
Gilead Sciences, Tesla and Amazon down with it. Get your stock shopping list ready because there will
be some great opportunities coming.
There is so much negativity right now in sectors like auto (Ford and
General Motors), aerospace (Boeing and Honeywell), housing (Toll Brothers, and
Home Depot) that if you are looking for stocks to own for a long time, look at
those sectors because they have all sold off sharply.
For full disclosure, this week I sold my
stake in Sunpower earlier in the week simply to take profits, sold my entire
stake in El Polo Loco on Thursday because I had a 100% return in less than 2
weeks and bought shares of Buffalo Wild Wings on weakness.
My
current positions: Long Ford (F), Gilead Sciences (GILD), Starbucks (SBUX),
Macy’s (M), Boeing (BA), Google (GOOGL), Facebook (FB), Coach (COH), Citibank
(C), Delta Airlines (DAL) Biogen Idec (BIIB), Buffalo Wild Wings (BWLD), and short
IBM (IBM), short SUGAR, short GAS, and short CORN.
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