Hopefully
you took my advice a couple weeks ago and bought some FireEye (FEYE) and Palo
Alto Networks (PANW), which have yielded 13% and 18%, respectively, with the
latter rallying Wednesday on an outstanding quarter. If you’re in those trades, stick with them because I see
more upside for both.
With the S&P closing down almost 1% for the week, you
can’t help but wonder if the impending correction is upon us. While I think the market is headed
lower, I am not at all worried about any kind of correction hitting the market. This week’s sell off was all about
rising interest rates and anticipation of what the Fed will say next week when
they meet Tuesday and Wednesday.
Investors are nervous that the Fed will be less dovish and change the
language in what they are looking for to determine when to raise interest
rates, increasing uncertainty and driving the stock market lower. The 10-year Treasury suffered its
biggest weekly drop since March, with interest rates rising about 20 basis
points. To track interest rates,
you can use the iShares 20+ Year Bond ETF (TLT) if you think interest rates are
going lower, or if you think interest rates are headed higher, you can buy the
ProShares Ultra Short 20+ Year Bond ETF (TBT). I think rates will continue to move higher towards 2.75%
before pulling back, which is the 61.8% Fibonacci retracement from the 52-week
low to high.
If rates rise to 2.75%, I would expect the stock market to
move lower. Right now investors
see higher rates as a negative for the economy even though the recent economic
data has been very strong. Higher
rates may mean that potential home buyers will sit on the sidelines and wait,
which is bearish for the economy, with home buying being one of the key drivers
to economic growth. I personally think
the opposite is true. I think if
rates begin to rise, there will be a sense of urgency in home buying because
people don’t want to lose out on a low rate. But if rates rise too quickly, as they did this week,
investors get nervous and start selling risky assets, like equities. I am looking for the S&P to trade
down to around 1940 before stabilizing and rallying back. While that represents a downside of 2.3%
from Friday’s close and 3.5% from all-time highs, I am not concerned about any
drop much larger than that.
The last thing I want to talk about is the energy
trade. Crude oil is now down
almost 15% from the highs back in June, and made a new 52-week low on Thursday,
trading down to $90.43/barrel. On
a fundamental basis, I think this sell-off is attributed to a demand issue and
not a supply issue. While there is
an abundance of crude oil across the entire world, the demand for oil just
isn’t there. Many European
economies are seeing slowing growth and still high unemployment, and here at
home, the unemployment level is still too high and with consumer purchasing
more fuel-efficient vehicles, they don’t need to fill up the tank as
often. Crude oil overshot to the
upside on reports on tensions in Russia and the Middle East, and now it has
overshot to the downside. On a
technical basis, crude oil looks to be finding a bottom around $90/barrel. Thursday was a very important day of
trading. On the second highest
volume day in that last 52 weeks, oil made an outside reversal day, where the
commodity opened where it closed the previous day, traded all the way down to
make a new 52-week low, but then reversed to close near the highs of the day,
up 1.5%. The low on Thursday was
$90.43, but I am bullish oil above $90 and I am looking for a short-term rally
back to $95, representing a 3% gain from Friday’s close. A lot of traders will use that low of
$90.43 to trade against, and I believe you can do the same thing.
A
few weeks ago I recommended buying Conoco Phillips (COP) and Talisman Energy
(TLM). While both have traded
poorly, with Talisman making a new 52-week low, I still believe they are the
right calls and I am sticking with Conoco. The big oil companies like Conoco, Exxon and Chevron have
all sold-off sharply but so far, Conoco and Chevron have held key technical
levels. I would be a buyer of any
of those three stocks, which are yielding nice dividends because they will
benefit greatly from higher oil prices.
As for my portfolio, I sold out of Buffalo Wild Wings
(BWLD) with a small profit. I
expected a bigger rally after falling sharply on its most recent earnings call,
and I didn’t get it. While I still
like the stock in the long run, I do not see any near-term catalyst to drive
the price higher.
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), Whole Foods (WFM), Wells Fargo (WFC), Michael Kors (KORS),
General Motors (GM), ConocoPhillips (COP), Kinder Morgan (KMI), Time Warner
(TWX), and Palo Alto Networks (PANW).
Jeff Lewison
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